MBA INDIVIDUAL ASSIGNMENT DECLARATION1

SUBJECT: STRATEGIC MANAGEMENT ASSIGNMENT NUMBER: 1 LECTURER: PROF K. JONKER STUDENT: AYANKOYA KAYODE DATE SUBMITTED: 19TH SEPTEMBER, 2012 EMAIL: AYANKAYODE@YAHOO.COM

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Table of Contents
1.0 INTRODUCTION ................................................................................................................................. 3 2.0 THE COMPETITIVE ADVANTAGE .................................................................................................. 3 3.0 SEARCHING FOR COMPETITIVE ADVANTAGES ...................................................................... 5 3.1 Competitive advantage from external environment.................................................................... 5 3.1.1 New market entrant .................................................................................................................. 7 3.1.2 Supplier ...................................................................................................................................... 8 3.1.3 Buyer .......................................................................................................................................... 8 3.1.4 Substitutes, product and technology development ............................................................. 8 3.1.5 Competitive Rivalry .................................................................................................................. 9 3.2 Competitive advantage from internal analysis ............................................................................ 9 3.2.1 Activity based view of organisations for competitive advantage ..................................... 10 3.2.2 Resource based view of organisations for competitive advantage ................................ 11 4.0 COMPETITIVE STRATEGIES ........................................................................................................ 11 4.1 Cost leadership .............................................................................................................................. 12 4.2 Differentiation ................................................................................................................................. 13 5.0 SUSTAINING COMPETITIVE ADVANTAGE................................................................................ 13 6.0 CONCLUSION ................................................................................................................................... 14 References ................................................................................................................................................ 16

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1.0 INTRODUCTION Organisations are constantly faced with issues of profitability, growth and sustainability in todays business environments that is characterized by fierce competition. The

dynamic business environment where firms operate require them to be able to set themselves apart, adapt to change very quickly or transform in order for them to remain relevant or survive (Thompson and Martin, 2010). Therefore it becomes very important for a business to have a clear pattern of decision making that is based on its perception of its industry and where it sees itself within the industry known as its strategy (Shafer, Smith and Linder, 2005). Thompson and Martin (2010) described the adopted strategy of an organization as its game-plan to achieve its desired goal and objectives and also concisely relate strategy to the pursuit of purpose.

Porter (1979) noted that the reason organisations create strategy is to be able to handle competition. Therefore, there is a need for an organisation to establish differentiating factors in its strategy that will set them apart from the competitors and guarantee continuous survival and growth (Porter, 1998). Recent literature has described this factors as competitive advantages and this study will attempt to review the subject.

2.0 THE COMPETITIVE ADVANTAGE Competition within a particular industry has gone beyond the traditional rivalry among firms operating in the same industry. The challenge for profit, growth and sustainability has now been extended to other factors like the behavior of the customers and supplier in the industry, potential entrants, availability of alternatives among other factors (Porter, 2008). While the firms in the traditional school of thoughts suggest that a business should focus its effort and strategy on out-performing or getting rid of the other rivalry firms, Porter (2008) describes this as a risky strategy. Rather, organisations that will out-perform others are those that are able to anticipate, read, respond, adapt and take advantage of changes in the industry (Reeves, Love and Tillmanns, 2012).

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A continuous analysis and review of the SWOT (Strength, weakness, opportunities and threats) will reveal the drivers of competition in an industry. Pesonen (2008) argues that the result from the use of the SWOT technique in analyzing the internal and external environment in which a company operates can be used to determine the strategic position an organization can take in its industry of operation to compete effectively. Managers are therefore able to choose in which and how they should compete in business through their knowledge of the external and the internal environments (Marcus, 2005). This can be through its understanding and influencing the market in a unique way or creating and using its core competencies to create unique opportunities for itself in the market place. Thus, the business becomes positioned for sustainable profitability irrespective of the rivals or the competitive factors within its industry (De Wit and Meyer, 1999).

According to Thompson and Martin (2010), a case in point is that of the first No-frill airline in Europe EasyJet. The airline industry is such that the competitive factors are very strong from all sides with a requirement of intensive capitalization to enter and a market characterized by slim profit margins (Porter, 1998). Prior to its entrance into the market, the European airliner has done things differently, but Thompson and Martin (2010) quoted Stelios Haji-Ioannou, owner of EasyJest, as saying that having an external enemy is the best way of focusing on results, rather than fighting each other and becoming complacent. The airline was able to position itself to a new set of air travellers, by offering affordable air travel that is devoid of the excess luxury including a completely different model of air travel service. Thereby, the company was actually able to enlarge the market by bringing first time air travellers into the industry and setting new standards for the industry. This could only have been achieved by a proper analysis of the industry and choosing a winning position.

