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Competitive Advantage is a company’s ability or strategy to perform in one or more ways that competitors cannot or will not be able to match in the long term, which are unique and help it serve its customers better.
Companies strive to build sustainable competitive advantages, and those that succeed deliver high customer value and satisfaction, which leads to higher repeat purchases and, therefore, higher profitability.
The possible sources or strategies for a company to build a competitive advantage can be:
Technology: The access and use of the latest technology to create superior products to fulfill the growing needs of its customers. Technology is a major source of competitive advantage for companies in the hi-tech areas such as Computers, electronics, Automotives, etc. Technology is also used in obtaining low-cost Productions, which will give the company the advantage.
For example, MICHELIN has been using technology as a source of gaining competitive advantage since the beginning. In the 1940s it discovered the Radial Tires and got a patent for them. It used this technology for gaining an advantage and in turn, revolutionized the Automotive Tire industry making many companies redundant. In the 1990s it has gained/developed a new Tire Manufacturing technology that converts the traditional labor-intensive industry to a highly automated manufacturing process and thus making it highly competitive on cost. Why did Michelin, a tire company, decide to rate restaurants?
INTEL uses technology for manufacturing new products to meet the consumer demands before anyone else can meet the demands.
Cost of Production: either through low cost of labor producing cheaper products can be a source of Competitive advantage. Many of the Asian countries and Latin American countries have a low cost of Production for certain labor-intensive industries.
Access to Raw Materials & Suppliers: This is important to certain industries dependant on scarce raw materials such as Steel, Aluminum, Petroleum, and gases. Similarly, companies, which have built a good Vendor base, have gained a competitive advantage. Companies such as Ford and General Motors have built their worldwide vendor base to give them competitive advantages.
Legal Protections: In the Cheese industry the AOC gives certain companies the Competitive advantage over the others. In the Pharmaceutical industry the company which is able to get a patent for new discovery / drug is able to derive the competitive advantage over the others for the period till the patent exists.
Flexibility in Product Development / Production: Many Japanese firms, such as National, have very flexible and faster processes to deliver new products / bring out imitations of new products in a much faster time than many of its Occidental competitors.
Quality of Product: Most companies build Quality products through the use of high technology, raw materials, and production process, and their Brand Names are associated with Quality products.
Marketing & Sales
Strong Brands: Many of the companies in Consumer products have built strong Brand names over a period of time and hence have built a competitive advantage over their competitors.
SONY in the Electronic goods, Kodak in the photo films, Néstle in the food industry are certain examples of companies building a competitive advantage over the years through their brands. Good food, Good growth: Nestle’s way of doing business!
Distribution Networks: Many companies have built strong distribution networks and used information technologies to build competitive advantages through distribution strategy. Coca-Cola invests in the distribution infrastructure to gain a competitive advantage over Pepsi.
Marketing Personnel: Many companies invest in their Marketing & Sales personnel through training and development to give them a competitive edge over the others in the marketplace.
After-Sales Service: Many companies use After-Sales Service to differentiate their products and get a competitive advantage. For Example; Xerox does not sell photocopy machines but sells its photocopying service to its customers. Similarly, Disneyland uses Service to gain an advantage in the amusement parks industry. Experiential Marketing by Disney – A fine example of Marketing 3.0
Marketing Systems: Many companies build Marketing systems by using the Information Technology, Computers & Software to identify consumer needs and builds ways to satisfy their needs before anyone else does that. Unilever has a unique system for identifying new consumer needs and developing products to fulfill those needs. Business Strategies that set FMCG giant “Unilever” a class apart
Access to Cheap sources of Funds: Companies, which are highly profitable in a certain industry and is flush with funds can enter a new field and has a competitive advantage over others as it has access to a large source of funds.
When it entered the Food industry, Phillip Morris had access to the funds from the profitable Tobacco business, which was used to gain an advantage in the Food industry by purchasing various companies and spending money to build and buy brands.
Similarly, when certain Banks enter other fields such as Information Technology or Insurance, they will be able to gain an advantage by using its available funds, which the competitors will not have access to.
Management Systems: Many companies have built internal Management and Control systems to give them the Competitive advantage over the others in its field of operations.
Building a successful Competitive Advantage Strategy:
Success can be defined if the organization is able to build competitive advantage in its business activities.
Given below are few extracts from the book “Made in America – My Story” by Sam Walton, the founder & former CEO of Wal–Mart which clearly demonstrates the key factors for the new activities in creating the competitive advantage.
Joe Hardin, Executive Vice President, Logistics and Personnel “ Distribution and transportation have been so successful at Wal-Mart because senior management views this part of the company as a competitive advantage, not as some afterthought or necessary evil and they support it with capital investment. A lot of companies don’t want to spend any money on distribution unless they have to. Ours spends because we continually demonstrate that it lowers costs. This is a very important strategic point in understanding Wal-Mart”.
Sam Walton “Many people have contributed over the years, but David Glass has to get the lion’s share of the credit for where we are in distribution. David had a vision for automated distribution centers- linked by computer both to our stores and suppliers-and he set about building such a system, beginning in 1978 at Arkansas…..”
