Technological Trends Have Changed the Mode of Life on the Planet - Essay Example

?Literature Review of Competitive Advantage Introduction The technological trends have changed the mode of life on the planet. Conventional business processes and operations have been replaced with newer forms of strategic planning that have become essential for organizations to meet the challenges of the changing times. The scope of service and products is no longer confined to limited regions; companies have to compete in a global market where the consumer has greater awareness and access to global businesses to fulfill their needs. In such demanding times, effective strategic management is required to ensure that the company performs better than its competitors, whether local or global, and continues to retain its market share. The concept of competitive advantage has evolved over the past few decades and has now become an integral part of strategic management of any organization. Much research has been conducted on the attainment of competitive advantage and effective ways to sustain it. This literature review aims to explain the concept of competitive advantage in the light of different authors, along with their proposals of effective strategies to sustain it. Few examples have been chosen from the available literature to highlight the practical implementation of the concepts of competitive advantage. 2. Literature Review The concept of competitive advantage was introduced in the study of strategic management by Ansoff (1965). His ideas and propositions are known to form the basis of vital aspects of the development of growth strategy of any organization. Lowy and Hood (2004) quoted Ansoff (1965) and stated that his extensive experience and research in the field of diversification planning, highlighted relevant aspects and issues that should be considered for an effective growth strategy. Hindle (2008) also discussed the contributions of Ansoff and stated that some of the valuable contributions of Ansoff’s work in the field of strategic management are related to the attainment of competitive advantage and core competencies. Priemand and Butler (2001) pointed out that Ansoff’s work seemed to stress on the relevance of industry-based factors (threats and opportunities) more than the resource-based ones (weaknesses and strengths). Dix and Mathews (2002) provided a basis of strategy formulation and explained the attainment of competitive advantage; he stated that the development of strategic decisions involve the analysis of the core competencies and resources of the company. Prahalad and Hamel (2003) also considered the identification of core competencies as an important aspect of competitive advantage. The core competencies, that are unique and distinguishing from the competitors, can serve to become the competitive advantage if they are availed in the presence of good opportunities in the market. The concept of competitive advantage was further researched upon by Porter (1998). Porter explained the formulation of a competitive strategy as the broad plan of how businesses should compete in the market (in the presence of various environmental factors) to meet their goals. It also involves the policies according to which goals and objectives of the organization can be met. Porter also stated that competitive advantage can be explained as the combination of having low expenses, differentiation value for the company and a strategy that enables the company to focus on their main objectives. Porter (1998) accumulated all the aspects that might be related to the attainment of competitive advantage onto a single page. He described it as the ‘Wheel of Competitive Strategy’. The underlying bases of the strategy are the basic goals that are aspired to be achieved by the company and the vision which is set as the main direction of the company. Various aspects on the rim of the wheel, like marketing, product line, finance and control etc have to be considered to attain competitive advantage in the market, while being influenced by the main vision of the company. The following figure shows the respective wheel proposed by Porter: Figure 1: Wheel of Competitive Strategy (Porter 1998) His contributions are considered valuable in the development of the concept of competitive advantage as they highlight a diverse range of organizational factors for succeeding in the presence of competitive forces in the market. Porter (1996) stressed on the need for companies to accept changes in their business processes and objectives, due to the changing times and needs of the environment. Hulsmann, Grapp, Li (2006), Shimizu and Hitt (2004) also gave importance to the need for strategic flexibility to improve competitive advantage. There are various schools of thoughts that aim to define competitive advantage. Rumelt (2003) mentioned that competitive advantage is often linked to the performance of the company in the stock market, while some schools of thoughts associate it with the degree of financial returns of the company. Peteraf (1993) discusses competitive advantage of a company in terms of ‘resource-based view’. The main aspects that have been linked to competitive advantage by him, involve the usage of resources in the most advantageous and fitting manner. Gjerde, Knivsfla, Saettem (2009), Tong and Reuer (2006) also considered resource-based factors to be more important than industry-based factors. However, McGahan and Porter (1997) discussed the industry based factors in detail and concluded that they cannot be ignored in the formulation of effective strategies. They also stated that industry based factors tend to have a considerably lasting effect than organizational effects. Barney (2002) denoted the attainment of competitive advantage as the experience in which the company is able to create greater economic value; the economic value is the result of actions and strategies that are not being performed by the competing companies in the market. Besanko, Dranove and Shanley (2000) also associated the possession of competitive advantage with the economic returns of the company, in contrast with the returns of the competing companies. This definition highlights an important aspect of competitive advantage i.e. the actions of the competing parties in the market. However, it refers to the progress of the company only in terms of its economic value which denotes a deficient perspective of the definition of growth of a company. Leinwand and Mainardi (2010) stated that strategic coherence is important for organizations since it leads them to the attainment of competitive advantage; he defined strategic coherence as the comprehension of the company’s status in the market, their core competencies and their product and service attributes. Heterogeneity