MEANING OF COMPETITIVE ADVANTAGE

When a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices. Competitive advantages are capabilities that are difficult to replicate or imitate and are non-tradable.

Pitts and Snow define a competitive advantage as "any feature of a business firm that enables it to earn a high return on investment despite counter pressure from competitors."

A competitive advantage exists when the firm is able to deliver the same benefits as the competitors are but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, a competitive advantage enables a firm to create superior value for its customers and superior profits for itself. ATTAINING COMPETITIVE ADVANTAGE

Competitive advantage is gained at the corporate and business levels through synergy and market share, respectively. Synergy evolves from size and diversification. By being large, a firm can gain advantage by: (1) paying less interest to its creditors and underwriters; and (2) paying less tax by internally shifting funds from one business to another. Diversified firms can use portfolio planning to produce synergistic advantage by assisting the firm in allocating resources according to the product's relative market share and market growth which in turn, directs the organization in its placement of managers in appropriate cells. Market share derives from three different sources: (1) economies of scale attained through specialization, automation, and vertical integration: (2) experience attained through employee learning as well as product and process development; and (3) market power-which is the amount of control the firm has over suppliers, customers, and competitors.

Sources of Competitive Advantage include: -

1. Economies of Scale 2. Latest technology 3. Human resources (Skilled, trained, creative, positive attitude, high EQ and IQ, competitive, etc.) 4. Continuous learning philosophy and knowledge management. 5. Automation and modernization of business processes like implementation of ERP, CADCAM manufacturing, E-commerce, BPR, etc. 6. Product and process innovation and development. 7. Diverse workforce. 8. Low cost 9. Development in the external environment favoring the firms business 10. Acquisition of market power.

PORTERS CONTRIBUTION

1. THE FIVE FORCE MODEL

The model of the Five Competitive Forces was developed by Michael E. Porter 1980. Since that time it has become an important tool for analyzing an organizations industry structure in strategic processes. Porters model is based on the insight that a corporate strategy should meet the opportunities and threats in the organizations external environment. Especially, competitive strategy should base on an understanding of industry structures and the way they change. Porter has identified five competitive forces that shape every industry and every market. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy should be to modify these competitive forces in a way that improves the position of the organization. Porters model supports analysis of the driving forces in an industry. Based on the information derived from the Five Forces Analysis, management can decide how to influence or to exploit particular characteristics of their industry.

The Five Competitive Forces The Five Competitive Forces are typically described as follows:

1. Bargaining Power of Suppliers The term 'suppliers' comprises all sources for inputs that are needed in order to provide goods or services. Supplier bargaining power is likely to be high when: The market is dominated by a few large suppliers rather than a fragmented source of supply, There are no substitutes for the particular input, The suppliers customers are fragmented, so their bargaining power is low, The switching costs from one supplier to another are high,

There is the possibility of the supplier integrating forwards in order to obtain higher prices and margins. This threat is especially high when

The buying industry has a higher profitability than the supplying industry, Forward integration provides economies of scale for the supplier, The buying industry hinders the supplying industry in their development (e.g. reluctance to accept new releases of products),

The buying industry has low barriers to entry.

In such situations, the buying industry often faces a high pressure on margins from their suppliers. The relationship to powerful suppliers can potentially reduce strategic options for the organization. 2. Bargaining Power of Customers Similarly, the bargaining power of customers determines how much customers can impose pressure on margins and volumes. Customers bargaining power is likely to be high when: They buy large volumes, there is a concentration of buyers, The supplying industry comprises a large number of small operators The supplying industry operates with high fixed costs, The product is undifferentiated and can be replaces by substitutes, Switching to an alternative product is relatively simple and is not related to high costs, Customers have low margins and are price-sensitive, Customers could produce the product themselves, The product is not strategically important for the customer, The customer knows about the production costs of the product There is the possibility for the customer integrating backwards.

3. Threat of New Entrants The threat of new entries will depend on the extent to which there are barriers to entry. These are typically: Economies of scale (minimum size requirements for profitable operations), High initial investments and fixed costs, Cost advantages of existing players due to experience curve effects of operation with fully depreciated assets, Brand loyalty of customers Protected intellectual property like patents, licenses etc, Scarcity of important resources, e.g. qualified expert staff Access to raw materials is controlled by existing players, Distribution channels are controlled by existing players, Existing players have close customer relations, e.g. from long-term service contracts,

High switching costs for customers Legislation and government action

4. Threat of Substitutes A threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same purpose. They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for existing players. This category also relates to complementary products. The threat of substitutes is determined by factors like: Brand loyalty of customers, Close customer relationships, Switching costs for customers, The relative price for performance of substitutes, etc.

