Building and Sustaining Competitive Strategy
Competitive Strategy (Worth a Maximum of 15% of Course marks)
Discuss the major theoretical approaches to the building and sustaining of competitive strategy using the available academic literature including blue ocean strategy and other approaches. This assessment component must be based on minimum of 12 peer-reviewed academic articles. No wiki or general web sites please.
Essay/Report style- can use headings and graphs, tables and diagrams.
A firm achieves a competitive advantage when it persistently obtains higher levels of profit than its competitors do. This eplains why there are a number of theories in the strategy domain that extensively address competitive advantage in an attempt to explain how management decisions and market factors may be manipulated to result into superior economic performance. To gain competitive advantage, an organization is first expected to create superior value for consumers by pricing their commodities a bit lower than the competitors, or instead develop a unique product or service that the consumers will be willing to purchase at premium price (Daniela 2014: 523). Hence, the firm needs to create a competitive strategy that will enable it to establish a much profitable and highly sustainable position in the industry compared to competitors. This profitability is also greatly influenced by the level of attractiveness of the industry. This paper champions the thesis that competitive advantage can be gained and sustained by the use of various competitive theoretical approaches.
Blue Ocean Strategy
For many years, companies have for long engaged in head-to-head competition while searching for the sustained and profitable growth. Hence, they have struggled for competitive advantage, market shares, and differentiation. Unfortunately, with the current overcrowded industries, such head on competitions will not benefit a company in any way, but instead will lead to a bloody “red ocean” of rivals, all of whom will be fighting for the gradually shrinking pool of profits (Ng, Lau & Ismail 2014: 132). Therefore, there are minimum chances that this approach will eventually lead to profitable growth in future. This is why it has been argued that most of the future leading companies will succeed by avoiding the red oceans, and instead creating blue oceans of uncontested market space with a great promise for growth (W. Chan & Mauborgne 2005: 105). These strategic moves, also known as value innovation, create powerful improvements in value for both the firm and its consumers, thus, the rivals are rendered obsolete and this unleashes new demand.
In this strategy, the red oceans signify the various industries existing today, while the blue oceans signify the nonexistent industries, also known as the unknown market space. Hence, where in red ocean companies try to outperform their rivals by grabbing the greatest market share of the existing demand, in blue oceans companies are focusing on creating new market space, demand, and thus an opportunity for highly profitable growth (Čirjevskis, Homenko & Lačinova 2011: 201). Despite the fact that some of the blue oceans are created beyond the already present industry boundaries, a greater number are developed from within the red oceans simply by expanding these existing boundaries (W. Chan & Mauborgne 2005: 106). In blue oceans, there is simply no competition since the rules are yet to be set. The market space has vast potential that has not been explored.
Red oceans will always be an important part of the business life. However, with the supply exceeding customer demand in most industries, competition for the greatest share will no longer be sufficient enough for companies to achieve and sustain superior performance. As a result, companies need to look beyond this competition in the established industries by seizing new opportunities for growth and profits by creating blue oceans as well.
Figure 1: The Profit and Growth Consequences of Creating Blue Oceans
According to research conducted by W. Chan and Mauborgne (2005: 107) on 108 companies, they noted that 86% of the launches were line extensions while another 14% were aimed at creating new market spaces. Although these line extensions in the red oceans delivered 62% of the total revenues, they only led to 39% of the total profits (W. Chan & Mauborgne 2005: 107). Contrary to this, the 14% that were aimed at creating blue oceans resulted in 38% total revenues and a startling high amount of 61% in total profits. As is noted in figure 1, the performance benefits of creating blue oceans are clearly seen, and they outnumber the benefits of red oceans.
There are quite a number of forces that drive the rising imperative to develop Blue Oceans. Increased technological advances have substantially contributed to the improvement of industrial productivity, which have allowed suppliers to produce a wide range of products and services. Globalization is also another factor as it has led to the dismantling of trade barriers between nations. This has also contributed to information on products and services being available globally (Singh 2012: 20). While supply is on the rise due to the rise in competition, there is no evidence to proof the rise in demand as well. As such, there is an increase in commoditization of products and services, intensified price wars, and also the shrinking profit margins. “For major product and service categories, brands are generally becoming more similar, and as they are becoming more similar people increasingly select basing on price” (Qtd from W. Chan & Mauborgne 2005, p.108).