“I think it’s fair to say that our distribution system today is the envy certainly of every one in the industry…..” (This is true as recently Amazon.com hired few distribution system personnel from Wal-Mart which was stalled / stopped by Wal-Mart legally.)
“Of course, the only thing that makes the whole distribution system work so well is the dedication of the people all across it. The technology and hardware are just tools. The people in the system believe, just as firmly as the associates in the stores…..”
“Without the right managers, and the dedicated associates and truck drivers all across the system, all that stuff is totally worthless.”
Hence, the 12 key factors that will make such New activities successful in a company are:
- Senior / Top Management: The Vision, Goals, Attitudes, and Support of the Senior Management are very much required in making all such new activities help in creating the competitive advantage and be successful. At Wal-Mart, Sam Walton developed this idea in 1966 after visiting the IBM School and supporting it.
- The vision of the Managers creating the New activities: It is of utmost importance that there should be at least one person/manager ( apart from the Top Management ) – “The Champion” in creating the new system to have the vision and the ability to create and make the new activity successful in the organization. They should also have the ability to demonstrate both to the top management and all persons the benefits of these new activities. For example, as mentioned above, David Glass had a vision for the system at Wal-Mart.
- Long Term Goals of the Organization: The organization should have long-term goals and visualize the usefulness of all such new activities in helping in reaching the goal and creating the competitive advantage. For example, Wal-Mart wanted to overtake K-Mart and be a global leader in Retailing.
- Demonstration of Benefits of the New Activities: Everyone needs to understand the benefits of using such new activities. Only then will all persons in an organization embrace such new activities. At Wal-Mart, the computerized distribution system gave them time savings and flexibility, but the cost savings were much more, making their products cheaper than their competitors. Hence, the new activities should demonstrate the benefits of having such a system for individuals and organizations.
- Involvement of all Employees in the Organization: The Top Management or the Manager involved in creating the new activities should involve all managers and persons at all levels of the organization. Only then will it be successful. They should be able to obtain dedication from every employee towards these new activities.
- Culture of the Organization: Components of Culture such as the average age of the employees, the organization’s capacity to Change, decentralization, empowerment, and customer orientation in the organization are few critical organizational cultures that will make all new activities successful in the organization.
- Competition: The present competition in the industry and the expected future competition from outside the industry will compel many companies to take up new activities to stay ahead of the competition by creating competitive advantages.
- Stability of the Top Management: This very important, especially after the start of the new activities, because if the Top Managers / Managers responsible for these new activities leave the organization, then these cannot be implemented.
- Benchmarking of the Organization: Benchmarking is very important because, without external benchmarks, it is all too easy for employees to believe that it is the top management rather than the competitive reality that applies the pressure of improvements through the adoption of the new activities.
- Architecture / Structure of the Organization: The Structure of the organization aids in the adaptation of the new activities. Traditional organization structures with high bureaucracy and many layers will be difficult for making new activities successful. Thus organizations with flat structures / few layers will have better chances of succeeding in new activities.
- Previous Experience/ Learning Curve: The organizations will have to have an earlier experience of successful adoption to add new activities of higher levels. This is also the ability of the organization to learn & apply faster than its competitors.
- Size of the Organization: A smaller and leaner organization will make new activities successful than a large and fat organization. People in smaller organizations will be willing to adapt and use the new activities faster.
Challenges while building Competitive Advantage:
The company’s size is NOT important when adding new activities. Still, a smaller and leaner organization will make new activities more successful than a large and fat organization. People in smaller organizations will be willing to adapt and use the new activities faster.
The new activities are meant to give the companies a competitive advantage. The company, which can identify, adopt, and use the new activities for building Competitive advantage, will be successful.
For example: In the mid 1960s Komatsu was a small organization in comparison to Caterpillar and embarked on overtaking Caterpillar since then through building new activities in new products through licensing, Quality programs, internationalization and building new systems to ensure a safe future. (Gary Hamel & C.K Prahalad, “Strategic Intent” HBR,1989 ).
The Challenges the company faces when it considers building a Competitive Advantage Strategy are:
- Building a clear and collective agenda/plan for building Competitive advantage through the deployment of new activities.
- Deployment of investment resources (both monetary & human) for these new activities.
- Top / Senior Management allocating time and intellectual energy for identifying the new activities, guiding, building, and evaluating the progress of these new activities for competitive advantage.
- Creation of Cross-Functional teams for the successful development of these new activities.
- Identifying/recruiting the Manager / Team leader who has the vision and ability to operationalize successfully the new activities.
- Delegating power to the team / the Manager for creating new activities.
- Percolation into every Employee of the organization, the Goals, Vision and a sense of creating the competitive advantage through the new activities.
Competitive Arenas encompasses the Market versus the non-market, whether it is the Strategic Business Units (SBUs) time frame or the cycle time for product development. A truncated view of the dynamics of competition & Competitive arenas obscures important strategy issues around notions such as consistency, continuity, resource conversation, and competence accumulation.
