The Development of the Concept of Competitive Advantage of Firms - Literature review Example

?Introduction In the fast transforming dynamics of global competition, maintaining leverage has become critical ingredient of business strategies. The various external and internal factors that influence the performance outcome have increasing emerged as major determinants of success. Indeed, while the success itself is always the driving force for evolving business strategies, the identification and evaluations of factors have become hugely important for its continued existence. They would also provide the firms with distinct advantage within the industry. Competitive advantage not only provides firms with the necessary edge but it also ensures that they are able to create and maintain niche position in the market. Hence, elements of competitive advantage become major tools of survival in highly competitive business environment of contemporary times. The paper would be mainly discussing the development of the concept of competitive advantage of firms and it is exploited by businesses to maintain market position. Concept of competitive advantage The concept of competitive advantage is complex in its scope and therefore is difficult to define with conclusive authority. Many scholars have tried to unravel the factors that can be applied universally for all businesses but have failed to do so. Though early scholars had tried to identify strength and weaknesses of business strategies and plans that could be exploited by businesses to compete against their rivals, the words ‘competitive advantage’ remained elusive (Andrews, 1971; Ackoff, 1970). Interestingly, Penrose (1959) and later Ansoff (1965) had used the word but only to describe as how to compete. For them, various components of business strategies were important issues within competitive advantage and were required to be identified as strength or weaknesses so that they can be used to compete against the rivals in industry. Porter (1985: 3) was the first scholar to use the words but only as a generic strategy for businesses. He says that it ‘grows fundamentally out of the value a firm is able to create for its buyers that exceeds the firm’s cost of creating it’. Porter has used the word, competitive advantage’ in the wider context of its correlation with the value based products. It therefore, provides huge possibility for factors or elements that could still be used by firms to gain competitive advantage. The generic strategies vis-a-vis cost leadership, differentiation and focus were promoted as major ingredients of competitive advantage by Porter. But in the contemporary environment of recessive trends and changing format of social structure, these factors are used by all firms. They have become an easy means of survival but in the tough times, they could be caught in the vicious war of price cut leading to loss and closure. Thus, something ‘more’ is required for firms to gain competitive advantage or CA. Hay and Williamson (1991: 42) describe CA as capabilities which give the firms relative advantage against the rivals. Barney (1991: 99) also asserts that CA is value creating strategy that is unique and is not used by competitors. Both scholars were aware that CA is important aspect of businesses but were deficient in describing the elements that constitute CA. The definition was abstract in its content but at the same time, gave invaluable insight into the importance of having competitive advantage. Kay (1993: 24) believed that CA is a measurable financial performance outcome that can be defined as ‘ratio of added value to the firm’s gross or net output’. Most important is the fact that Kay had used it as a tangible asset or value addition to the product and services that help the firms to improve their financial outcome. The criteria lose its essence in the fast transforming scenario of emerging new paradigms in intangible assets and business compulsions. Competitive advantage cannot be confined within the context of tangible products and viewed objectively for its value added services. The transforming values have redefined businesses as value propositions for its various stakeholders vis-a-vis management, shareholders, employees, customers, supply chain etc. The various inter-related units within the business become major elements of competitive advantage for organization that cohesively create value for revenue generation. Hence, workforce, machinery, infrastructure etc. become tangible assets that can be exploited for competitive advantage. At the same time, knowledge management provides the firms with intangible assets to gain leverage in the cut throat market. Very often, organization’s perception to change greatly facilitates in gaining leverage. Indeed, when elements of change are identified early and evaluated and analyzed, they provide the firms with distinct advantage in the highly competitive business environment. Mintzberg (1990) strongly believed that it is extremely important to exploit the informed choices, especially with regard to the changing trends in the market conditions and the preferences of the people. Organization which continuously make efforts to disseminate information about markets, products, technologies, and business processes across its people, develop resources and skills for gaining leverage (Slater & Narver, 1995). Thus, data, information and knowledge become the three key elements of the informed choices which are exploited by organizational leadership. Indeed, leadership initiatives, shared