Strategic positioning helps organisations not just to be different in the industry where they operate. But being different in the industry is expected to create a competitive advantage for the firm by being able to create and add value to its customers (Thompson and Martin, 2010). The value creation emphasis of competitive advantage
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was stressed by Maritan and Peteraf (2011) by citing Barney (1991) that a firm that is able to create value for its customers or within an industry by implementing strategies that other competitors are not implementing or are not able to implement at that time is said to have a competitive advantage in that industry. This view is supported by Sheehan and Foss (2009) where they described an organisations competitive advantage as its potential to create and appropriate more value than the competition. Therefore, the issues of value creation and uniqueness stands out in the concept of competitive advantage and must be addressed to develop it.

3.0 SEARCHING FOR COMPETITIVE ADVANTAGES It was mentioned earlier that forces that controls competition is the main reason that managers develop strategies (Porter, 2008). It therefore follows that managers should focus on doing what their company does best than rivals (Marcus, 2005) in the best way that no one else can. Marcus (2005) suggests that this could become a source of competitive advantage for the organisation. From the core concept of competitive

advantage reviewed in the earlier section, a thorough analysis and understating of the external factors that control the industry i.e. the opportunities and threats and the internal factors within the company i.e. strengths and weaknesses, managers can position their organisations strategically to derive competitive advantage in their industry (Thompson, Gamble and Strickland, 2006).

3.1 Competitive advantage from external environment There are very few industries that have immunity from the effects of globalization. This phenomenon allows competitors to purchase cheaper raw material from another companies, outsource operations overseas to cut cost and supplier have wider options to choose from. This is just one of the factors with external influence on the operations of a firm. Other external factors that can provide an opportunity or pose a threat that can determine the competitive environment in an industry include the general macroeconomic outlook, the law and government regulations, societal values and life
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style, demographic changes and technological advancements (Thompson, Gamble and Strickland, 2006).

However, according to Porter (2008), at the different industries level, the forces that control profitability (hence sustainability, growth and therefore competition) within each industry are structurally the same. Porter (2008) explained further that there are five fundamental forces that drive the competition in each of the industries. Although the author cautioned that each of the five forces does not affect different industry at the same degree. Marcus (2005) suggests that a firm can develop or come up with competitive advantages that they can use to maintain a profitable position in their industry by carefully and thoughtfully looking at the structure of the Porters five forces that shape industry competition in the industry where they function. Figure 1.1 below shows the five forces that controls competition in different industries.

New Market Entrants

Supplier Power

Competitive Rivalry

Buyer Power

Product and Technology Development

Figure 1 : Adapted from the five competitive forces that shape strategy (Porter, 2008).

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Marcus (2005) describes the analysis of the Porters five factors that controls competition in a industry as the industry analysis for competitive advantage. This study will therefore look at the Porters model of competitive forces that shape industry competition from this perspective below:

3.1.1 New market entrant From the perspective of a company that already exist in the industry, the porters model looks at new entrants into the market as threat that puts a cap on profitability (Porter, 2008). To maintain a competitive advantage in such environment, the strategy has to be such that it is difficult for new entrants either to come into the industry all together or to implement the strategy that provides the competitive advantage created based on this factor. As explained by Porter (2008), a proper configuration of factors such as capital requirement, customer switching cost and restrictive government policy among other factors can give and help maintain competitive advantage in an industry. An example of this in the South African context is the telecommunication industry where the four major players have been able to build sophisticated network coverage of the nation. Beside the government control of the industry with the licensing process, a new entrant into this industry will require an enormous amount of capital for infrastructure and branding. This barrier for new entrant in this industry can is a strategic competitive advantage for the industry players if well configured with other factors and looked after.

On the other hand, from the perspective of a firm entering an industry, new entrants can create a competitive advantage for itself by carefully analyzing how difficult it will be for the firms that are already in the industry to respond to its strategy, thereby upstaging the industry (Marcus, 2005). This was evident in Dells personal-computer divisions competitive advantage over other manufacturer of the same type of computers as described by Magretta (2002). While others sold to retailers, Dell chose to sell directly to end users knowing fully well that its rivals will find it difficult to violate existing contracts with retailers or make changes to their distribution network to compete with Dell. This became a major competitive advantage to Dell.
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3.1.2 Supplier Dealing with suppliers that have the ability to increase or generally influence costs like that of raw material can put a company or even an industry at a position of disadvantage (Porter, 2008). However, Oh and Rhee (2010) alludes that a proper configuration of the supplier network can provide a competitive advantage through strategies that harness supplier capabilities and collaboration.

3.1.3 Buyer The Porters model also describes the buyer as a powerful force that influences the structure of competition in different industries. This force might be a strategic hurdle to turn into a competitive advantage because the buyer will always bargain for more quality and cost reduction (Porter, 2008). However an analysis of this factor will provide an understanding of how easy it is for buyers to control price. Besides, as with the suppliers, innovative seller-buyer collaboration could either reduce the competitive pressure or actually create a competitive advantage (Thompson, Gamble, Strickland, 2006).