Competition occurs not just between individual product and/or service offerings but between firms and coalitions of firms. Companies compete in building core competencies that transcend the resources of individual business units. Coalitions compete to create new Competitive spaces or Competitive arenas. The fact that this competition takes place outside a “Market” does not make it any less real. An insensitivity to this broader scope of competition can prevent a company from adequately preparing for the future.
The Examples of Competitive arenas are as follows.:
- McDonald’s considers itself as being in the business of satisfying the world’s hunger and considers its Competitive arena as any food served either through Foodservice outlets or Food Retail outlets as its competition and hence built strategies for facing this Competitive arena.
- Kellogg’s considers itself as being in the business of providing nutritional breakfast and hence considers its Competitive arena to comprise of Cereals, Biscuits, and others and hence makes its products available in all forms of products such as Cereals, Cereal bars, and Cereal biscuits.
- Coca-Cola considers itself satisfying the thirst of the people worldwide. Hence, its Competitive arena consists of all Cola & non-cola soft drinks, Bottled Water, Tea, Coffee, Beer, alcoholic drinks, and various liquids that satisfy the human thirst. Its strategies revolve around this Competitive arena in providing its products.
Building different forms of Competitive arenas are as follows:
- Redrawing the boundaries of its Competitive arena: The only avenue open for a company confronting insurmountable barriers to entry is to redraw the Competitive arena boundary so that what is now attractive lies outside the former barriers. This is done by radically shifting the basis for the competitive advantage in the industry as CNN did in the news broadcasting using high levels of technology into the industry.
- Creating a new Competitive arena ideally suited to one’s own strength: Intel decided to concentrate on the Microprocessor business exiting from its earlier one. Similarly, Sharp identified pocket electronic organizers as its strength and built its business around this. Danone exited from various unrelated businesses and is concentrating on three core businesses of Yogurt, Bottled Water, and Biscuits.
- Combining forces to fight a Competitor: Nestlé joined with General Mills in 1988 to form a company called Cereal Partners Worldwide for the production of Breakfast Cereals outside the US & Canada to fight Kellogg. Similarly, Carrefour and Promodes joined to get the competitive advantage for taking on the mighty Wal-Mart.
- Collaborating / Combining forces to expand the Market or Competitive arena: Nestlé joined with Diageo’s Pillsbury (Haagen-Dazs) for production and marketing of Ice-creams in the US. This gives Néstle the technology of manufacturing Ice-Creams and a market for its milk products and desserts.
- Partnering with Customers to create barriers in the Competitive arena: In 1990 Nestlé reached an agreement with the Walt Disney group concerning a long-term partnership in Europe thus making Nestlé the exclusive food supplier for Euro-Disneyland. The joint marketing programs enable Nestlé to use the Walt Disney characters in the packaging and advertising of its food products. Similarly, Coca-Cola tied up with McDonald’s for being the exclusive supplier of all its Soft Drinks. This prompted Pepsi to create a chain of fast-food restaurants such as Pizza Hut, Kentucky Fried Chicken, and Taco Bell for serving its soft drinks.
- Partnering outside the industry for creating a future Competitive arena: In 1989, Nestlé and Baxter Healthcare Corporation created a network of companies worldwide known as Clintec Nutrition Company for developing, marketing, and distributing Clinical Nutrition Products “ Nutraceutical Food Products” / Functional Foods which is seen to develop rapidly in the future. Similarly, Quaker Oats and Novartis recently created a joint venture for Nutraceutical / Functional Foods.
Nestlé in 1974 acquired 49% of the stake in L’Oreal for discovering new horizons of scientific research such as the study of aging which is essential for nutrition and has a close connection with L’Oreal’s desire to increase its understanding of the skin’s aging process and internal assaults on the skin by Food versus the external assaults.
Similarly AOL and Time Warner merged to utilize the complementary capabilities of each other to create a new strong entity and changing the Competitive arena.
- Creating other Entry and Exit barriers: Entry barriers can be built by creating a cost advantage, strong brands, serving all the segments of the market and leaving no consumer demand unfulfilled.
- Reinventing the Industry / Changing the rules of the Game: Many companies have in the past rewritten the rules of the Game by changing the Key Success Factors. For example Northwestern Airlines changed the rules by offering a no-frills Airline at lowest possible prices. Similarly Compaq and Apple Computers changed the rules for the computing industry by challenging IBM with smaller desktop machines.
- Cornering Scarce resources: Either through backward integration or forward integration and thus making the Competitive arena difficult to enter.
- Creating Global Competitive arenas: will change the Competitive arena from a local / country-specific to global arenas where everyone will not be able to compete. This can be either through acquisitions and or mergers or has to be built systematically over a long period of time.
Additionally Building New Competitive arenas can be done in the following ways:
- Creating an Intelligent Organization: Adopting and Utilizing all the new activities for creating competitive advantages.
- Creating competitive Cost Advantages in manufacturing and through suppliers.
- Serving the Customer better through Consumer Satisfaction and Consumer Delights.
- Making organizations Futuristic and prepare for the future.
- Making organizations identify, analyze and manage uncertainty.
- Identify the functions for building the competitive advantages.
- Redefining the Competitive arena boundaries through new products and services.
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