learning and streamlined feedback system are essential part of knowledge management. They not only foster linkages across wider platform of knowledge management but also impact the developing processes within and outside the organizational capabilities. Hence, they help gain leverage for optimal performance outcome. Stalk, Evans and Shulman (1992) assert that organizations must develop business capabilities to gain leverage. Firms need to adopt dynamic strategies to meet the challenges of changing times. They have broadly defined capabilities as strategic business processes that are used judiciously and strategically to improve their performance. The various managerial initiatives and business processes are designed towards development of goods and services which are delivered to the target group. Thus various business processes like effective supply chain, logistics etc. become critical elements of competitive advantage and intrinsic part of organizational capabilities. Hence, strategies and policies incorporate the changes within the environment. They encourage building unique organizational capabilities and focus on issues and areas that are vital to maintain its market position. Byrnes (2003) views product flow management as a powerful profit lever which can significantly increase profits. At the same time it ensures that levels of customer service keep on using new measures of improvements. Mannan and Ferdousi (2007, p.2) claim that ‘key to competing in the international market place is to simultaneously improve both quality and productivity on continual basis’. It is for this reason that businesses continuously make effort to identify and evaluate factors and issues to generate the desired outcome with efficiency and unmatched proficiency. In the current times, firms are increasingly adopting myriad processes which can speed up the processes and deliver results. They increase profits through quality products that meet the changing needs of customers. Indeed, various scholars have emphasized that improvement initiatives of business processes across the world facilitate competitive advantage (Porter et al., 2000; Laraia et al., 1999). Hence, TQM, six sigma, benchmarking, JIT etc. are hugely popular methodologies of quality management that are used by firms to gain leverage. Various factors have increasingly become highly relevant to the survival of small and big businesses as that promote competitive advantage. New product development or value addition to the existing products has become intrinsic part of business strategy across the board. It helps the firms to introduce new vision and value to the products and services so as to meet the changing preferences of the consumers. Montgomery (2008) firmly stresses that dynamic strategies need to be adapted within the wider goals and objectives of organizations because of the changing socio-economic and cultural environment. The flexibility in adapting to the changes helps the firms to meet the changing requirements of the customers with speed and thereby maintain their market position. The various intangible processes like forging alliances to improve and improvise business process are important mechanisms to gain leverage in the industry. The strategic business partnerships that rely on building effective linkages have become vital compulsions of contemporary times. The networking solutions help the firms to expand their business interests across geographical boundaries. At the same time, access to information considerably widens the knowledge base which significantly impacts organizational growth and gives a unique advantage in the market (Drucker, 1998). The informed choices are exploited by businesses to improve and improvise their productive outcome and help maintain their market position even in the recessive environment. Kay (1995:50) has succinctly declares that the emerging new model of business relationship is not enforced by ‘legal process, but by the need the parties have to go on doing business with each other’. The research and development are another important facilitator of CA. They greatly encourage discovery and invention of new processes and mechanisms. It is highly significant because it gives a distinct leverage to the firm through patents and ownership rights leading to financial gains. The R&D is also an intrinsic part of development that facilitates advancement based on new knowledge which may provide the businesses with strong measures of success in the competitive environment. Barney (2002: 9) says that ‘a firm experiences competitive advantages when its actions in an industry or market create economic value and when few competing firms are engaging in similar actions’. The various imperatives of R&D endorse creation of value based products and services which can be used to achieve financial advantage. Prahalad and Hamel (1990) emphasize that core competencies of firms comprise of skills and tangible and intangible resources which are either not available to others and therefore provide firms with unique advantages. De Wit & Mayer, (2005) claim that leadership initiatives and organizational culture that exploits human capital to improve its productivity are strong elements of competitive advantage. The leadership within the organization facilitates integration of diverse ideologies, values and beliefs of multicultural society and promotes shared goals. They are therefore, able to exploit the cultural competencies of the workforce and help align it with the organizational goals and objectives. The