Posted in Finance Articles, Total Reads: 3042
, Published on 30 December 2013
Competitive advantage gives a company an edge over its rivals and enables it to generate a greater value for all the stakeholders. Companies with sustainable competitive advantages can withstand the slowdown in a better manner. There are few companies, which exploits the competitive advantage they gained in domestic market, to all across the globe. One of the best examples of these kinds of companies is IKEA. With market getting saturated and recession in Euro zone IKEA expanded its operations into consumption centric economies. The expansion was followed by building up on its competitive advantage in new market.
Competitive advantage is gained by a company by harnessing its core competencies. A core competency of a firm is an asset that gives an organization an upper hand against its peers in an industry. Diagram shows how a competitive advantage depends on external factors as economy, currency fluctuation, geography, culture as well as on internal environment as change in technology, human resource, policy of company etc.
Along with that a core competency meets the following three conditions as specified by Hamel and Prahalad (1990):
• Provides benefits to customers (for sustaining product utility)
• Hard to imitate for competitors (for sustaining competition)
• Can be leveraged to many products and markets (for sustaining product variety)
A core competency can take various forms including expertise in technical knowhow, product development, supply chain, human resources, distribution etc. Company can gauge its core competency by doing internal and externally analysis of an environment.
Various frameworks are used by companies to analyse internal environment. The most often used is VRIO (Value, rarity, imitability, organization) framework.
Declining relevancy of competitive advantage in the economic slowdown:
These frameworks and tools in use nowadays are based on dominant idea of devising strategies that will provide sustainable competitive advantage. With economic slowdown, the competition has become fierce in the domestic as well as in international market. Economic slowdown in domestic market forced many companies to foray in to global arena.
IKEA, a Swedish firm is the world’s largest furniture retail chain. In Europe, IKEA provides good quality, stylish furniture at a cheaper price. IKEA has cost competitive advantage which is achieved by optimising their sourcing and supply chain strategies and product/ service differentiation by better understanding of their customers. When IKEA ventured into China, IKEA lost its competitive advantage of cost competitiveness. It is mainly because of local firms which copied their designs and provided the product at low cost than IKEA. Local firms had access to cheaper raw materials and labour and lower design costs. Inherent fault in competitive advantage of being non-universal in character harmed IKEA a lot. While the same products were cheaper in US and Europe found no customer when IKEA entered China. IKEA’s global branding that promises good quality products at low price did not work in China. It is also because of western products are seen as an aspiration in Chinese market.
IKEA built a number of factories in China and increased its local sourcing. Apart from this IKEA adopted other strategies to reduce on cost. It helped IKEA to reduce its prices by approximately 60% since its entry to China in 1998. It also started targeting middle class as this segment happened to be better versed with western styles. Moving away from its image of IKEA for common people, it stated itself as a high end product in China. As described by IKEA case in China, competitive advantage may not be sustainable when external environment changes.
In a creative economy, the problem, says Professor McGrath (Book: The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business), is that competitive advantage is transient, not sustainable. It is not possible for any company to make strategies that work well every time in different environment and at different pace of economy. In today’s business environment, companies cannot settle for incremental improvement; they must periodically undergo performance transformations to get, and stay, on top. This requires a continuous transformation from one competitive advantage to another, but the problem lies in where to find them and if such a differentiator is found then how to apply throughout an organization.
The problem arises from the inherent nature of human being which happens to be resistive towards change or transformation. A recently published book, Change or Die explains “as the odds are nine to one that individuals will not alter behaviour even when faced with the likelihood of dying prematurely as a result of bad habits. Business leaders who see this statistic might question their chances for success in leading less threatening initiatives in their organization”. Surrounded by the pressure to respond to a rapidly shifting world, leaders need tools to address many challenges in building and maintaining new initiatives, so that they are never caught off-guard. A competitive advantage is lost in this scenario, even it appears much devastating as company will resist to change from a strategy which it consider as a competitive advantage.
For a company to be successful it is essential not only to identify its strength but also to analyse and implement it again in the event of product change, market change, geography change.
It could be easily explained by taking example of fifth largest automaker of Japan, Mazda.
Each of Mazda’s cars in the 1960’s had the Wankel engine installed. Specializing in this engine design gave Mazda a competitive advantage against their competitors. The success of this rotary engine allowed Mazda to enter larger markets such as America and Australia. Mazda's rotary engine success continued until the onset of the 1973 oil crisis. As American buyers (as well as those in other nations) quickly turned to vehicles with better fuel efficiency, the relatively thirsty rotary-powered models began to fall out of favour. After some years few of the automakers from Japan like Honda developed their competency in engine design. Eventually, Mazda lost its competitive advantage and engine design became Key Success factors for the automobile industry in Japan.
Mazda refocused its efforts and made the rotary engine a choice for the sporting motorist, thus capitalizing on a niche segment. This switch in focus also resulted in the development of another lightweight sports car, the piston-powered Mazda Roadster. Introduced in 1989, the Roadster has been widely credited with reviving the concept of the small sports car.
After 2000 Mazda entered into number of international and national strategic alliances to optimize its supply chain. It kept its focus on innovation in technology and alternative composite materials especially plastics for interiors. It helped Mazda to deliver “innovative vehicles that are both affordable and fun to drive”.
When the sub-crime crisis hit US economy in 2008, the sales of Mazda in US declined where it had 2.5% share of passenger car market. This temporary decline in sales not forced Mazda to revise its strategies but to sustain its competitive advantage. But the prolonged economic slowdown in US in parallel with Euro-Zone crisis led to appreciation of Yen (from value of 1 USD = 107.0800 JPY in Aug, 2008 to 1 USD = 75.9800 JPY in Oct, 2011) thus making exports from Japan expensive.
Mazda currently earns approximately 78% of their revenues from overseas market. While only 28% production of passenger cars takes place in overseas market. Sub-prime crisis made Mazda realize this problem of its vehicle prices exposure to international currency fluctuations. Mazda acted on it and devised strategy to produce 50% of their vehicles in the overseas locations.
Along with this Mazda developed competitive advantage through its dealer centric business model and achieved huge success in Australia.Mazda3 was the top selling car in Australia in 2012. Mazda also came out with SKYACTIV-D technology. With a unique combination of class-beating performance and fuel efficiency, Mazda’s SKYACTIV-D line-up of clean diesel engines is attracting the admiration of automotive experts and consumers worldwide.
Successful firms, at the time of economic slowdown, tightly focus on delighting customers by mobilizing whole ecosystem that deliver continuous innovation and mass customization. Nowadays business, are facing situations where competitive advantages are imitated quickly and rapid growth of technology allows customers with various alternatives. Nokia and Kodak are some of the few examples where we witnessed how technology overcame competitive advantage of a company. Such scenario make companies focus on advantages which they can carry with time to any place, the only transformation possible is to build up the ladder of competitive advantage. Examples of IKEA, MAZDA, Godrej in India explains the surety of success for an organization which continuously transform themselves by building up more differentiating factors, these factors are nothing but building up “ Competitive Advantage”.