Resource Based View Strategy
A different conceptual foundation which features more on the internal firm capabilities and less on the industry structure argues that a firm’s position to achieve and sustain competitive advantage is directly linked to the firm specific resources (Laosirihongthong, Prajogo & Adebanjo 2014: 1232). This resource based theory of the firm puts great emphasis on the role of developing unique and valued know-how as well as capabilities that will be close to impossible for rivals to imitate (Madhok, Li& Priem 2010: 94). This is usually difficult and it requires the firm to select effective strategies basing on the development of resources and capabilities. The presence of multiple resources and capabilities positively contribute to the development of the highest competitive entry barriers (Hinterhuber 2013: 797).
Figure 2: Resources and Capabilities Based View of the Firm
For a firm to develop a true cost or differentiation advantage, the firm’s resources and capabilities must be valuable, rare, imperfectly imitable, and non substitutable (Newbert 2008: 745). “If a resource or capability yields the potential to enable a firm to reduce costs and/or respond to environmental opportunities and threats, it is valuable, and to the extent that a firm is able to effectively deploy such a resource or capability, it will attain a competitive advantage.” (Qtd. From Newbert 2008, p. 747 ). Judging from this statement, it is clear that the level of competitive advantage achieved by a firm will basically rely on the value of its resources and capabilities. Hence, when the resources and capabilities are of marginal value, the firm will only attain minimal competitive advantages compared to firms with greater resource and capabilities values. This theory creates an assumption that the firm is well placed to exploit its resources and capabilities. This is because competitive advantage can only be achieved once the potentially valuable resources and capabilities are deployed effectively (Costa, Cool & Dierickx 2013: 449). Hence, resources and capabilities must be deployed together so as to attain competitive advantage. To further support this, Madhok, Li and Priem (2010: 99) state that firms are also required to process raw materials to make them more useful. For this to be effective, the resources must be put in use in a group of other resources to form effective combination. This is why Costa, Cool and Dierickx (2013: 449) contend that organizations may develop rents not only through the choice of better resources than that of competitors, but also by exploiting these resources more effectively with the use of proper capabilities. “no matter how great a firm’s capabilities might be, they do not generate economic profit if the firm fails to acquire the resources whose productivity would be enhanced by its capabilities” (Qtd. From Newbert 2008, p. 748).
Competitive advantage is usually obtained when the firm achieves a cost level, exploits untapped market opportunities, and neutralizes threats that competitors would otherwise fail to accomplish (Varey 1995: 45). This, however, may be impossible to achieve if the resources and capabilities are present widely. Consequently, competitive advantage will be more likely achieved only when the exploited resources and capabilities are rare or only possessed by few firms in a small industry where perfect competition will be impossible (Srivastava, Fahey & Christensen 2001: 777). Since resources and capabilities are supposed to be explored in a combination, it means that the rareness will not be at the individual resources and capabilities, but instead at the level of resource-capability combinations (Newbert 2008: 750). For instance, if a particular combination of resources and capabilities is common, a greater number of firms will be able to imitate the resulting strategy, hence reducing a firm’s competitive advantage. Therefore, the individual resources and capabilities need not be rare for the firm to achieve competitive advantage, but the combination is what must be rare.
Porter’s Generic Strategies
The approaches involved in this strategy are referred to as generic strategies mainly because they can be applied to products and services of all industries, and to organizations with varying sizes. Porter named the three approaches “cost leadership”, “differentiation” and “focus”. The focus strategy is then further divided into two parts; the cost focus and the differentiation focus (See figure 3).
Figure 3: Source of Competitive Advantage (Miller & Friesen 1986: 38)
Important questions for the economy are how firms compete and which strategies they choose. An improved understanding of a firm’s competitiveness is also important in that it contributes to the improvement of existing policies relating to competition and other relevant issues (‘Achieving the Superiority’ 2010: 152). This improvement will, hence, provide valuable support to the efforts meant to continuously develop markets and businesses. This understanding is also important when it comes to comparing the domestic and internal contexts by being placed to effectively assess a firm’s competitive behavior. “If firms pursue any of the three recommended generic competitive strategies they will be able to outperform competitors who do not pursue such strategies.” (Qtd. From Ormanidhi & Stringa 2008, p. 56).