cohesive and highly innovative inputs of the human capital helps to provide the firms with new perspectives that can be used to gain leverage in the market. Hence, employees need to be viewed as major resource whose potential can be tapped to improve and improvise the performance of the organization against fierce market competition. Most interesting is the fact that concept of competitive advantage is not only exhaustive in its scope but the ever increasing areas of its application are mind boggling. The subjective and objective overviews of various factors that may contribute towards competitive advantage have cascading impact on the business processes. Thus, while it may not allow the firms to remain indifferent to the changes within which it operates, it nevertheless is considerably influenced by those changes. The firms must become proactive participants of change in order to survive and therefore engage in activities that would provide them with creative approach. Thus, environmental changes emerge as major imperatives that provoke new mechanisms of gaining competitive advantage. Examples of competitive advantage in business Competitive advantage has become intrinsic part of business strategy which continuously strives to improve its productive outcome through creative inputs relative to other firms. The various paradigms of business compulsions serve as powerful agents of innovation and discoveries which is designed towards gaining leverage in the market. While creative logistic solutions may provide some firms with strong financial and logistic advantage, others try to compete with resources with unique attributes to give firms with competitive advantage. The various mechanisms and processes of gaining competitive advantage must be addressed in innovative manner to give them an edge over their rivals in the industry. General Motors had led the race with their electric car that was eco friendly and had provided them with distinct advantage in the industry which was still in the infancy stage to adopt sustainable business practice. PACCAR is another exemplary example which has gained competitive advantage by adopting innovative business practice in production of quality goods. It is a multinational technology company which manufactures heavy duty trucks, industrial winches etc under various brands. An exceptionally high standard of quality is visible in its plants. It has incorporated Six Sigma strategy within its various business processes through the evolving process of entrepreneurial creativity. It has introduced new concepts of production flow improvement by using six sigma strategy with high impact Kaizen events or HIKE (PACCAR). The technology has been judiciously exploited to gain relative leverage against competitors. Ford Automobiles is yet another organization which has maintained its market position through strategic production innovative processes for improved quality products that has resulted in increased sales. It continuously looks for new areas of innovation within the auto industry to identify the critical factors of change. Through collective vision and shared goals it meets the challenges of time (Ford). The various innovation within its automobiles vis-a-vis design, sustainable business practices, hybrid machines etc are important incentives for its customers. The speed, pricing and quality within its new products become intrinsic part of business processes. Hence, Ford’s creative approach and innovative practices give a unique perspective to shared goals of management and employees and provides it distinctive competitive advantage. The technology based industries like IBM, Apple Inc, Netflix etc thrive on learning environment which helps to gain leverage in the highly competitive business. The enabling environment of continuous learning empowers the workforce with informed choices that are exploited for competing successfully with their competitors. Indeed, forging successful business alliance, including merger and acquisition become crucial component of competitive advantage. They provide the firms the critical knowledge which adds value to their existing competencies. Thus, IBM’s alliance with Lenovo was a huge success helped it to expand its business across the globe with low investment. (IBM, 2004). Microsoft’s acquisition of hotmail added value to its online businesses and now its acquisition of Skype would further enhance its business prospects and give it an edge in the webspace (Microsoft). McDonald’s is perhaps the most scintillating example of firm that has exploited its internal resources to maintain its competitive advantage in the highly volatile market condition. Its people centric policies focus on meeting the changing needs of the customers with high degree of customer satisfaction. The brand equity, quality products and exemplary customer services give it an inimitable service attribute. It has expertly used technology to streamline its processes which helps it to promote same quality in its products across all its various fast food. It not only lowers the cost of production but also leads to higher profitability even during tough economic conditions. The customization of its products to suit the varying requirements of its customers is yet another major element of its continued success. Samsung is a market leader in the field of semiconductors, electronics and telecommunication accessories. The company’s business strategies are focused on research that provides it with engineering skills with which it is able to improve