Study on competitive advantages among three companies for the similar products
With increasingly fierce competition, the whole market is full of similar products; consumers are increasingly indistinguishable from the differences between them. For companies, it would be difficult to earn extra profits above the average level if they can not guarantee the uniqueness of its own products. Furthermore, the increasing same products will decline the average profit of the whole industry. So, study on competitive advantages for the similar products is very important.
The rest of the paper is organized as follows. Section 2, review the theories of competitive advantages, including positioning school, resource-based view, transaction cost theory and relationship-oriented school. Section 3, introduce how to get competitive advantages for the similar products, including reduction of cost, attraction of consumers, outsourcing non-core businesses and sharing profits.
2 The origins of competitive advantages
‘Competitive advantage' is widely used in many fields, and broader definitions include national, industrial, and firm levels. It is the meaning of the advantage which is unique and difficult to replicate. On a global scale, developing competitive advantage has become the core strategy for many businesses. What are the origins of competitive advantage? Although existing research explains why some firms (and some industries) can get supernormal returns (Rumelt, 1991; McGahan and Porter, 1997), this problem is one to which we lack a clear answer.
2.1 Positioning school
Early researches of competitive advantage were based firmly on historical analyses and qualitative research. This work could be explained that competitive advantage is a complex phenomenon, which is depended crucially on the active presence of superior leadership (Selznick, 1957; Chandler, 1962; Andrews, 1971). Chandler's work implies those firms who adopted the new M-form before their competitors gained a strategic advantage, and, moreover, that the choice to adopt the new organizational form reflected the structure and leadership qualities of a company's top management. Through the 1960s and 1970s, most of the scholars concentrated on the study of what general managers or ‘leaders' should (not) do and it was generally assumed that doing these things would be different: firms with better leaders would make better choices and would ultimately do better than their competitors.
Then Porter turned this paradigm on its head (Porter, 1980). In transforming the study of ‘imperfect competition' into the analysis of ‘competitive advantage', Porter shifted the focus of strategy research outward, towards the analysis of the firm's microeconomic environment. In his book ‘The Competitive Advantage of Nations', he questions ‘‘Why (do) nations succeed in particular industries, and (what are) the implications for firms and for national economies?'' He stresses the important role played by ‘a nation's economic environment, institutions and policies' that lead to successful competitive industry development, and he states:
Differences in national economics structures, values, cultures, institutions and histories contribute profoundly to competitive success. The home nation takes on growing significance because it is the source of the skills and technology.
Porter's approach yielded sharply defined tools for understanding exactly why some firms (and industries) were likely to be more profitable than others. Porter developed the ‘diamond model' which he uses to discuss the determinants of national advantage based on four broad attributes of a nation: factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry. Porter states:
The determinants, individually and as a system, create the context in which a nation's firms are born and compete: the availability of resources and skills necessary for competitive advantage in an industry; the information that shapes what opportunities are perceived and the directions in which resources and skills are deployed; the goals of the owners, managers, and employees that are involved in or carry out competition; and most importantly, the pressures on firms to invest and innovate.
Porter (1985) identifies five structural forces to be considered when deciding on strategy and position in an industry: entry barriers, threat of substitution, bargaining power of buyers, bargaining power of suppliers, and rivalry among competitors in the industry. From then, the literatures are filled up with ‘five force analyses': build these kinds of barriers to entry, structure rivalry along these lines, and your firm and perhaps your industry would become more profitable. Notice that at its roots this stream of work returns to the founding assumption of the field: good strategy is about leadership, about foresight. Managers who are smart enough to understand the implications of structural analysis and to make the commitments that it requires are likely to outperform those who do not (Ghemawat, 1991; Shapiro and Varian, 1998). According to Porter, there are three generic strategies for achieving a competitive advantage: differentiation, cost leadership, and focus. There are several bases for a differential advantage—for example, technological, legal, and geographical (Alderson, 1965)—and to be successful, the strategy is adapted to the external environment.
2.2 Resource-based view
The resource-based view (hereafter RBV) of strategic management evolved from the work of Penrose (1959) and her book ‘The Theory of the Growth of the Firm'. Her theory was subsequently refined and named the ‘‘resource-based view of the firm'' by Wernerfelt (1984), and experienced a renaissance when Prahalad and Hamel (1990) published their article about ‘the core competence of the corporation'.
