Theories of Competitive Advantage - Essay Example

1 Introduction The sports industry is attracting increasing attention from people of all walks due to higher health consciousness. New and more adventurous sports are coming to fore that require different high performance gear for their users. Even older sports are coming out of their staid looks and becoming more focused on higher and better than before performance levels. To go along with the current image of the sport new clothing and apparel are the demand of the day and designers are fashioning clothes are not just practical but attractive too. A number of companies have come up with such clothing and serve this market exclusively through chain marketing. They have specialty outlets to cater to niche segments of high spenders as well as sports lovers. Usage levels are very high indeed. Almost 90% of people under 35 years of age, and about 76% of the population as a whole buy sportswear including sport shoes. One such company is Black’s Leisure Group plc (Blacks) whose principal activity is outdoor and boardwear retailing. The Group operates through two retail chains of stores called Outdoor and ONeill. The core activities of Outdoor comprise of outdoor and boardwear clothing, footwear and equipment, while ONeill functions as a distributor and retailer of ONeill products in UK. By September 2007 the Group operated from 100 Blacks High Street stores, 12 Out-of-Town stores, 274 Millets stores, 47 Freespirit stores and 15 O’Neill stores. In 12 months ending March 2007On sales of £ 298.276m it suffered a loss of £ 12.353m. This has improved somewhat for the next 6 month period in current year by September end with sales at £146.8m with profits at £0.2m. This cannot be considered final as the annual set offs like depreciation and reserves can only be calculated at the end of the year. Blacks have also closed down 7 loss making stores out of 45 planned for closure. It also continues to face tough competition from top 4 competitors. The overall market of sportswear is certainly increasing but the prices are under pressure due to customer resistance and high degree of competition. 2 Theories of Competitive Advantage The fact is both external environments affect the competitive advantage of companies and therefore the PEST analysis helps the management to deal with situations and formulate strategic policies to overcome, circumvent or even take advantage of these factors. PEST stands for Political, Economical, Socio-Cultural and Technological factors. As they are all external, the company can at best try to strategize to tune itself in accordance with them for survival, sustenance and indeed for growth. Political factors include Legislation, Regulation of transfer for capital and labour and Stability of political system. It is found that these are favourable in UK for Blacks operations. Economical factors cover Development of relevant economic indicators, Business cycles, Unemployment and Industry structures. The economic indicators show growth in the UK economy with controlled inflation at around 3%. The economy has experienced an unusually long period of growth over the past few years and businesses have generally enjoyed a robust period of growth on the back of strong growth in sportswear industry. Unemployment is lower than Europe. All factors point towards growth prospects. The socio-cultural factors comprise population, demographics and customer behaviour. The UK population is urbanised and the younger generation is very health conscious tending to favour sports and sporting events that have led to healthy growth in the sportswear industry. Buyer behaviour is a source of concern as they are very price conscious and look for value for money products therefore pricing plays an important role. Technological factors consist of the lifecycle of the phases of the products and the research and development expenses. The nature of sportswear demands improved products all the time hence the life cycle phases are not too long. Some innovative features need to be put in every season to create buyers interest and Blacks need to do some R& D activities that need an outlay. This is a tough call s they are not in a financially comfortable position for which reasons they rely heavily on branded products and have taken to representing other brands like the Australian Mambo brand and the UK O’Neil as well as other emerging brands. Another important method of finding the competitiveness is by using the Five Force Analysis devised by Porter M.E. (1985), often called the Porter’s five force analysis. This will help the management to devise appropriate marketing strategy to take care of vital issues. Porter divides the competitive environment into five forces of ‘powers’, these are Power of buyers, Power of suppliers, Threat of new entrants, Threat of substitutes, Intensity of rivalry between existing firms. (Porter, M. E.1985)1 A The Power of Buyers Four different reasons influence a buyers’ decision. They are also known as 4Ps as explained by McCarthy (1964)2. This needs careful study to understand customer behaviour. 1 Product. The buyer is greatly influence if the product or service is perceived as useful for him. Blacks have a fairly large range of products to offer the customers. 