5. Competitive Rivalry between Existing Players This force describes the intensity of competition between existing players (companies) in an industry. Strong competition pressurizes on prices, margins, and hence, on profitability for every single company in the industry. Competition between existing players is likely to be high when: There are many players of about the same size, Players have similar strategies There is not much differentiation between players and their products, etc.

Influencing the Power of Five Forces After the analysis of current and potential future state of the five competitive forces, managers can search for options to influence these forces in their organizations interest. Although industry-specific business models will limit options, the own strategy can change the impact of competitive forces on the organization. The objective is to reduce the power of competitive forces. The following table provides some examples: 4.1 Suppliers Partnering Supply chain management Supply chain training Increase dependency Reducing the Bargaining Power of 4.2 Reducing the Bargaining Power of

Customers Partnering Supply chain management Increase loyalty Increase incentives and value added Move purchase decision away from

Build knowledge of supplier costs and price

methods Take over a supplier

Cut put powerful intermediaries (go

directly to customer)

4.3

Reducing the Treat of New Entrants 4.4 Increase minimum efficient scales of

Reducing the Threat of Substitutes Legal actions Increase switching costs Alliances Customer surveys to learn about their

operations Create a marketing / brand image

(loyalty as a barrier) property services 4.5 Tie up with suppliers Tie up with distributors Retaliation tactics Reducing the Competitive Rivalry Alliances with linked products / Patents, protection of intellectual

preferences Enter substitute market and influence

from within Accentuate differences (real or

perceived)

between Existing Players Avoid price competition Differentiate your product Buy out competition Reduce industry over-capacity Focus on different segments Communicate with competitors

1. GENERIC COMPETITIVE STRATEGIES

Discussed earlier in this section

2. VALUE CHAIN ANALYSIS The value chain is a systematic approach to examining the development of competitive advantage. It was created by M. E. Porter in his book, Competitive Advantage (1980). The chain consists of a series of activities that create and build value. They culminate in the total value delivered by an organization. The 'margin' in the value chain is added value. The value chain splits the organization into 'primary activities' and 'support activities.' The aim of the activities is to offer the customer a level of value that exceeds the cost of the activities, thereby resulting in profit margin.

The Primary Value Chain Activities consist of: -

Inbound Logistics Here goods are received from a company's suppliers. They are stored until they are needed on the production/assembly line. Goods are moved around the organization. Operations This is where goods are manufactured or assembled. Operations is the process of transforming inputs into finished products and services. Outbound Logistics The goods are now finished, and they need to be sent along the supply chain to wholesalers, retailers or the final consumer. Marketing and Sales In true customer orientated fashion, at this stage the organization prepares the offering to meet the needs of targeted customers. This area focuses strongly upon marketing communications and the promotions mix. Service This includes all areas of service such as installation, after-sales service, complaints handling, training and so on.

Support Activities Procurement This function is responsible for all purchasing of goods, services and materials. The aim is to secure the lowest possible price for purchases of the highest possible quality. They will be responsible for outsourcing (components or operations that would normally be done in-house are done by other organizations), and e-Purchasing (using IT and webbased technologies to achieve procurement aims). Technology Development Technology is an important source of competitive advantage. Companies need to innovate to reduce costs and to protect and sustain competitive advantage. This could include production technology, Internet marketing activities, lean manufacturing, Customer Relationship Management (CRM), and many other technological

developments. Human Resource Management (HRM) Employees are an expensive and vital resource. An organization would manage recruitment and s election, training and development, and rewards and remuneration. The mission and objectives of the organization would be driving force behind the HRM strategy. Firm Infrastructure This activity includes and is driven by corporate or strategic planning. It includes the Management Information System (MIS), and other mechanisms for planning and control such as the accounting department.

1.

COMPETITIVE ADVANTAGE OF NATIONS/DYNAMIC DIAMOND OF NATIONAL CA

Increasingly, corporate strategies have to be seen in a global context. Even if an organization does not plan to import or to export directly, management has to look at an international business environment, in which actions of competitors, buyers, sellers, new entrants of providers of substitutes may influence the domestic market. Information technology is reinforcing this trend.

Michael Porter introduced a model that allows analyzing why some nations are more competitive than others are, and why some industries within nations are more competitive than others are, in his book The Competitive Advantage of Nations. This model of determining factors of national advantage has become known as Porters Diamond. It suggests that the national home base of an organization plays an important role in shaping the extent to which it is likely to achieve advantage on a global scale. This home base provides basic factors, which support or hinder organizations from building advantages in global competition. Porter distinguishes four determinants:

FACTOR CONDITIONS The situation in a country regarding production factors, like skilled labor, infrastructure, etc., which are relevant for competition in particular industries. These factors can be grouped into human resources (qualification level, cost of labor, commitment etc.), material resources (natural resources, vegetation, space etc.), knowledge resources, capital resources, and infrastructure. They also include factors like quality of research on universities, deregulation of labor markets, or liquidity of national stock markets. These national factors often provide initial advantages, which are subsequently built upon. Each country has its own particular set of factor conditions; hence, in each country will develop those industries for which the particular set of factor conditions is optimal. This explains the existence of so-called low-cost-countries (low costs of labor), agricultural countries (large countries with fertile soil), or the start-up culture in the United States (well developed venture capital market). Porter points out that these factors are not necessarily nature-made or inherited. They may develop and change. Political initiatives, technological progress or sociocultural changes, for instance, may shape national factor conditions. A good example is the discussion on the ethics of genetic engineering and cloning that will influence knowledge capital in this field in North America and Europe.