Generally speaking, RBV is simply a reinterpretation of the environmental perspective. Where the latter describes analytically why a differentiated position within an industry coupled with high entry barriers can lead to profitability, the former redirects attention towards the underlying heterogeneity making such a position sustainable. For example, while early environmental analyses seemed to suggest that competitive advantage arose from purely technological factors (such as economies of scale) or from unique assets (such as a brand name reputation), the RBV emphasized the idea that these technological or market positions reflect internal organizational capabilities, such as the ability to develop new products rapidly, to understand customer needs profoundly, or take advantage of new technologies cheaply.
Proponents of the RBV suggested that strategic investments directed towards these internal activities might be as (more) important as in generating supernormal returns. Furthermore, the RBV deepened the discussion of causality by focusing attention on two key insights about the sources of competitive advantage. First, in many cases, an industry's ‘structural' features are the result of the organizational capabilities of its constituent firms: a powerful brand name, for example, may reflect years of successful new product introduction and superb (and unique) marketing skills. Second, there are many good reasons for thinking that the market for organizational capabilities may be imperfect in exactly the kinds of ways likely to lead to the existence of supernormal returns. In part because of these two insights (which are implicit but not always manifest in environmental analyses), the RBV is often positioned as an ‘alternative' to the environmental perspective. In my opinion, such a positioning reflects a significant misconception, since the RBV and the environmental perspective are complementary in many important respects.
Each proposes a model of why firms may sustain superior performance, but the two models are not mutually exclusive, at least in terms of their empirical predictions: while the environmental view focuses attention on external industry structure, the RBV directs us towards the fact that internal capabilities and investments provide the instruments and tools to shape this external environment. Moreover, both literatures offer a similar theory about the process of strategic choice.
In the case of environmental analysis, while economics is used to explain what kinds of strategic positions are likely to be most profitable, the theory is essentially agnostic as to how firms come to assume them. Firms can be lucky, they can be fast, or they can be far sighted: as long as they deal with the ‘five forces' they will be profitable, and the power of the tools lies in explaining exactly what these forces are and what kinds of mechanisms will help a firm deal with them. At least at some level, many (perhaps most) empirical treatments within the RBV tradition follow a similar logic, with the caveat that rather than emphasizing the fact that one firm rather than another ‘chose' a particular market position or production technology, the analyses focus on the fact that one firm ‘chose' to develop a certain set of internal capabilities or unique organizational assets (Henderson and Clark, 1990; Clark and Fujimoto, 1991; Eisenhardt and Tabrizi, 1995). At a more subtle level, however, the RBV literature begins to address causality and the ultimate origins of competitive advantage more deeply. It has implicit within it a significantly different view of the dynamics of strategic advantage, and, in particular, of exactly what managers can and cannot do. While the canonical reference for the RBV literature is usually taken to be Penrose (1959), the RBV perspective on the strategy process seems to be influenced more by Stinchcombe (1965), on the one hand, and Nelson and Winter (1982).
