competitive advantage

1. Introduction:

In this competitive business world, proper management is vital for any organization's success. Profit maximization subject to the budget constraint is the main objective of any business organization. For this, any organization need good business plan. Management is the process of getting things done, effectively and efficiently, with the help of people. Basically, planning, organizing, leading and controlling are the main processes of business management. Business planning is a roadmap which guides any organization about what to and how to do. Planning includes defining goals, establishing strategy, and developing plans to coordinate activities. It is concerned with ends (what is to be done) as well as with means (how it is to be done). Due to the dynamic nature of the society and business world, any organization must be sincere and attentive about happenings around. So, to manage changes in the environment, planning is necessary. For the long term business planning, strategic management process is necessary. Strategic management process includes a nine-step process that involves strategic planning, implementation, and evaluation.

Business organizations need to be able to plan for the future if they are to achieve competitive advantage over their competitors. For the competitive advantage of a company, it should have long term strategic planning. Strategic planning is the process of an organization which defines its strategy or direction and making decisions on allocating its resources to track this strategy, including its capital and people. Various business analysis techniques like SWOT analysis, PEST analysis, STEER analysis etc. can be used in strategic planning. It is the guideline of a company's future course. It mainly deals with three key questions namely, what do we do? For whom do we do it? And how do we excel?

Different strategic modules/approaches are developed by different scholars to define competitive advantage of a firm. Michael Porter's five forces model, Porter's generic strategy, Ansoff's matrix, BCG matrix etc are some important modules. Theory of competitive advantage was proposed by Michael Porter in 1990. It suggests that any state and business should pursue policies that create high-quality goods to sell at high prices in the market. This theory states that any country should specialize in exporting primary goods and raw materials that trap countries in low-wage economies due to terms of trade. According to Porter (2004), “An effective competitive strategy takes offensive or defendable position against the five competitive forces”. A competitive advantage is the thing that differentiates a business from its competitors. It is what separates you from everyone else. And, it's usually the reason you are in business. It answers the question, “why should I buy from you?” How are you better than my current supplier” (Dr. Lang).Value-creating products and different from competitors makes comparative advantage sustainable. There are different opinions about competitive advantage propounded by different scholars. However, it advocates mainly how a company is best at what and why?

The main purpose of this assignment is to study how the companies make plan to gain competitive advantage in the market. Why any company is in market since the long time or how any new company is capturing more market place within short span of time?

2. Literature Review:

The concept of competitive advantage mainly was propounded by Michael E. Porter. His five forces model and generic competitive strategies, Ansoff's product/market matrix, BCG matrix etc. are some important modules of competitive advantage. Competitive advantage can be achieved through different methods.

Michael Porter (1998), defined three approaches to competitive advantage, first cost leadership, second product differentiation and third one is focus. He also suggested applying both strategies simultaneously would be beneficial for competitive advantage. For instance, Japanese and German companies, after World War –II, used the above strategies and gradually, they occupied the global market by their cheap and different products. Another example, in current situation, is of Apple Inc which produces exclusive and classy products with product differentiation strategy. He, however, recommended both strategies simultaneously, it is difficult to do so because of organizational restrictions and limits. Applying one of them is possible and will create competitive advantage.

Cost leadership is one of the approaches of competitive advantage. In a case study of Wal-Mart, Blanco and Zellener (2003) state “ for the financial year ending January 31, 2003, retailing giant Wal-Mart reported revenues of $244.5 billion, making it the world's largest company. The company topped Fortune's list of the world's largest companies for the second year in succession. Considering the modest beginning of this company four decades ago, nobody, including the company officials expected Wal-Mart to emerge such a dominant player in the retailing industry. Wal-Mart's success story is a classic example of a company, which became successful by rigorously pursuing its core philosophy of cost leadership, right from the day it began operations in 1962.” Commenting about Wal-Mart, Ira Kalish, Global Director of Deloitte Research says "There's nothing like Wal-Mart. They're so much bigger than any retailer has ever been that it's not possible to compare."

Differentiation is also another important strategy for competitive advantage. Under this strategy a firm tries to make and introduce unique and especial products/ services to their customers which are very different from other similar products and services done by the rivals. Of course, these kinds of products and services could more expensive and costly. The expenses for research and development (R&D) to invent and produce the new products could be gained through high prices of products or extra charges taken from the customers. (George, 2007).

Competitive advantage can be developed through product innovation and experience. Khade and Metlen (2003) say that “Companies must have some sort of advantage over their competitors to sustain in this market share and provide consumers with what they want at the prices they are willing to pay. There are numerous ways to gain a competitive advantage. Two effective methods are process/product innovation and utilization of the experience curve”.

Pratima Bansal has defined competitive advantage through sustainable development. To her, “organizations have the potential to lower cost and maintain a commitment to sustainable development. Producing the same output with fewer inputs, all things remaining equal, will have a positive environmental and economic impact. Fewer resources will be used and fewer wastes will be generated, which will have a direct positive impact on a firm's cost structure” (Bansal, 2001).