HOME DEMAND CONDITIONS Describes the state of home demand for products and services produced in a country. Home demand conditions influence the shaping of particular factor conditions. They have impact on the pace and direction of innovation and product development. According to Porter, home demand is determined by three major characteristics: their mixture (the mix of customers needs and wants), their scope and growth rate, and the mechanisms that transmit domestic preferences to foreign markets.

Porter states that a country can achieve national advantages in an industry or market segment, if home demand provides clearer and earlier signals of demand trends to domestic suppliers than to foreign competitors. Normally, home markets have a much higher influence on an organization's ability to recognize customers needs than foreign markets do.

RELATED AND SUPPORTING INDUSTRIES The existence or non-existence of internationally competitive supplying industries and supporting industries. One internationally successful industry may lead to advantages in other related or supporting industries. Competitive supplying industries will reinforce innovation and internationalization in industries at later stages in the value system. Besides suppliers, related industries are of importance. These are industries that can use and coordinate particular activities in the value chain together, or that are concerned with complementary products (e.g. hardware and software). A typical example is the shoe and leather industry in Italy. Italy is not only successful with shoes and leather, but with related products and services such as leather working machinery, design, etc.

FIRM STRATEGY, STRUCTURE, AND RIVALRY The conditions in a country that determine how companies are established, are organized and are managed, and that determine the characteristics of domestic competition Here, cultural aspects play an important role. In different nations, factors like management structures, working morale, or interactions between companies are shaped differently. This will provide advantages and disadvantages for particular industries. Typical corporate objectives in relation to patterns of commitment among workforce are of special importance. They are heavily influenced by structures of ownership and

control. Family-business based industries that are dominated by owner-managers will behave differently than publicly quoted companies. Porter argues that domestic rivalry and the search for competitive advantage within a nation can help provide organizations with bases for achieving such advantage on a more global scale.

Porters Diamond has been used in various ways. Organizations may use the model to identify the extent to which they can build on homebased advantages to create competitive advantage in relation to others on a global front. On national level, governments can (and should) consider the policies that they should follow to establish national advantages, which enable industries in their country to develop a strong competitive position globally. According to Porter, governments can foster such advantages by ensuring high expectations of product performance, safety or environmental standards, or encouraging vertical co-operation between suppliers and buyers on a domestic level etc.

SUSTAINING INTERNATIONAL COMPETITIVE ADVANTAGE

Competitive advantage occurs when a firm is using a strategy that is currently not being currently implemented by any of its present and potential competitors. Sustainable CA continues to exist after the efforts by competitors to copy that advantage continues to exist after the efforts by competitors to copy that CA have ceased. That means, the inability of competitors to copy the strategy makes for a sustainable competitive advantage. It is difficult to sustain a significant CA over a time without periodically revisiting the firms identity and purpose. For instance, reducing costs is not a true strategy because it simply provides a breathing

space for the organization to formulate an appropriate strategy. The length of time over which a firm can maintain its CA is dependent on: 1. Replicability: how easy it is for the competitors to duplicate it. 2. Transferability: how easy it is for the competitors to acquire the same resources and capabilities. 3. Transparency: to what degree can the competition tell what a firm is doing strategically. 4. Durability: how long can the firm keep its CA. The most important resources of a firm are those that are durable, difficult to identify and understand, not easily duplicated, and in areas over which the firm has clear control.

Sustainability of CA depends on the following characteristics of the critical resources involved: -

1. The resources need to be valuable to the firm in exploiting opportunities and neutralizing threats. 2. The resources should be rare and of such a nature that they cannot be reproduced individually. 3. The resources should be imperfectly imitable because of casual ambiguity, which: (a) might be due to the historical conditions of its occurrence; (b) makes it difficult for others to see the linkage between the resource and the benefit; and (c) makes the resource socially complex due to corporate culture. Coyne suggests that the durability of CA depends on some capability gaps that exist between firms. These gaps are: -

1. Business System Gaps- often found in organizational structure and its people. 2. Position Gaps- resulting from past decisions, from being a fast mover, or from the acquisition of a precious resource. 3. Regulatory Gaps- resulting from some governmental limitation on the extent of competition allowed in the industry.