Specifically, the RBV scholars often seem to suggest that organizations are fundamentally different from each other for reasons that may have very little to do with any kind of ‘strategic logic' and that they can only change through limited, local search. To the extent that competencies are built on organizational routines that are only tacitly understood indeed if tacit understanding and complexity are a prerequisite for any competence to be a source of competitive advantage then there may exist a fundamental tension between the fact that competencies lie at the heart of competitive advantage and the use of this insight to guide strategy choice (Leonard-Barton, 1998). From this perspective, the simple observation that competencies may lead to advantage is only half the battle: the other half understands where competencies come from. The theoretical RBV literature thus makes explicit a view of ‘strategy' that has long been latent the sense that strategy is not all, or not only, about the cognitive ability of the senior management and their ability to make the ‘right' decisions, but also about their ability to work creatively with the raw material presented by their firm and their environment (Quinn, 1978; Mintzberg, 1987); to respond appropriately when their firm's organizational structure finds good strategies (Burgelman, 1994); and to create decision structures and procedures that allow a firm to respond to its environment adaptively (Bower, 1974; Levinthal, 1997). In short, in focusing on the dynamics of competence and resource creation, the RBV is centrally concerned with the degree to which successful firms are indeed lucky since it suggests that many of the competencies underlying advantage are the result of investments made under a heavy cloud of uncertainty and that they are subject to local but not globally adaptive evolution. This approach promises a bridge between the insights of those who stress ‘luck' or ‘initial heterogeneity' in shaping firm performance and the central insight of the strategy field: that what managers do matters. But we believe that these implications have not been fully worked out. Most importantly, the RBV has not generated the kinds of empirical studies of adoption that are crucial both to fleshing out a full response to Stinchcombe's critique and to building a richer understanding of the origins of competitive advantage. While there are studies suggesting that the possession of unique organizational competencies is correlated with superior performance (Henderson and Cockbur, 1994; Powell, Koput, and Smith-Doerr, 1996), and others suggesting that competitive advantage may be heavily influenced by conditions at a firm's founding (Holbrook et al., 2000; Eisenhardt, 1988; Eisenhardt and Schoonhoven, 1990), so far as there are few careful studies of the hypothesis that successful strategy is the successful management of the evolution of organizational skills and its changing environment. Indeed, some of the most elegant and widely cited studies of the diffusion of organizational innovation do not control for firm founding conditions (Davis, 1991). At its worst, just as overenthusiastic readings of Porter led to the prescription ‘choose a good industry', the RBV have had the flavor of ‘build the right resources/competencies'.
2.3 Other schools
2.3.1 Transaction cost theory
Transaction cost theory, which was first proposed by Coase (1937) and refined by Williamson (1975) in his influential book ‘Markets and Hierarchies', is used to analyses make-or-buy or the optimum governance structure for buyer-supplier relationships as a tool. According to the theory, the choice of governance structure—or the rules, techniques, and organizational forms needed to control activities and transactions—should be guided by the degree of cost that might occur in the course of a transaction (uncertainty), the degree of customization of products in the transaction (asset specificity), and the degree of frequency of transactions (transactions) (Williamson, 1975, 1981).
When uncertainty and asset specificity are low and transactions are relatively frequent, the transactions can preferably be governed by markets, and there will be arm's-length relationships with suppliers. On the contrary, high asset specificity and uncertainty lead to transactional difficulties and hierarchical governance.
Among these extremes there is intermediate governance, for example, bilateral relations and cooperative alliances. After all, the assumption of this theory is that companies will choose a governance mode based on efficiency in terms of cost considerations and the risk of opportunism.
2.3.2 Relationship-oriented school
In the 1980s, the concept of ‘relationship marketing' was introduced (e.g., Berry, 1983; Gronroos, 1994; Liljander and Strandvik, 1995), it was assumed that only those organizations which build strong, close, and positive relationships with their customers have the potential to develop a sustained competitive advantage (Rowe and Barnes, 1998).
This school is naturally linked to study on marketing orientation (e.g., Narver and Slater, 1990; Jaworski and Kohli, 1993), focus on the role of marketing in improving business performance and service management (e.g., Berry, 1995; Gronroos, 2000). It seems to be generally accepted and empirically verified, rather than just selling goods or services of high quality and low cost, firms are more likely to survive by focusing on creating value for customers and fulfilling their needs (Boulding et al., 2005; Rust et al., 2002).
In a similar vein, an increasing number of researchers (e.g., Dyer and Singh, 1998; Lorenzoni and Lipparini, 1999) has more generally focused on relational rent and how a competitive advantage may result from external relationships with suppliers governed by informal mechanisms such as trust. This ‘relational view', which has many similarities with the network approach (e.g., Hakansson, 1982), emphasizes the benefits of relational, or partnership type, management of the relationships between buyers and sellers, focusing on respects such as mutuality, win-win, trust, information sharing, and risk and benefit sharing.
