Achieving Success through Competitive Advantage and Building Better Working Worlds
Posted in Marketing & Strategy Articles, Total Reads: 2096
, Published on 08 May 2015
Success strives for the most competitive strategies, any firm should adopt in gaining profitability and competitive advantage, over its competitors. Reading between the lines of vision and mission statements of Fortune 500 companies makes only one sense, to be more successful than their competitors, riding on their competitive advantage.
Competitive advantage is an ability of a firm in earning a persistently higher rate of profits than its competitors through a disequilibrium phenomenon due to the consequences of change.
These changes could be external or internal. For example, in automobile industry, GM had an ROA of 4.81%, Toyota 3.48% in 2000 while suddenly the ROA changed with GM's -23.77% and Toyota's 5.87% in 2008 when Oil PRICES had tripled during this time (external change). Toyota had better fuel efficient products and distribution network.
Competitive Advantage could be achieved through the following:-
1. Responsiveness: Firms should have the ability to anticipate change (through superior information) and then the ability to speedily shift towards change, also known as the TIME BASED COMPETITION.
2. Strategic Innovation (New Game Strategy):-
Using newer Business models and approaches, such as through newer products (ex. Apple and Google), experiences (ex. Starbucks), or product delivery (ex. Flipkart, Paytm).
It has a broad scope, such as:-
A. Introducing new Business Line, companies expanding its offering, ex. EY opening up the IT Advisory.
B. Introducing newer Customer Segments, ex. Microsoft’s XBOX is exploiting the already existing video games segment.
C. Introducing newer Sources of Competitive Advantage, ex. Dell introducing the Customized laptops space.
Internal sources are due to form's Resources and Capability. Firm has different types of resources at its disposal- Tangible, Intangible and Human Resources. While, capabilities are due to its core competency. Core Competency is due to disproportionate contribution to customer value and a basis for entering new markets.
To establish a competitive advantage, firm needs:-
1. Scarcity: Use of a cutting edge technology is not a competitive advantage if it being used by everyone.
2. Relevance in the current potential market.
For example, Hybrid Cars could have been a competitive advantage of a firm, had it been of lower cost to own and run than a normal car.
Sustenance is more important than just establishing the competitive advantage that includes:-
1. Durability: Consumers generally buy a more reliable time tested product.
2. Transferability: Ability to buy out other firms in the competition box. For example, Facebook buying out Whatsapp, as it turned out to be a threat.
3. Replicabilty: Ability to imitate the competitor if it cannot buy. Ex. Snapdeal imitating and eroding the competitive advantage of Flipkart.
Industry earns profits but how is this shared among the firms competing in that industry could be answered by the firm's ability to survive and prosper - its key success factors.
A firm must meet two criteria:
1. What do customers want?
2. How does the firm survive competition?
Once the customers' preferences are based, one can identify those factors that would bring success to individual firms.
For example, cost efficiency is the primary basis of competitive advantage in the domestic airlines industry and key success factors of each firm would differentiate their profitability in the industry, wherein many firms starts imitating and erode the competitive advantage.
Environment under which an Industry survives is based upon external influences, such as political, economic, social and technological, commonly known as PEST. While the Industry environment has three main profit earning sources:-
1. Customer: through Value Creation
2. Supplier and the bargaining power of producers relative to supplier
3. Competition: the intensity and key success factors
Value creation is the difference between the price one pays for a product and the actual cost of production. For example, a bottled water requires a cost of extraction of water at Rs. 4 per liter while the market price stands as Rs. 20 per liter. Hence, there is a value creation of the difference Rs.16.
Michael Porter, in 1979, pioneered the concept of competitive framework and broke it down into four variables that influence the competition and profitability.
1. Threat of Substitutes:
It depends on the availability of the product, on prices, reliability of substitutes, willingness of the buyer and the propensity to substitute.
Ex. One wants to buy a Nokia phone.