4. Organizational or Managerial Gaps- when superior leadership results in the recognition of trends and adaptation to change earlier than the competition.

Characteristics of sustainable competitive advantage: -

1. Creates flexibility and adaptability so that firms products change with the customers Create consumer dependence on your bundle of products Build on the strength of the existing bundle Product development and/or horizontal integration

2. Creates flexibility and alternatives in the sources and means of production Mixed production systems Vertical integration

3. Maintain systems that monitor the environment for change The number one factor associated with the loss of competitive advantage is change o Competitor-induced changee.g. new products and technologies o Environment-induced changee.g. demographic changes or random events o Evolutionary vs spontaneous erosion of competitive advantage

4. Develop internal systems that adapt to change quickly and effectively Management is generally adverse to change and most management systems reward consistency. This tends to lead to the slow erosion of competitive advantage This requires the development of an internal reward structure that values new ideas and rewards experimentation (whether it succeeds or fails)

5. Work at protecting, expanding, and building upon the unique assets and strengths of the company This requires using the environmental monitors to look for opportunities to expand the companys expertise or bring new expertise into the company

Competitive advantage, in order to be valuable, needs to be long-lasting. From an economic point of view, a competitive advantage is similar to a monopoly that the company creates for itself and which gives the company a profit advantage (an economic rent). This happens only if this monopoly is not immediately destroyed before imitation. One can generally distinguish three ways of achieving sustainability:

(a) Customer loyalty (b) Positive feedbacks (c) Pre-emption of capabilities.

CUSTOMER LOYALTY creates sustainability when customers keep coming back to a company by choice, because the product or service provided to them is unique or more valuable than competition. It can also be due to a brand that has imprinted an association of uniqueness to the product or service in the mind of the customer. It can also be due to high switching costs that customers would incur if they changed products or services: in that case the customer is locked-in. An example of uniqueness or superior value is provided by Schlumberger, which commands nearly 70 per cent of the world market for logging, a highly specialized service of control for oil exploration. Coca Cola or Louis Vuitton are among the most characteristic examples of sustainable competitive advantages coming from a strong brand. A high switching costs example is given by Microsoft, whose operating system is so

dominant that a customer wishing to shift to a competitive system like Linux or Apple would have tremendous application software adaptation costs.

POSITIVE FEEDBACKS are advantages that follow the logic of 'success brings success' and produce increasing returns. There are two kinds of positive feedback: `network externalises' and `experience effects'. Network externalises exist when the customer base of a product or service is such that it induces other products or services providers to adopt it in their own value proposition. In turn, the fact that other products or services use the original product increases the value for new customers to buy the original product or service. This virtuous circle creates a positive loop that reinforces the company's competitive position. The classic example of network externalities has been provided by the battle of standards between VHS and Betamax. Because JVC, the inventor of VHS, opened its licence to many consumer electronic manufacturers, it made VF IS more readily available. This, in turn, induced video producers and distributors to put more movies on the VHS standard, inducing more consumers to buy %'HS machines, given the large number of VHS movies available. Microsoft DOS and Windows or Microsoft Office followed the same path: more software available with Windows or more users of Microsoft Office attracts more customers to buy Windows personal computers and to become users of Microsoft Office which in turn induces more Windows-based software, thereby attracting more customers. Betamax cassettes disappeared, Macintosh computers were pushed into a small market niche and Lotus 123 or WordPerfect nearly collapsed. In the end, network externalities create a situation in which the `winner takes it all', meaning that the company which has developed a competitive advantage based on network externalities has reached a quasi-monopolistic situation.

PRE-EMPTION OF CAPABILITIES is a type of competitive advantage based on the appropriation by one company of key resources or assets that competitors will find difficult to access, or to the development of competencies that are `time incompressible' (see below). Appropriation of resources or assets applies to the privileged access to natural resources such as location or mining concessions. It may apply to access to skills and talents when they are in limited supply, as is the case in many emerging markets such as the Internet-related sectors. It may apply to the right to do business, such as the obtaining of licenses, as in telecommunications, or landing rights

in air transport. Patenting is a form of pre-emption since it gives the patent holder a period during which it has the proprietary right to exploit the patent. It applies to distribution networks, partnerships or access to favorable locations, as in the retail or hospitality industries. Time incompressibility is a competitive advantage based on competencies, which are time-consuming to imitate. For instance, Toyota obtained a sustainable advantage by developing the `kanban' and the `just-in-time' processes. Those processes have been built up over time, through trial and error. When Western automobile manufacturers discovered the power of such processes in the 1980s they also discovered that they were not so easy to imitate given the complexity of the social relationships involved. They had to take the time to go through the same type of trial and error that Toyota had experienced in the first place. INTERNATIONAL STRATEGIC ALLIANCES