GAINING AND KEEPING COMPETITIVE ADVANTAGE Session 13
What is competitive advantage When an organisation sustains returns that exceed the average for the industry or the sector it is said to possess competitive advantage over its rivals (Yolles, 2009: 95) Yolles, M. (2009) 'Competitive Advantage and its Conceptual Development' Business Information Review. pp 93-111
Underlying premise and origins Originates in the strategic management paradigm. Underlying assumption was that organisations operate in a socio-Darwinian (survival of the fittest) environment. Premised on the understanding that profitability and sustainability are linked and that we can find model organisations to follow (Peters and Waterman, 1982). Peters (1987: 3) later argued that chaos rules – those who survive do so because they thrive on change and impermanence.
Sustainable Competitive Advantage The way you compete Basis of competition Where you compete Whom you compete against Sustained competitive advantage Aaker, D. A. (1992: 183) Strategic Market Management.
Key components Where you compete – choice of target market (back to the discussion on strategic windows). You might have the right skills and assets, but are applying them in the wrong marketplace. Whom you compete against – who are they and what skills and assets do they have – if they are the same you may cancel each other out. You should aim for a price or differentiation asset.
Additional Characteristics To be effective, Aaker (ibid, 184) argues, a SCA should have three components supported by assets and skills. It must be substantial enough to make a difference – a modest advantage will not be valued adequately by the market. Be sustainable enough to weather a change in the environmental conditions in which the business operates. Be leveraged into visible business attributes – made apparent to the customer through branding, marketing or design – these will support a reasonable positioning strategy.
Evolution of SCA SWOT AnalysisEconomic/Utility TheoryResource Based ApproachKnowledge Management Knowledge Cybernetics
SWOT Highly simplistic – two main forms: –Input/output model (aims for optimal outcomes in an external environment). –Resource Based View of Organisation – organisations possess resources that are inputs to its production process: physical; human and organisational. When these are appropriate the organisation can achieve competitive advantage.
Input/output model This approach pre-supposes that the marketplace offers equal opportunity to all participants. Sheth and Sisodia (2002) explored this from the perspective of organisations operating in a market free from regulatory constraints and barriers to entry. In this market two types of competitor evolve: Generalists: Volume driven, therefore financial performance is linked with market share Specialists: Margin driven – financial performance deteriorates with increased market share.
Resource-based View Looks for a relatively high return on investment. Aims for economic value added – economic rent. To achieve this it must have assets or resources that its competitors don’t have – intangible assets (information, reputation, knowledge).
Relationship to Porters (4, 5, or 6) forces This traditional view sits on the work of Porter, who outlined the primary forces that determine organisational competitiveness: –The bargaining power of customers; –The bargaining power of suppliers –The threat of new entrants –The treat of substitution These combine to create a situation of competitive rivalry (5 th force), to which is added ‘complementors’ (6 th force) to help to explain the need for strategic alliances.
Possible entrants: Needs characteristics: products; knowledge; capital; distribution chain; cost advantage and so on Complementors: formation of strategic alliances Competitive Market Rivalry: understandin g exit barriers; costs/value added; over capacity Substitution Threat: Needs characteristics: possible cost switching; trade- off substitution; buyer inclination to switch and so on Buyer Power: Needs characteristics: information on products or services; bargaining leverage; understanding product or band differentiation and so on Supplier Power: Needs characteristics: volume of supply; importance, concentration, input differentiation; relationship between cost and industry norm for purchases and so on Yolles, 2010:96
Limitations It pre-supposes that an organisation has the capability to recognise the threats and create a strategy to deal with them. It deals with ‘ideals’ which assumes: –Certainty in the market; –That buyers, competitors and suppliers are unrelated; –That value is created by structural advantage, which creates barriers to entry; – That the basis for competitive market strategies is rational, so returns can be maximised.
Entrepreneurial approach Organisation may again sustained competitive advantage by being responsive to change and by maintaining and developing existing resources and adding new ones. Knowledge is deemed to be the most important value creating asset.
Knowledge Management Seen to be one of the organisations key tools and resources. Yet more organisations look out at the competences of their competitors, than look in at their own competencies. It is agreed that SCA is often related to core competencies, but knowledge or know-how is often tacit – uncodified, difficult to recognise and manage. Explicit knowledge is codified, captured and managed.
Knowledge Management Two factors influence an organisations ability to win and sustain competitive advantage: –Structure and configuration – do the resources fit the environment in which the organisation operates? –Organisational culture – is the organisation capable of identifying, stretching and exploiting the opportunities available to it? Whilst knowledge management has both tacit and explicit elements, knowledge capture tends to be limited to explicit knowledge and despite its strategic importance, tacit knowledge is frequently mismanaged.
Strategic Thrust The primary drivers for organisational strategy may be a combination of options, but most notably are: Strategic Thrusts Focus on market segment or product Pre-emption = first mover advantage Synergistic = joined up thinking Low Cost Differentiation Most important: all strategies will embrace one of these.
Strategic Vision versus Opportunism Vision – brings a long term view which helps organisations to plan for future resources and structural needs. Strategic Stubbornness – looking forward can be tricky and uncertain, you cant accurately forecast what the market or competitors will do. Strategic opportunism – more entrepreneurial. Has a focus on the present. If the strategic focus for the present isn’t right, there will be no future.
Key Characteristics Flexibility and responsiveness are the main characteristics. Monitor the market to ensure that you identify trends and opportunities. Strategic drift – avoid. Where investment opportunities are made incrementally in response to opportunity it can lead to a dilution of resources as the organisation ‘blows with the wind’ Strategic Flexibility – Aims to balance both long term and short term goals. This approach requires some resources to be underutilised - difficult in a competitive market driven by JIT and Lead thinking.
References Sheth, J. N. and Sisodia, R. S. (2002) ‘Competitive Markets and The Rule of Three’, Business Journal (September–October), www.iveybusinessjournal.com/view_article.asp?intAr ticle_ID=195