Reliability (times genuine)
Brick and Mortar
after 7 days
after 5 days
after a day
Depending upon these factors a firm sets their price.
2. Threats of entry:-
If the return on capitals is greater than the cost of capital it becomes a magnet for others to enter the space. Barriers of entry and exit is most important here.
3. Industry Rivalry:-
A. Concentration of competitors: Monopoly (Microsoft), Oligopoly, perfect Competition
B. Diversity: For example, Origin of car makers: Italian Fiat, US Ford, Cadillac, Japanese Honda, etc. compete in the same market.
C. Product Differentiation: Variety of offerings made by the competitors, for example, Mitsubishi has car division, metro cars and motors division, defense technology, and this would increase the sustainability of the form and collection of profits from variety of products offered.
D. Excess Capacity and Exit Barriers: In Shipping Industry: there is huge initial costs which makes the firm to not exit until huge profits over the years are earned.
4. Bargaining power of Buyers and Suppliers:
It depends on Price Sensitivity and bargaining power of buyers and suppliers. Ex. Cola companies always try to reduce their cost for aluminum cans.
By 1990, Six Forces Model was proposed, sixth force being the Complementary force. Ex. tourism industry and airline industry. When a consumer travels on an airplane he is most likely to visit a destination which is a part of tourism industry.
In 2005, a ground breaking research spawned by professors of INSEAD, came up with Blue Ocean Strategy, the result of 20 years of research on the strategic moves of over 150 companies across 30 different industries to see what made some succeed out of the ocean of competition. Throughout the world, it has successfully described past strategic moves and is recognized as best practice in strategic management planning and change management.
Red Ocean (Market Competition) deals with strategic thinking that involves head to head competition as described in Porter's Model. Here, companies try to outperform and grab greater market share. But, as potential entrants realize the scale of returns, the market gets crowded. Thus, a cut throat competition with limited profits and margins, limited growth, harder to get investments turns the ocean bloody red. Leaders' here took the structure of the industry for granted as they thought it is tough and they built strategy based on it. Thus, the only way to succeed here became attaining cost advantage or differentiation. But, as high differentiation requires premium cost structure it meant fewer people could buy it.
In contrast, Blue oceans (Markets creating moves) are seen as opportunities as there is unlimited untapped market space. Here, Leaders thought their strategy would shape the structure of the industry environment, because industry structure are results of the mind and can be restructured to their favors. Thus, by restructuring, one can achieve differentiation and low cost but also made it difficult to imitate. It involves aligning value proposition-that makes buyers win, and profits proposition-that makes companies earn.
Ex. In the video game industry, Nintendo came up with Wii, an innovative motion-gaming with massive scale that eliminated the cost of CPU power and high end graphics, made for every section of society competed with Sony, Microsoft and succeeded.
The Body Shop, founded in 1976, created a whole new market space of natural beauty products through social and value innovation rather than compete with large cosmetic companies.
Cirque de Soleil redefined the circus industry and created a new live entertainment shows by eliminating the taken for granted cost drivers such as animals and the stars. They incorporated opera, ballet and concerts.
Starbucks introduced new coffee bar culture
ITunes and iPods unlocked the blue ocean in digital music with added advantage of highly successful iPods.
Viagra, Pfizer changed the focus of Pharmaceuticals Company as a medical treatment towards lifestyle enhancement and emotional orientation.
Cyanogen Mod, a free and open source software based on official release of Android, after the ‘jail breaking’ permission by US.
Zara is able to develop a new product and get it in stores in as little as two weeks compared to the six-month industry average.
Industry is changing and so are the strategies of the firm to maximize the yield. With a short term view, firms focuses on product innovations, i.e., innovation with existing business model. But, firms should focus on business model innovation which gives superior profitability and better competitive advantage over others, in long term.
This article has been authored by Anshul Agrawal from International Management Institute (New Delhi)
1. Contemporary Strategy Analysis: Robert M. Grant