3.1.4 Substitutes, product and technology development Consumers are generally attracted to a product because of a need they want met. It is therefore important to note that they might choose another product line entirely that meets the same need maybe at an even cheaper cost and with higher quality because of the technological advancements. Strategist should therefore be concerned about the technological advancements in creating competitive advantages for their firms (Porter, 2008).

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3.1.5 Competitive Rivalry

The amount and the basis of rivalry within and industry can give an indication whether the industry is worth entering. However, the fact that there is an existing strong rivalry within an industry does not indicate that it will not be profitable to join the industry (Porter, 2008). According to Kim and Mauborgne (2005), the blue ocean strategy by shows that with the understanding of the rivalry in an industry, innovative firms can define their own rules and create their own markets. The existing rivalry therefore becomes an opportunity to keep away new entrants into the industry.

The Porters five forces that shape competition model do not create competitive advantage directly. But the knowledge of the industry threats and opportunities should lead to a good strategy; one that can create bring about competitive advantage (Barney and Hesterly, 2012). Furthermore, Porter (2008) extends this tool as useable for uncovering salient opportunities and creating new trends within industries. Therefore, organisations can use industry analysis as a determinant in formulating its competitive strategy and competitive advantage.

3.2 Competitive advantage from internal analysis In the dynamic and ever changing business environment of today, it can be deduced from literatures that creating and sustaining competitive advantage might require the understanding and unique configuration of many factors. Barney (1995) agrees with the initial discuss of this text that organisations can derive competitive advantage from scanning its environment and positioning itself uniquely. However, Barney (1995) makes a case for the integration of internal analysis with the external environment in developing strategies that will produce competitive advantage. Marcus (2005)

describes internal analysis as evaluating the strength and weaknesses within an organization, making a case for SWOT analysis, as a tool for crafting strategies, that should in turn lead to competitive advantage (Barney and Hesterly, 2012).

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While Barney (1995) raised the questions of value, rareness, imitability and organization, other factor that will be worth reviewing is the concept of resource based view of the organization (Thompson and Martin, 2010) and the activity based view of organization (Sheehan and Foss, 2009) that is based on the value chain analysis (Porter, 1998).

3.2.1 Activity based view of organisations for competitive advantage Marcus (2006) cites Porter (1985) that organisations creates value from the margin or profit derived from carrying out different activities. A proper evaluation and strategic configuration of the activities that an organisation carries out in creating value therefore can help in establishing competitive advantage (Porter, 1998). Porter postulates that a firm would create a competitive advantage for itself by carrying out strategic activities cheaper or better than its competitors. The activity based view provides a framework that provides how organisations can derive competitive advantage by looking at its activities as subject of analysis.

Porter (1998) provides a generic framework for understanding the main activities carried out by different industries in creating value called the generic value chain and makes a strong case that has become the basis of many literatures that competitive advantage can be created by developing innovative variations of value chain to stay ahead of competitions. This fact has now been supported by other work on activity based view of organisations for competitive advantage by studying the concept of the value chain. The study of the value chain as the activity template that can be used to study, hence improve a firms competitive position (Sheehan and Foss, 2009) therefore represent the core concept of how organisations can generate competitive advantage by looking inward.

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3.2.2 Resource based view of organisations for competitive advantage This view looks at an organisation and how it can either create value or make profits from the perspective of the resources available within the organization, its capabilities and competencies (Marcus, 2006). Marcus further explained that the focus of this view links the performance, profitability and hence ability to stay ahead of competition to a firm to three factors. Barney (1991) cited in Knott (2009) describe the resource based view of a firm for competitive advantage as the unique position that organisation is able to attain in the industry because of resources that peculiar to the firm. It therefore becomes clear that a firm can carve a competitive advantage for itself in its industry by looking inward to identify resources that it has or can use differently than other competitors in the industry.

However, it is important to note that the availability of unique resources within a firm does not necessarily translate into a competitive advantage. The role of organizational leadership would be key to taking advantage of such resources for competitiveness (Fahy, 2000; Clulow, Gerstman and Barry, 2003; Andersen, 2011). Besides the role of leadership in harnessing resources to produce competitive advantage, a proper configuration of those resources is required (Andersen, 2011). Also, literatures (Barney, 1995; Knott, 2003; Andersen, 2011) over the years has suggested that the competitive advantage derived from the resource-based view of an organisation will be sustainable only if the resources that created or creates the advantage adds unique value enough to explore opportunities and neutralize threats. Such resources should also be rare in such a way that competing firms are unable to acquire such resource easily, beside it has been said such resources need to be difficult to imitate to generate an enduring competitive advantage.