A relational rent is defined as ‘a supernormal profit jointly generated in an exchange relationship that cannot be generated by either firm in isolation and can only be created through the joint idiosyncratic contributions of the specific alliance partners' (Dyer and Singh, 1998). Arm's-length market relationships are incapable of generating such relational rents because there is nothing idiosyncratic about such an exchange relationship, and they are not rare and difficult to copy. According to Dyer and Singh (1998), there are four sources of relational rent: (1) inter-firm specific assets; (2) inter-firm knowledge-sharing routines; (3) complementary resource endowments; and (4) effective governance. According to their view, self-enforcing safeguards (e.g., trust or hostages) are preferable to third-party safeguards (e.g., legal contracts), and informal self-enforcing safeguards (e.g., trust) are preferable to formal self-enforcing safeguards (e.g., financial hostages) owing to lower marginal cost and the difficulty of imitation.
3 How to get competitive advantages for the similar products
After summing up the origins of competitive advantages, we would access to existing researches on ‘How to get competitive advantages for the similar products'. In terms of the coffee market, products of three companies (Starbucks, Maxwell, and Nestle) have a strong alternative interaction. The empirical analysis point out those similar products firms available from the following aspects to maintain their sustained competitive advantages.
3.1 Reduction of Cost
It means a firm must keeping costs low by exploiting scale and location advantages. Scale advantages would be exploited and labor costs would be reduced spectacularly by locating service operations at production facilities in a limited number of low-cost locations (Cachon and Harker, 2002). Although decisions regarding where to locate service operations must also take other costs, such as transportation, into account, lower labor costs are essentially the reason why, for instance, Boeing has outsourced the design of wing parts to Russia, and Texas Instruments and Intel have outsourced the development of devices to India (Engardio et al., 2003). Costs may be further reduced if suppliers are kept at arm's length in transactional relationships, with contracts awarded through competitive bidding. In particular, for simpler services bought in bulk, which have low asset specificity and uncertainty (cf. Williamson, 1975, 1981), and do not directly impact upon core business processes, transactional purchasing may be useful (Agndal et al., 2007).
If location advantages may not be achieved because of the need to keep service operations local, for example, as regards installation and field services, an alternative is to use locally sourced alternatives at a lower cost, such as using foreign resources locally, on the condition that legislation allows this. Hierarchical governance or using company-owned local offices or joint ventures overseas is another alternative, although this may limit the chances of exploiting scale advantages through servicing a multitude of firms at the same location. It is not unusual that competitors avoid using each other as suppliers because of the risk of disseminating important knowledge. In essence, however, what matters is that the firm has a global perspective on its sourcing, and that every service and process is sourced wherever total costs are minimized, internally or externally, including labor and other costs. This typically entails adopting a transactional sourcing approach through which market competition may be exploited.
The potential benefits of exploiting scale and location advantages are obviously greater for maturing and standardized products. For such products there are more competent suppliers available on the market and the volumes are greater. Consequently, the relevance of scale and location advantages is greater (Bharadway et al., 1993; Nordin, 2005b).
3.2 Attraction of Consumers
Attraction of Consumers is another law which companies must follow in order to maintain their competitive advantages, means companies should develop valued and differentiated offerings to attract the attention of the market. Because, to attract consumers' attention is associated with higher prices in certain circumstances.
Keeping costs low is certainly essential, but nowadays seldom a sustainable differentiator in business markets. A lower cost can guarantee products with a lower price, and therefore able to ensure higher sales. However, as easy to imitate, a low cost can not bring about more profits. So, a low cost is most likely to be perceived by the customer as dissatisfaction (Hertzberg, 1968). It is important for the supplier to consider factors such as cost because they may lead to dissatisfaction but never satisfaction. Thus, to keep a competitive advantage or at least competitive parity, service offerings must be differentiated while costs are kept low. This may be achieved by developing the capabilities of internal resources, or by capturing relational rents by aligning with partners and by keeping certain service processes internally.
In accordance with the relational view (e.g., Dyer and Singh, 1998; Lorenzoni and Lipparini, 1999), several scholars have also described the advantages of close collaboration with customers from a product innovation perspective (Karkkainen et al., 2001; Prahalad and Ramaswamy, 2000). In this view, collaboration with customers can lead to new product ideas and business opportunities. The frequent customer interactions in many service businesses imply many opportunities for developing new product ideas that may satisfy current customer needs.