and improvise on the electrical and digital products of Sony, Phillips, Matsushita and Nokia. Its ability to launch its own products with added features with greater speed is key element of its competitive advantage (Siegel and Chang, 2009). Its teams of professionals keep tab on the people’s pulse. They are therefore, able to anticipate changing preferences of people and used them to introduce new products and features that were envied by its rivals. In construction industry, it not only adds value to the business imperatives but also may provide the firm with sustainable competitive advantage to maintain its niche position in the industry. In the contemporary environment of recessive economy, elements of competitive advantage become highly pertinent for construction industry. In recent times, real estate has been a major contributor to the financial breakdown in United States and other parts of the globe. Construction industry is vital part of development and is intrinsically linked to the people’s needs and requirements for home and shelter. Elements of competitive advantage not only add value to the business imperatives but also may provide the firm with sustainable competitive advantage to maintain its niche position in the industry. Corus is an excellent example of this sector that has been able to maintain its high standard in the construction industry and gain sustainable competitive advantage. The company has adopted myriad mechanisms to gain leverage. Corus was established in 1999 as a merger of British Steel and the Dutch company Koninklijke Hoogovens. In 2007, it was acquired by Tata Steel Europe, a subsidiary of Tata Steel, India. It is a leading international brand in construction industry that provides highly creative metal based products to construction market across globe. Strategies innovation is critical part of its competitive advantage in construction industry as they facilitate timely and efficient response to emerging new challenges from fast transforming business dynamics. Strategic choice in construction industry must focus on exploiting its competencies. Langford and Male (2001) are of the view that hierarchy of sources can be considered important elements of competitive advantage of construction companies. While some of them may be sustainable for short time, others may transform into sustainable CA. Construction firms therefore are increasingly adapting strategies that are inimitable and low cost to compete against their rivals. Simple mechanisms that tend to lower cost while ensuring strict adherence to industry benchmarking are critical aspects of Corus. There are three major areas where it has significantly gained ground against its competitors: use of refurbished, environment friendly raw materials; Using technique of effective road mapping; and TQM. Corus has been a flagship company that has adopted sustainable business practice. It continuously strives to develop new products that reduce wastage. It has evolved the use of road mapping to evaluate and exploit opportunities in future. This is one of the most advantageous aspects of its business strategy that provides it with high degree of inimitable products and services giving it a distinct advantage in the construction industry. The various mechanisms like forging strategic alliance across the globe to reduce logistic costs; promoting use of technology in its operation to increase efficiency; using diversity to exploit cultural competencies to improve productivity and promoting use of non conventional energy are few important elements of CA. Thus, it can be stated that Corus or Tata Steel Europe, as it is now known as, has maintained its competitive advantage in the construction industry because of its creative input and its inherent tendency to adopt sustainable business practice. It has overcome the social concern of aligning its business goals with that of its social responsibilities. It has emphatically shown that innovation is not only applied in its building and construction service but also in its wider framework of managing its business. Indeed, the quality based work with futuristic scope has endowed it with sustainable competitive advantage even during recessive time. Conclusion One can therefore conclude that the wide ranging imperatives of competitive advantage within the business environment have emerged as essential ingredients of business competencies. The relative advantage in resources and capabilities of organization against competitors promotes creativity and innovative approach. The concept of competitive advantage has also undergone tremendous change. It now encompasses all elements which directly or indirectly provide firms with unique attribute that anticipates and meets the changing needs and requirements of the people at large. In the cut throat business environment, competitive advantage becomes highly desirable factor for businesses primarily because it helps them to create or maintain their market position. Hence, it has become intrinsic part of corporate strategy. (words: 2647) (words: 3217) Reference Ackoff, R. L. (1970) A concept of corporate planning. New York, Wiley-Interscience. Andrews, K. R. (1971). The concept of corporate strategy. Illinois, Richard D Irwin Inc. Ansoff, H. I. (1965). Corporate Strategy. New York, Mc Graw Hill. Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, Vol. 17, 1, 99-120. Barney, Jay B. (2002). Gaining and Sustaining Competitive Advantage. 2nd ed. Reading, Addison-Wesley. 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