4.0 COMPETITIVE STRATEGIES It has been said that the essence of strategy is for a firm to be able to stay ahead of competition (Porter, 2008) and that competitive advantage should emerge from a good

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strategy (Barney and Hesterly, 2012). As mentioned in the earlier sections, the internal analysis of strength and weaknesses and the external analysis of the opportunities and strengths does not culminate into competitive advantage in themselves, but an effective configuration and understanding of the environment should be help strategists in determining strategic positioning within an industry or a competitive strategy that will help the firm create values uniquely in its industry (Thompson and Martin, 2010). Therefore the actual competitive advantage emerges from strategic positioning within an industry by being able to create value, create competitive advantage in delivering the value and operating the business effectively (Thompson and Martin, 2010).

The ability to manage costs effectively in a way that is unique within an industry, innovative differentiation and creating value in the process have been identified as the main sources of creating and sustaining competitive advantage (Porter, 1998; Thompson and Martin, 2010). In the process of creating value, firms can create competitive advantage by optimizing its surplus as a customer and revenue obtained from customers as a supplier (Bowman and Ambrosini, 2007). On the other hand, a firm differentiates itself from its competitors if it can be unique at something that is valuable to buyers (Porter, 1998). The product or service that delivers value must be perceived to have distinct qualities by the consumer for it to be considered differentiated (Thompson and Martin, 2010). According to Thompson and Martin (2010) citing Porter (1985) describes the Porters generic competitive strategy framework that shows how a firm can position itself for competitive advantage using cost leadership and differentiation within an industry.

4.1 Cost leadership A firm deriving competitive advantage from the configure of the cost-quality parameters in a way that puts it ahead of competitors and leaving competition with no room to challenge its position based on cost is said to maintain a cost leadership with the industry (Thompson and Martin, 2010). The author explained that the cost leadership does not necessarily mean the lowest cost in the industry, but could be the ability to
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serve a broad industry segment or several industries uniquely and gaining a unique cost advantage using methods such as economies of scale, unique access to raw material or uncommon/innovative cost reduction method (Hsieh and Chen, 2011). This is particular evident in the banking industry where some banks are able to differ on cost structure by implementing highly streamlined processes and paperless transaction initiatives.

4.2 Differentiation The differentiation strategy is when a firm aims a product or service to its buyers and the buyers can perceive the product or service as unique, though it adds the value that they require (Hsieh and Chen, 2011). A firm can create and sustain competitive advantage from differentiation sources such speed, reliability, service, product design, features, technological advancement, corporate personality and the way it relates to its customers (Thompson and Martin, 2010).

5.0 SUSTAINING COMPETITIVE ADVANTAGE Based on how a firm is able to configure the factors that generate competitive advantage for it, there is no guarantee that the advantages and opportunities that a firm relies on will produce a permanent competitive advantage (Thompson and Martin, 2010). It is therefore important that a firm is continuously scanning its environment for changes and responding to such ahead of competition.

Kim and Mauborgne (2005) allude that a firm can sustain competitive advantage by remaining innovative in what they called the Blue ocean strategy. The authors describe the firm using the blue ocean strategy as one that does not fight the rival for market share, but discovers untapped market space, able to create its own demand within and outside the existing market. Porter (2008) describes this as a positive-sum competition where the firm operates in the future of the industry. Operating with this

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strategy will mean that a firm evolves continuously making it to remain ahead of competition and sustaining its competitive advantage.

6.0 CONCLUSION The review of literature in this study has shown that the analysis and understanding of the environments internal and external where a firm operates is very important to stay ahead of competition. The understanding and analysis of the environment should provide strategists with information about the strengths, weaknesses, opportunities and threats. Each of these can be used to decide on a strategic position to take that can lead to competitive advantage.

The main reason that organisations embark on creating strategy for their firms is so that they can maintain a position in their industry that can separate them from their rivals. The discovery of this position together with effective leadership is what produces differentiating factors for firms that they can use to create value uniquely in a way that competition is not able to either in the short or long term. That firm is therefore said to have competitive advantage if the competition is unable to achieve the same position either in the long or short run.

Although the environmental analysis does not create competitive advantage in itself, the tools found in the literature shows that competitive advantage can emerge from understanding the environment, taking advantage of opportunities and building defenses against threats. Figure 2 below shows a perceived model of how competitive advantage can be achieved and sustained in a firm based on this study.

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Internal Analysis

Activity base view

SWOT

Resource base view External Environ mental Analysis

Leadership

Competitive Strategy

Macro Economic Advantage

Competitive advantage

Continuous evaluation and change management

Figure 2: Creating sustainable competitive advantage

Figure 2 above summarizes a perceive model of how firms can create, evaluate and sustain competitive advantage within their firms.

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