From a firm’s point of view, a relevant and most important aspect of competitive environment should be the industry in which it operates in. This is where the competition takes place (Allen, Helms, Takeda & White 2007: 72). According to Porter’s analysis, these industries contain firms that create and develop close substitutes, but the competitive environment of the firm’s feature a common structure with the five competitive forces. These forces are what will determine the overall level of competitiveness and profitability of the industry (Gurǎu 2007: 369). These include; threat of new entry, intensity of the level of rivalry among the already existing firms, pressure from the presence of substitute products, bargaining power of consumers, and the bargaining power of suppliers (Gonzalez-Benito & Suárez-González 2010: 1030). Profitability- the turn on invested capital- is related negatively to the overall strength of these five forces. Therefore, the greater the joint strength of the five forces affecting industries, the lower the industry profitability (Miller & Friesen 1986: 39).
Porter’s generic strategies help a firm to analyze the industry in which it functions in, in terms of the five competitive forces, so as to note its strengths and weaknesses in relation to the actual state of competition. This is possible because if the firm realizes the effects of each of these five forces, it will be better placed to take actions so as to defend itself or grasp an opportunity to enable it to be better placed so that these forces do not affect it (Gonzalez-Benito & Suárez-González 2010: 1032). Differentiation and low cost are the two forms of strategic or competitive advantage that firms can use to position themselves effectively against the pressures of the five forces. When these strategies are applied, firms will be better placed in the industry, and this will give them an opportunity for achieving higher profitability than their competitors. To achieve competitive advantage, these strategies cannot be pursued all at the same time. Instead, they must all be considered individually.
The cost leadership strategy is mainly focused on bringing in sales and taking them away from competitors. This happens by increasing profits by lowering prices, and ensuring that the average industry price is charged for products. This is important as it brings in sales since consumers will not understand why they have to pay higher prices in other companies for a similar product. The differentiation strategy, on the other hand, ensures that products are differentiated and made more attractive than those of consumers. This is enhanced by the presence of effective research, development and innovation among many others. Lastly, the focus strategy ensures that a company focuses on a particular niche in the market. This is made effective when the firm takes the effort of understanding the market dynamics and unique needs of customers.
Bowman’s Strategy Clock
Figure 4: Bowman’s Strategy Clock
Bowman’s strategy clock is based on an argument that key variables, when it comes to positioning, include price and perceived quality both of which are major determinants of value (Varey 1995: 47). To achieve these, Bowman makes an assumption that five potentially successful routes can be followed, while three others will lead to straight failure.
Position 1: Low price/Low Value
When the products of a company are only differentiated minimally, the company will most definitely be in this position whereby the sales are only made on price alone. The firms in this position never choose to compete here, as it features the bargaining region. Therefore, consumers have an opportunity of bargaining the prices into an amount they feel is suitable for the products they want to purchase. This is usually because consumers cannot find any differentiated value, thus they know that they possess the power to manipulate prices as a result of many competitors. Firms in this position can improve their chances of gaining and sustaining competitive advantage by cost effectively selling volume and also developing new ways of attracting more customers (Laosirihongthong, Prajogo & Adebanjo 2014: 1240). It may be impossible to achieve customer loyalty; however, one way of being ahead of other competitors in this position is by always being one step ahead by selling more products than they do. Therefore, there is hope since the products may be of low quality, but judging from the prices, customers will feel more comfortable purchasing from these companies.
Position 2: Low Price
This position can be compared to Porter’s generic strategies: low cost leader position. The companies available in this position usually struggle to lower costs and also achieve high volume to counteract the negative effects of low margins (Ormanidhi & Stringa 2008: 60). Over time, such a company using this strategy will turn out to be most powerful in the market as it will have increased its market share. This is one way of gaining and sustaining competitive advantage over other companies. In case a company’s strategy to be low cost leader fails, the result may be catastrophic to all companies in the industry but beneficial for consumers. This is because there may develop a price war situation whereby each company is trying to take control by altering prices.