3. Some important approaches of competitive advantage

As we stated that there various approaches to define competitive advantage. Some important strategic approaches are briefly explained below.

3.1.Porter's five forces model:

Porter's first book named Competitive Strategy (1980) became best seller in the world. His innovative thinking and ability to represent complex concepts in an easy way made him famous. His Five Forces model, market factors can be analyzed so as to make a strategic assessment of the competitive position of a given supplier in a given market. A sample of five forces models can be shown in the following diagram.

This model provides suggested points under each main heading by which we can develop a big and complex analysis of competitive position for creating strategy, plans or making investment decisions about business.

3.2. Porter's Generic Strategies:

The position of any firm within industry becomes the second important determinant. Even though an industry may have below profitability, a firm if it is best positioned can create superior returns. Porter has argued that a firm's strengths eventually fall into one of two headings: cost advantage and differentiation. By using these strengths in either a broad or narrow scope, three generic strategies result: cost leadership, differentiation and focus. These strategies are applied at the business unit level. These are called generic because they are not firm or industry dependent.

Hence, Porter has suggested that by adopting any strategy, a firm can gain competitive advantage in the market. Applying cost leadership strategy, any organization sells his products in the broad market within low cost. The cost of the company is lower and it gains competitive advantage. The second concept is differentiation in which a firm charges premium prices to its products. The products are unique and valuable. It does not compete with prices rather provides better quality so why it get competitive advantage. The third is focus in which a company focuses its products to any particular market depending on price leadership or products differentiation.

3.3. Ansoff's Product/ Market Matrix:

This is well known marketing tool which was developed by Igor Ansoff. This was published in the Harvard Business Review(1957) in an article named “Strategies for Diversification”. It is commonly used tool by marketers who have objectives for growth. It offers strategic choices to get the objectives. There are four main categories for selection i.e. market penetration, market development, product development and diversification.

This model explains that if more existing products are supplied in the existing market, it is market penetration. It suggests we can go through the whole market where our products are sold. So finding out new consumers within present market is one of the strategies of a firm. The second concept is of market development where existing products are sold in the new markets. It searches out the new market places. The third strategy is product development in which new products are launched in the existing markets. So, here, product will be new but markets remain the same. And the last one is diversification in which new products are launched in the new markets. At this situation, due to innovation and large scale production, any firm becomes able to supply its products even in the international market.

4. Approaches of competitive advantage and their linkage between theory and practice: Some case studies:

There are other various models/approaches of competitive advantage developed in the business management field. However, I will mainly concentrate my study on the three basic approaches of competitive advantage. They are cost leadership, differentiation and focus.

4.1. Cost leadership:

In this approach a country or a company tries to reduce its cost and increase in the output. By beating in prices, a company sells more units of products in the national as well as in international markets. The best example of cost leadership is China. China is producing low prices goods and selling in national and international markets. Due to cost leadership, China finally gained the first position among its competitors such as India and Brazil. Cheap labour market is one of the main reasons of getting competitive advantage in the whole world.

The other example of cost leadership is Wal-Mart, a giant US company in groceries. Wal-Mart aggressively followed a cost leadership strategy that included developing economies of scale and making consistent efforts to reduce cost. The main strategy of Wal-Mart in initial stage was to reinvest its surplus, use latest technology and strict control on its overhead costs.

Other examples of cost leadership in UK market are ASDA, TESCO, Sainsbury, Primark etc. These organizations are trying to use pricing factor as a tool to increase their market share (i.e. profit maximization through sales maximization). Although different retail companies use different methods of competition with each other to gain more market share and make more profit, the pricing policy stands on the top of other competitive advantage factors. Fortunately, this is good news for consumers who get advantage form such situations. In case of basic goods, it's a good strategy to adopt cost leadership strategy to attract more customers. But in the name of low prices, if the quality of products decreases mainly in groceries and medicines, it will be a serious concern.

Raynair airline could be one example of cost leadership in airlines industries. Raynair, a Dublin, Ireland based 20-year-old international airline is the largest low cost airline in GB and Europe. As of the end of the year 2004, Ryanair was flying 25 million passengers annually with a staff of less than 2,500 personnel. Ryanair flies only Boeing 737s and is rapidly transitioning to the newest 737 models - the 737-800. Challenges to the airline at the end of 2004 included escalating fuel costs, intensity of competition and the sometimes less than favorable attitude of the regulatory bodies in Great Britain, Ireland and the EU(Thomas and Byus, 2007).

4.2. Product Differentiation:

Product differentiation (also known as differentiation) is the process of distinguishing a product/service from others. Under this strategy, a firm tries to make and introduce unique and special products/services to its customers which are quite different than other rival firms. Firms invest huge amount in research and development to invent and produce the new products which could be of high prices. Apple Inc. is one of the best examples of product differentiation. Concerning the theme of Innovation and Design, Apple Inc. is frequently introducing new products in the computer market. In its strategy, it does not take care about price mechanism; rather it always spends much more money in R&D. The latest example is iPad which has just been launched in US market. Apple always concentrates on its design strategy in line with value transference. In their latest launching of iPad, they named it as a revolutionary device for browsing the web, reading and sending email, enjoying photos, watching videos, playing games, reading e-books, and much more.

