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

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

• 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 (5th force), to which is added ‘complementors’ (6th 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:

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?intArticle_ID=195