2 Price. The price is not usually a stand-alone factor. It has to be comparable with other products or services but with weight given to factors like quality and after sale service. There is a play on the mind of the buyer that middle ground is best for him. He also considers price in context of the privileges attached to it. The prices offered by Blacks are comparable with competition. 3 Promotion. Image plays a very important role. Whether it is the image of the product which enhances value or status or the image of the buyer when he acquires a product, both factors are extremely important for the buyer in arriving at a purchase decision. Here Blacks do not fare well and the competition like JJB and John David find higher preference with buyers. Place or Time of offer. It is of great value to the buyer if a product is offered to him at a place and time that suits him. The importance of this can be gauged from the fact that often a deal is concluded at the most awkward time and place just because of the whim and fancy of the customer. Blacks have a problem here too. A fairly large proportion of their outlets are not well located and need to be closed down due to lack of customer support. In recent years the 4P concept has come under criticism and as a result different marketing mixes have been put forward by Kotlet P,. (1986)3; Mindak and Fine (1981)4; and Nickels and Jonson (1976)5. But the one put forward by Booms and Bitner (1981)6 to include another 3Ps viz., Process, Physical Evidence and Participants has gained the most acceptability and popularity in marketing literature. 5 Process Marketing and Sales policies are important factors that attract a customer to a product. Warranties offered, after-sales service support and guarantees, quick response from employees are comfort levels that promote a product’s marketability. Blacks suffer from lack of strategic direction from the top as is evident from the fact that they failed to appoint a CEO for nearly an year. 6 Physical Evidence This is the defining of the environment where the marketing activity is to take place and is concerned with layout, Furnishings, Colour, and Facilities. It is argued that the general ambience makes for a good marketing strategy as the customer feels comfortable and is more inclined to conclude a deal in congenial atmosphere. Blacks lag behind the competition in this area although they are on the way to make amends. 7 Participation Largely neglected earlier, but by far the most important aspect of marketing is the adequate training of the employees that are involved in the marketing process. Their knowledge and confidence builds up an image of robust product and enthuses the customer. A satisfied customer is the company’s best brand ambassador and word of mouth publicity is the most precious campaign that any company wishes for and this 7th P is no doubt the most important of them all. Blacks appear to have an average record here. B The Power of Suppliers When there a few suppliers of components or services, they offer better terms and service to the company but when they are few, they normally offer goods and services as per their own priorities. The external factor that affects quality of service depends largely on the cooperation and coordination of various suppliers. The power of the suppliers cannot be ignored. Apparently the supply chain is not well manages at Blacks. This is revealed from the extraordinarily high levels of inventories left at the end of season. Blacks need to forecast demands and arrange effective purchases to avoid heavily discounted loss making sales. C Threat of New Entrants The Evolutionary Cycle of Competitive Behaviour advocates that change takes place only when one of the competitors come out with an innovation and others follow it and improve upon it until it becomes an industry standard, at which time the cycle ends. The two ends of the cycle are Innovation and Efficiency. Then, with the introduction of another innovation, the cycle recommences. The performance of all players is evaluated vis-à-vis the efficiencies they are able to achieve. This theory evolved by Strebel (1966)3 suggests that evolution is a continuous process; no product can expect to be acceptable to customers in its present form and functionality to be for all time to come. Blacks appear to be followers and not leaders in the market hence they lag far behind competition a few of whom have been fairly new and more newcomers are likely with the range of products increasing by newer sports that have taken fancy of the younger customers. D Threat of Substitutes At any point in time there is always a possibility that, inspired by the popularity and acceptability of a product, a substitute is offered that will replace it due to its better features or innovative idea (J. Schumpeter 1934)4. There is a delicate difference between innovation and invention although one leads to the other. Innovation is the first happening or germination of an idea for a new product or a process while the first attempt to make it or practice it is what invention is all about. Innovation is therefore creation of a new value and invention is the