has been explained comprehensively by Besanko, Dranove and Shanley (2000); he stated that the resources and production capabilities of any company have to be distinguished from the others. Firms that possess such heterogeneity are able to earn greater economic growth and satisfy their customers in a more commendable manner. Madhok and Li (2009) highlighted the importance of heterogeneity by stating that identification of heterogeneity also plays a major role in the formulation of strategic decisions in organizations. Much research has been conducted on the formulation of competitive strategies and the factors that need to be considered to possess heterogeneity in the market; however, limited literature is available to provide information about the sustainability of competitive advantage. Sustainability of competitive advantage is vital for any company since its acquisition for a limited time period does not ensure long term success. Porter (1998) explained that sustained greater returns and competitive advantage is not possible in every industry, therefore it is vital for the organizations to evaluate the attractiveness of any industry before expecting long term possession of competitive advantage. Porter (2008b) proposed the model of five forces to analyze the attractiveness of any industry; threat of new entrants, bargaining power of customers, bargaining power of suppliers, threat of substitute products or services and rivalry among existing competitors. This model is considered to be a landmark in the study of strategic management and continues to be the foundation of many theories. Figure 2: Five Forces that Shape Industry Competition (Porter, 2008a) Porter (1998) further stated that there are two main sources of attaining competitive advantages; cost leadership and differentiation. Barney (1991) also discussed the need to sustain competitive advantage and proposed few steps that would help the organization to achieve long term success. He proposed that resources should be considered as an asset of the company and should be retained to create heterogeneity in the market. He stated that the resources of the organization should be managed such that they comply with the following traits: Valuable: The resources should be valuable such that they are able to utilize available opportunities in the market and neutralize the potential threats in the market. Rare: The degree of rarity of the resource should be such that it is not present with the competitors and neither available in the prevailing infrastructure of the organization. Imperfectly imitable: The resource is unique and cannot be imitated perfectly by the competitors. Without Equal Substitutes: The resource would have no substitutes of equivalent status in the market. Stabell and Fjeldstad (1998) explained value as the conversion of input into a resulting product or service. ‘Value chain’ is a significant term in the field of strategic management and is witnessed frequently in relation with the attainment of competitive advantage. Sturgeon (2001) defined value chain as the operations that are performed within or outside the organization to provide a service or a product to the customers; such operations might include delivery, production, maintenance etc. Johnson, Scholes and Whittington (2008) stated that organizations need to analyze the quality and worth of their value chain to be able to provide value to their customers and sustain competitive advantage in the market. Porter (1985) discussed an inevitable change that was expected to be the future of business at the time of the publication of the book. In this book, he stressed on the need to realize the value of information technology to attain competitive advantage. Porter and Millar (1985) stated that information technology is affecting the attainment of competitive advantage in the following ways: The composition of the industry gets altered which modifies the rules of the prevailing competition. Hurwitz and Kaufman (2007) also agreed that companies are able to acquire competitive advantage by devising innovative methods to surpass their competitors in the market Information technology proves to highlight areas or competencies that might be ignored by the management but have the potential to develop into a new domain of business for the company. Information technology is affecting the value chain by altering the way activities are performed to offer the services and products. Youssef (2005), Eatock, Serrano, Paul (2001), Gadiraju and Dev (2010) stated that information technology introduces the level of accuracy and reliability that can improve the value chain operations to a great extent and thus gain competitive advantage for the company. Reicher (2005), Laudon and Laudon (2006) agreed that competitive advantage can be gained if information technology systems are fully integrated in all operations of the organization; there should be a single system for all needs of the company, rather than separate systems. Chen and Tsou (2007) proposed a framework that signifies the influence of information technology on the business processes of the organization. Information technology introduces a significant degree of innovation in the processes and thus gains competitive advantage: Figure 3: Proposed Framework for IT Adoption in an Organization (Chen and Tsou, 2007) 3. Examples of Competitive Advantage Apple and Microsoft are globally recognized names in the field of computers. Klein (2009) pointed out that Apple had the opportunity to launch the first personal computer in the market. It was predicted that the first mover’s advantage would become a source of long term competitive advantage for the company. However, Schoettler (2006) pointed out that the loss of competitive advantage by Apple became evident when they divided their attention in a diverse range of areas, for example they took charge of the development of the operating systems and software, as well as the manufacture of the computers. Involvement in numerous areas of research and development in a developing field led to the loss of their first mover’s competitive advantage and provided avenues for Microsoft to invade the market. On the contrary, Microsoft analyzed the nature of the developing field of computers in late 1970s and decided to concentrate their efforts for the development of a single core competency at one time. Operating System (2004) stated that Microsoft launched MS-DOS in 1980 and instantly acquired a major portion of the market. MS-DOS was a unique operating system (at the time of its launch) since it offered usability for its users. There was no substitute available in the market that offered its degree of convenience to the users. It became the default choice for personal computer owners and thus attained