Position 3: Hybrid (Moderate price/moderate differentiation)
This approach is a combination of the low cost approach, however it also emphasizes on product differentiation so as to offer consumers better value for their money. These companies also focus on volume; however, their main agenda is to build their reputation by offering good prices for equally good products. This approach enables a company to build and maintain competitive advantage as there is an assurance that the products will be of high quality, despite the fact that prices are fairly low (Costa, Cool & Dierickx 2013: 456). Hence, this company will be better placed to have more loyal consumers as items are of good quality and prices are affordable compared to what is presented to them in other companies.
Position 4: Differentiation
This is also another approach that is quite similar to Porter’s view of differentiation. It is basically emphasizing on offering differentiation so consumers would prefer certain products to others from another company. Therefore, when the high perceived value is offered, the company can either choose to increase price when there is higher margins, or keep prices lower so as to increase market share (Hinterhuber 2013: 800). This is where branding is very important, as the company’s product will always be related to higher quality than others. This strategy must be applied with care; otherwise, the company will fail as a result of running low on resources. Competitive advantage in this case will rather be achieved when there are higher profit margins, or an increased market share. This is because; the production of higher value products will need extra resources. Companies use the extra income to keep up with the change in value. Therefore, in the event that these new sources of income fail to yield results, the company will not be able to keep up. The higher the value of products compared to that of other companies, the better the competitive advantage.
Position 5: Focused Differentiation
This strategy is usually characterized by the presentation of a higher perceived value at a rather substantial premium price. The consumers who purchase in this category are basically focused on the product’s perceived value only. This means that price is not a factor for these consumers, as they have a certain kind of product value they are in search of. Companies that offer designer products are more likely to be found in this position. Bowman states that the products do not necessarily have to be of much higher value as the consumers are basically relying on their perceived value of the products. Therefore, if consumers feel like a certain brand offers high value products; they will purchase it without considering if the products indeed have more value than others. The competitive advantage for such a company will be gained and sustained by focusing on target markets and high margins (Daniela 2014: 529). This means that the company will focus on producing goods that its target market will most likely purchase. This increases the odds of having many consumers purchase expensive products. This in turn will result into high profit margins that the company will enjoy and use to sustain its position by further developing more valuable products and selling at premium prices.
Position 6: Increased price/Standard Product
This strategy features a sudden increase in price without an equal increase in product quality. It is, however, basically a gamble as the high price may either result into positive or negative impacts on the firm. There are times when the price increase in accepted by consumers, this is probably where the previous price was very low for the products. Hence, consumers will not mind topping up the amount. However, if the product is of poor quality, and this strategy is sought, the consumers may decline the change and thus lose loyalty in the company. This, in turn, results into loss of market share that will also affect the competitive advantage of the company (Singh 2012: 26). Another disadvantage of this strategy is that it may only be applied for short term use, maybe to boost market share, but must soon be discontinued. This is because in a competitive industry, another company will soon imitate this strategy and set another premium price, thus affecting this company’s profitability.
Position 7: High Price/ Low Value
This strategy only applies in a monopoly market, whereby goods and services are only offered by a single company. There are no competitions, which is why the company can charge whatever amount it prefers since there is no risk of losing market share. If this is the only company with the goods and services, consumers will have to pay for the products whether they agree to the pricing or not. This knowledge is what gives the company an advantage to make the most of the situation as such markets never last. Soon there will be new entries, and competition will be triggered. Therefore, companies will be forced to once again focus on the value of products and the prices they offer as well.
Position 8: Low value/ Standard Price
Generally, a low product value leads to a low product price so as to attract consumers to purchase the product. Therefore, this last strategy is the worst that companies may choose to use as they may appear greedy and selfish. With this approach, failure is predicted easily. Consumers will obviously prefer to pay a standard price for better valued products, or instead a low price for low valued products.
In a competitive industry, the last three strategies will most definitely lead to failure as customers will move in search of better product offers in other companies. This positioning approach is usually not static as competitor positions will most definitely change in response to new entries, or changes in strategies as a result of market or internal company conditions.