creation of a new product or service that offers this value to the customer. Sometimes additions to existing products are also called innovations as they enhance the value or are value creators and generate revenues. But a better way of describing an innovation is the discontinuation of an old value and replacing it with new value. As a consequence discontinuation becomes a source of an innovation. Again Blacks have not developed their own labels of any significance and function largely as distributors of outside brands. E Intensity of Rivalry Finally the competition never gives up and is always finding newer and better ways and mean to make inroads into the market share of an existing product. This is an ongoing struggle and has to be met head on with innovative practices. A few of the marketing strategies in this direction are Product Strategies, Brand Management, Publicity and Promotional Strategies. Leading Sportswear Retailers in UK are JJB Sports, John David Group and Sports World 3 The Micro Environment SWOT deals with Strengths and Weaknesses, both of which are internal and can be changed through actions; and Opportunities and Threats, both of which are external and needs strategies to take advantage or precautions as the case may be. A SWOT of Blacks shows following results: STRENGTHS Freespirit Brand is doing well and is accepted Women’s sportswear is doing very well Own labels catering to niche markets at premiums Operates a surf academy that provides for making new customers A known name in market as the oldest sportswear company – established in 1863 WEAKNESSES Too many loss making stores that need to be closed down Very weak supply chain that results in bad inventory management High losses due to heavily discounted sales at end of season Warehousing problems lead to financial chaos Low operating profits diminish financial leverage in the market Low Return on Investment discourages shareholders and put pressure on share prices Lack of direction due to non-availability of suitable leaders at the top management level OPPORTUNITIES Expansion in Women’s sportswear Addition of own labels aimed at niche markets Add on new and fresh brands to expand product portfolio THREATS The economic environment and market factors that influence customers spending; The customers expectations of quality products at competitive prices; Competition, both current and new entrants to the market; The supplier base that ensures the ability to meet demand and remain price competitive; Warehouse and distribution minimising business interruption; IT systems and business continuity to meet the future business needs; Key personnel, the retention of and the ability to attract high calibre individuals; and Treasury and risk management for available funds to meet the business needs. Threats have been quoted from the Interim Results published in October 2007. 4 Conclusions It is evident that Blacks are facing a serious challenge. External pressures of severe competition coupled with high customer expectations on prices have taken a toll on returns. Profitability is almost zero and supply chain is not properly managed resulting in high stocks of unwanted goods. Internally, it appears to have lost directional leadership and it is not nurturing talent. It could not replace a CEO from internal management hierarchy proves that there is no system of grooming successors for smooth transfer of power. It does not have a sustainable strategy in place. It does not have a brand that could entice customers. On top of it all it is still burdened with a huge percentage of stores with locational disadvantage. Its inventory control systems are in disarray needing some software upgrades. Overall it needs to revamp its management, define its strategic goals, tune up its supply chain systems in order to become competitive. It has to either develop a new range of products with strong appeal or to get a celebrity to endorse its present range to attract customers. With such a high percentage of customers among the population it has a ready market. What it needs is a turnaround led by a forceful and imaginative leader. It should go for a positioning strategy for competitive advantage over its rivals. 5 Bibliography Booms, B.H. and Bitner, M.J. (1981), “Marketing strategies and organization structures for service firms”, in Donnelly, J.H. and George, W.R. (Eds), Marketing of Services, American Marketing Association, Chicago, IL, pp. 47-5 Kotler, P., Armstrong, G,. Principles of Marketing, Prentice Hall & Pearson Education. McCarthy, E.J. (1964), Basic Marketing, Richard D. Irwin Homewood, IL. Mindak, W.A. and Fine, S. (1981), “A fifth ‘P’: public relations”, in Donnely, J.H. and George, W.R. (Eds), Marketing of Services, American Marketing Association, Chicago, IL,pp. 71-3. Nickels, W.G. and Jolson M.A. (1976), “Packaging – the fifth P in the marketing mix, Advanced Management Journal, Winter,pp. 13-21. Porter, M.E. (1985) "Competitive Advantage", The Free Press, New York, 1985. Schumpeter, J. (1934), The Theory of Economic Development, Harvard University Press, Cambridge, Massachusetts. Strebel, P. (1996). Breakpoint; How to Stay in the Game. Mastering Management, Part 17, London; Financial Times. Read More