competitive advantage in the market by maximizing their efforts on the acquisition of a single core competency. After gaining success in one field of technology, they began their efforts to conquer another area of computers; software development. The launch of Microsoft Office also helped the company to attain competitive advantage in the field of software development, due to the constant commitment of Microsoft towards innovation and usability. Caterpillar is a prominent name in the field of engineering, construction and mining machinery. According to Hoovers (n.d.), it stands at the 58th rank in the Fortune 500 companies that enlists the top 500 companies of the world. Effective strategic decision making capabilities of the management of the respective company have enabled them to sustain competitive advantage in the market since decades. Google Docs (2008) provided the information that the respective company occupies 70% of the dollar sales share in the construction equipment sector. Caterpillar has managed to sustain competitive advantage in their field of business by gradual expansion in the international markets, rather than introducing abrupt and reckless changes in the company. As a result of their incremental expansion, they have managed to spread their business in over 8 countries. Jay (1995) stated one of the reasons of attainment of competitive advantage by Caterpillar; they availed the opportunity which was given to them in the times of the Second World War. It was due to this opportunity that they became the exclusive supplier of the construction gears to the Allied forces in the respective war. This opportunity proved to give them the experience of global supply that was not present with any other company in the industry. The company has been able to sustain their quality and efficiency of production due to the presence of engineering expertise in their resources. Hoovers (n.d ) stated that they devised the strategy to study the needs of their customers and provided them with a wide range of equipments and machineries that would fulfill all of their unique needs. Due to the enormity of the company and their network, they have been able to maintain the delivery service of replacement parts and components to a wide range of customers; this level of access and scope of the delivery network has been difficult to imitate by their competitors. Caterpillar Inc. (2009) provided the information that they claim to provide any replacement part in any part of the world within two days; such a reliable and efficient service makes customers trust their service and earns them competitive advantage in the market. Therefore, it can be stated that Caterpillar has been able to sustain a major market share in the machinery production industry due to the widespread network and effective worldwide delivery service. One of the direct competitors of Caterpillar is Komatsu. Komatsu analyzed the market position of Caterpillar and realized that it could not compete with the market giant on the same grounds for which it is famous. Therefore, Jay (1995) stated that they attempted to create their own core competency in the field of heavy construction equipment and worked on the unique design of their products. The distinctive designs were the end product of effective manufacturing processes that were aimed to induce more durability in the equipments. According to Jao (2010), they adopted the competitive strategy of making their products last longer, rather than attempting to replicate Caterpillar’s supply network. Komatsu strived to establish their own core competency instead of imitating Caterpillar’s strategies. Gjerde, Knivsfla and Saettem (2009) provided the information that Komatsu occupies the place as the second largest company in the world in the field of construction and mining equipments after Caterpillar. It has even managed to occupy a greater share (than Caterpillar) in Japan. This level of success has been possible due to the adoption of effective competitive strategies, rather than endeavouring attempts to imitate the activities of the market leader. 4. Conclusion Competitive advantage is considered to be a vital aspect in the field of strategic management in the modern times. The attainment of competitive advantage is categorized in diverse manners by different researchers; some of the researchers consider stock performance and investment returns as the possession of competitive advantage. However, a well defined definition of competitive advantage has been given by Michael Porter; the strategic plan according to which a company aims to achieve their business goals and objectives while competing with the external forces in the environment. This definition seems comprehensive since the competitive strategic planning of the companies should be aligned with their vision to ensure success and competitive advantage in the desired direction. After the extensive study on the respective topic, it can be concluded that resource-based factors bear greater relevance than industry-based factors since the identification and strength of the core competencies plays a major role in the attainment of competitive advantage. Resources can prove to be great assets for companies if they are rare, imperfectly imitable, valuable and exist without any relevant substitutes in the respective industry. The study of examples of real companies highlighted an important lesson; success lies in the identification and development of one’s own area of core competency, rather than imitating a market leader’s competitive strategy. References Ansoff, I 1965. Corporate Strategy. New York: McGraw-Hill Barney, J 1991, ‘Firm Resources and Sustained Competitive Advantage’, Journal of Management, Vol. 17, pp. 99-120. Barney, JB 2002, Gaining and Sustaining Competitive Advantage, 2nd ed. Addison-Wesley. Besanko, D., Dranove, D & Shanley, M 2000, Economics of Strategy. 2nd Ed. John Wiley & Sons, New York. 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Schoettler, J 2006, Finding Competitive Advantage, The Motley Fool, viewed 20 June 2011, Shimizu, K & Hitt, MA 2004, ‘Strategic flexibility: Organizational preparedness to reverse ineffective strategic decisions’, Academy of Management Executive, Vol. 18, No. 4. Stabell, CB & Fjeldstad, DO 1998, Configuring Value for Competitive Advantage: On chains, shops and networks, Strategic Management Journal, Vol. 19, pp. 413–437. Sturgeon, TJ 2001, ‘How Do We Define Value Chains and Production Networks’, Bellagio Value Chains Workshop Italy. Tong, TW & Reuer, JJ 2006, ‘Firm and Industry Influences on the Value of Growth Options’, Strategic Organization, Vol.4, No. 1. Youssef, M 2005, ‘Using information technology for competitive advantage’, Arab Academy for Science and Technology Egypt. Read More