Structure Conduct Performance Approach
Over many years, this approach has offered guidance for many scholars who wished to further develop approaches for competitive strategy (Madhok, Li & Priem 2010: 94). This approach features three major elements: first, the structure of industries that are mainly defined by concentration, market share distribution and many other characteristics; Second, the conduct of firms that usually involves their action in relation to price setting, advertisement expenditures, technology and many others; Third, the performance of firms and industries as identified by profitability measurements. These elements of structure, conduct and performance are usually bound by three main casual relationships: The effects of structure on firm conduct, the effects of structure on firm performance, and the effects of firm conduct on its performance. The most important relationship, in this case, is the one between structure of industries and firm’s performance. When it comes to considering performance, an assumption is made that the market power is positively related to profitability. Therefore, the higher the market power, the higher the profitability will also be, and vice versa. “The manufacturing industry over 1936-1940 found support for the hypothesis that profitability of firms in highly concentrated industries is larger than in less concentrated ones” (Qtd. From ‘Achieving the Superiority’ 2010, p. 160).
Various researches have been conducted on the different approaches for competitive strategy, and the SCP model always gives differing results commonly depending on heterogeneity degrees (Afuah 2013: 259). However, this finding can be more refined when the relationship between concentration and performance assumed by the SCP model would stand in homogeneous and not heterogeneous industries. Although structure was initially considered to be exogenous in this model, the most important issues relating to it can all be summed up under barriers to entry. According to Daniela (2014: 526), the factors that can be interpreted as barriers to entry include, economies of scale, differentiation advantages that products have, and the advantages of absolute cost. Therefore, although there is an assumption made on structure, it does not mean that it is an irrelevant component. Therefore, all these components must be used equally in an evaluation expected to result in competitive strategy. This is why this model has always been criticized. It is clear that the conduct of a firm and its profitability will most definitely influence market structure.
This model, therefore, can be used by firms to gain and sustain competitive advantage in that firms will know how to influence the three factors so as to result with good results on the other. Since competitive strategy is all about getting power over the other companies, by offering goods or services that they cannot easily imitate, this company may choose to adopt a conduct that will enable it to change its structure and eventually lead to improved performance. The price setting conduct can be used to gain competitive advantage in that when the best prices are offered, consumers will be attracted in high numbers (Gonzalez-Benito & Suárez-González 2010: 1039). The product must also be considered so as to ensure the consumers will not result into a great loss for the company by purchasing goods at throw away prices. Therefore, the company may decide to calculate the costs of manufacturing the product, and then sell it at minimal profits to avoid crisis. This sudden increase in consumers for the company is just part of gaining competitive advantage, and must therefore be improved for the company to sustain its competitive advantage. The sustenance can be achieved once the company is sure the consumer loyalty has been gained, and not just their one time appearance once the price has been lowered. This is because its profit margin and increased market share will be improving every day, and not rising high for a couple of weeks before dropping tremendously.
The relationships described in this model will play a major role in guiding the formation of a competitive strategy. For example, it is stated that the structure related to the performance of the firm. Therefore, when the structure of the industry is concentrated, it means that the company should be experiencing better performance. This is due to the fact that there is an opportunity for obtaining increased market share and profit margins. This information will hence be used in determine the conduct of the firm to achieve competitiveness. A concentrated market structure means that there are more consumers than companies can cater for. Therefore, a firm may decide to lower prices for a couple of months so as to increase market share. This unique opportunity will be attractive for consumers, who will henceforth shop in this company. After some time, the company may opt to increase both price and product value. This is a strategy to ensure that customers are not lost in the process of increasing profit margins. With this, the company will have gained competitive advantage, and will be better placed to act as the price setter in its industry since it will possess the largest market share.
In light of the discussion presented above, it is clear that there are various strategies that can enable a company to achieve and sustain competitive advantage. The five discussed in this paper are the major and most commonly used strategies. All of these strategies are focused on placing the company at a better industry position, providing customers with value at fair prices, and offering unique products to satisfy the unmet needs of consumers. They, however, achieve these through different approaches. The Blue Oceans strategy focuses on the creation of a new market space; the resource based view focuses on developing rare products that will limit competition through the possibility of substitution; and Porter’s generic strategies focuses on forces within the industry that can affect competitive advantage. Bowman’s Strategic Clock is a strategy that focuses on different directions that companies may take to achieve and maintain competitive advantage in different market situations. The SCP model, on the other hand works on relationships, and how one action may be manipulated to result to competitive advantage for the firm as a whole.
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