3.3 Outsourcing Non-Core Businesses
Obviously, an increasing number of demands for turnkey solutions with an increasing number of customers (Frambach et al., 1997), often customized to the unique requirements of each customer would seem to further emphasize the importance of retaining control over the relationship with customers. Satisfying this demand may be a way of differentiating oneself from the competition. It is particularly important that service processes that are closely integrated with the offerings to customers, and which constitute a foundation for building core capabilities (Long and Vickers-Koch, 1995; Prahalad and Hamel, 1990), are not outsourced to suppliers at arm's-length market. Certain processes are more critical than others to organizations, for example, the marketing, sales, and contracting of product services that differentiate the offering relative to the competitors. For such strategic and specialized processes, the organization must either retain service processes internally or protect itself by forming deeper and closer partnership-type relationships with suppliers (cf. Bensaou, 1999; Kraljic, 1983; Peisch et al., 1995; Williamson, 1975, 1981). Peisch et al. (1995) suggest that decisions concerning a payroll data centre, for instance, cannot be made independently from those concerning the payroll function, because they are both integrated parts of the businesses they support and cannot be separated so easily. In contrast, standardized services may be outsourced completely into transactional relationships, unless they are an integrated part of the businesses they support, such as the offering to the customer (Peisch et al., 1995). By doing this, the value of suppliers of standard services may be captured.
‘Total' outsourcing will be risky. More specifically, researches focusing on IT outsourcing shows that outsourcing arrangements built on long-term, largescale relationships with single suppliers create an undesired dependence upon single suppliers. Selective outsourcing, i.e., using multiple suppliers that are contracted for tasks of smaller scale, is generally better than complete outsourcing due to the dependence that complete outsourcing creates (Currie, 1998; Peisch et al., 1995). However, according to the relational view, relational rent is more easily achieved in partnership-type relationships. Thus, a fractional strategy (Baker and Faulkner, 1991) seems feasible where the buyer engages in longer term relationships with several suppliers.
The risk of becoming dependent upon suppliers would seem to be particularly feasible in contexts where the degree of uncertainty is high, for example, where innovation is essential and the speed of change is relatively high. Being dependent upon a single or very few suppliers may reduce a buyer's capability to innovate and to follow changes in the market place.
3.4 Sharing Profits
Sharing Profits means firm maintaining positive bonds with customers. It has been widely acknowledged that firms may increase their competitiveness and financial performance by being market oriented and by creating positive bonds with customers. As Brown (2000) pointed out, one particularly efficient way of creating positive bonds with customers is to engage in delivering services as a supplement to products. By starting to see the customers' needs and wishes as business opportunities, and where the repeat business of satisfied customers is seen as the key to long-term revenue and profitability, instead of focusing solely upon cost minimization, several benefits may be achieved.
Companies that have acknowledged the opportunities of services treat the customer both as an asset to be nurtured and as a partner. If positive bonds have been established, a customer may accept a lower level of service quality than otherwise, without breaking the relationship (Liljander and Strandvik, 1995). In addition, by establishing close relationships and positive bonds with customers, the firm may find it easier to acquire knowledge about customers that may be used for the creation of value for the firm and its customers. Although the relationships, as such, do not create a competitive advantage, the customer knowledge it may generate, and the customer loyalty that results from the value creation processes in the relationships, may be difficult to imitate (Boulding et al., 2005). An important note is that structural bonds or a relationship marketing strategy of ‘locking-in' customers will at best lead to competitive parity in the long term. To be sustainable, bonds should be based on mutual trust between the two parties (Barney and Hansen, 1995; Rowe and Barnes, 1998). Likewise, bonds with existing customers must not be at the expense of the establishment of new relationships, as too much focus on current relationships may produce core rigidities and long-term failure (Boulding et al., 2005; Leonard-Barton, 1992).
There is, however, a difference between different services and service processes in terms of how they may influence such bonds. Basic, mass-produced, and product-oriented services, such as hardware repair, differ significantly from professional services such as training and consulting that focus on the relationship with the customer or on the end-user's process. While the latter typically focus on solving individual customers' needs and are customized rather than standardized, the former focuses on solving product-related technical problems cost efficiently and are often standardized to decrease costs.
In relation to customer bonds, unstandardized service processes with high asset specificity, and which involve a certain degree of problem solving and information exchange, are most fruitful to retain internally, while service processes of a maturing and standardized nature may be outsourced
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