Marks and Spencer (M&S) is another example of differentiation in UK market. It always tries to supply variety of products with high quality. Products available in M&S are relatively highly priced than other rival organizations. As they celebrate their 125th anniversary, they again promise for quality, value, service, innovation and trust. They say these core values are as important today as they ever have been. They are all about doing the right thing which is, quite simply, how we do business.

Differentiation can also be obtained from patent rights too. Microsoft has been dominating more than 90 percent in computer software market in the world. It is gaining competitive advantage due to its sole rights of patent rights. If any organization gets the certificate of patent rights from government, it will be sole authority of that product until and unless that the date of it expires. Microsoft is not only gaining competitive advantage from patent rights, from research and development too. Microsoft is gradually improving in its technology by which it is becoming more successful and able to produce low cost.

4.3 Focus:

Focus can be of two types i.e. cost focus or differentiation focus. In this strategy, an organization tries to gain competitive advantage through focusing in any specific field. The firm concentrates on a few target markets (segmentation strategy) depending upon age, sex, socio-economic groups etc. It is hoped that by this strategy, a firm can better meet the need of that target market. In this, a firm looks to gain competitive advantage through product innovation and/ or brand marketing rather than efficiency. Examples of firm using a focus strategy are South Airlines, Family Dollar which targets poor urban American families who can not drive to Wal-Marts because of not having their own cars.

Another example of focus is Nike which mainly produces sports related products. Shoes, socks, jackets, trousers sets, bags etc. are products of Nike. Nike's focus is concentrated on branded products. It provides quality products with little higher prices than other rivals. We can call this as a focus differentiation.

Cost focus and differentiation focus are relative concepts either. For example, Chinese companies produce same products with different qualities targeting on different purchasing power conditions of countries. Chinese products exported to USA or UK is quite different from the products exported to developing countries like Nepal, Pakistan, and Bangladesh etc.

5. Criticisms of generic strategies:

The above mentioned strategies are widely used for strategic planning however some scholars have questioned the use of generic strategies. They have commented that they lack specificity, lack of flexibility, and are limiting. Miller, Baden- Fuller and Stopford, W. Chan Kim etc. are main who criticize this concepts.

6. Conclusion:

It's obvious that an organization should have a proper strategic planning for long term growth and gain competitive advantage. There are various approaches of competitive advantage out of which Porter's Generic Strategies are studied in this study. Different organizations are applying different strategies to gain competitive advantage. For instance, in a worldwide level, China is gaining competitive advantage through cost leadership. Wal-Mart, a US grocery is also adopting cost leadership strategy by strict control on its overheard costs. In the context of UK, giant groceries ASDA, TESCO, and Sainsbury etc are applying cost leadership strategy. Apple Inc. in the other hand sees its competitive advantage with differentiation. So, it is investing huge amount in its research and development. And Apple always tries to do new innovation. Organizations like Nike are adopting focus strategy which mainly produces sports related products. From this short study, I came to know that different strategies are adopted by different organizations for their competitive advantage.

7. Recommendations:

By this study, I came to know that different business organizations should have different strategies to gain competitive advantage depending on their size, product nature, market place, and customers' preferences. First of all, organizations like ASDA, TESCO who sell groceries should adopt cost leadership strategy because by doing so they can capture more customers and make profit high. Secondly, organizations that produce durable and classy products should always draw their attention on innovation. By introducing new and new technology time and again they can beat other rival firms in the market. Last but not the least, small firms like small retailers, perfume producing firms should apply focus strategy to gain competitive advantage and retain in the market for long period of time.

References:

Books:

1. Porter, Michael E.(1998). Competitive Advantage: Creating and Sustaining Superior Performance. New York: Free Press.

2. Porter, Michael E.(2004). Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press.

Journals:

3. Blanco, A., and Zellener, W. (2003). Is Wal-Mart Too Powerful? Business Week. (http://www.icmrindia.org/casestudies/catalogue/BusinessStrategy/Wal-Mart/CostLeadershipStrategy.html accessed on 12/02/2010).

4. Bansal, P. (2001).Building Competitive Advantage and Managing Risk through Sustainable Development. Ivey Business Journal, London. (http://www.iveybusinessjournal.com/article.asp?intArticle_ID=315 accessed on 11/02/2010).

5. Khade, Alan S. and Metlen, Scott K. (2003). Developing competitive advantage through process/product innovation and experience curve. Journal of Academy of Business and Economics.

6. Thomas M. and Byus K.(2007). RYANAIR (2005): SUCCESSFUL LOW COST LEADERSHIP. Journal of the International Academy for Case studies. Business Publication (http://findarticles.com/p/articles/mi_qa5452/is_200705/ai_n21289700/ accessed on 13/02/2010).

Internet:

7. Dr Lisa Lang (www.MafiaOffers.com accessed on 12/02/2010).

8. Devid Kumar Basyal/MBA-1(SBL)/GoU/student ID: 0851KMKM1109

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