Upload
ayankayode
View
121
Download
0
Embed Size (px)
Citation preview
MBA INDIVIDUAL ASSIGNMENT DECLARATION1
SUBJECT: STRATEGIC MANAGEMENT
ASSIGNMENT NUMBER: 1
LECTURER: PROF K. JONKER
STUDENT: AYANKOYA KAYODE
DATE SUBMITTED: 19TH SEPTEMBER, 2012
EMAIL: [email protected]
1
1 | P a g e
Table of Contents
1.0 INTRODUCTION................................................................................................................................2
2.0 THE COMPETITIVE ADVANTAGE.................................................................................................2
3.0 SEARCHING FOR COMPETITIVE ADVANTAGES......................................................................4
3.1 Competitive advantage from external environment...................................................................4
3.1.1 New market entrant.................................................................................................................6
3.1.2 Supplier....................................................................................................................................7
3.1.3 Buyer.........................................................................................................................................7
3.1.4 Substitutes, product and technology development.............................................................7
3.1.5 Competitive Rivalry.................................................................................................................8
3.2 Competitive advantage from internal analysis............................................................................8
3.2.1 Activity based view of organisations for competitive advantage.......................................9
3.2.2 Resource based view of organisations for competitive advantage................................10
4.0 COMPETITIVE STRATEGIES.......................................................................................................10
4.1 Cost leadership.............................................................................................................................11
4.2 Differentiation................................................................................................................................12
5.0 SUSTAINING COMPETITIVE ADVANTAGE...............................................................................12
6.0 CONCLUSION..................................................................................................................................13
References..............................................................................................................................................15
2 | P a g e
1.0 INTRODUCTION
Organisations are constantly faced with issues of profitability, growth and sustainability
in today’s business environments that is characterized by fierce competition. The
dynamic business environment where firms operate require them to be able to set
themselves apart, adapt to change very quickly or transform in order for them to remain
relevant or survive (Thompson and Martin, 2010). Therefore it becomes very important
for a business to have a clear pattern of decision making that is based on its perception
of its industry and where it sees itself within the industry known as its strategy (Shafer,
Smith and Linder, 2005). Thompson and Martin (2010) described the adopted strategy
of an organization as its game-plan to achieve its desired goal and objectives and also
concisely relate strategy to the pursuit of purpose.
Porter (1979) noted that the reason organisations create strategy is to be able to handle
competition. Therefore, there is a need for an organisation to establish differentiating
factors in its strategy that will set them apart from the competitors and guarantee
continuous survival and growth (Porter, 1998). Recent literature has described this
factors as competitive advantages and this study will attempt to review the subject.
2.0 THE COMPETITIVE ADVANTAGE
Competition within a particular industry has gone beyond the traditional rivalry among
firms operating in the same industry. The challenge for profit, growth and sustainability
has now been extended to other factors like the behavior of the customers and supplier
in the industry, potential entrants, availability of alternatives among other factors (Porter,
2008). While the firms in the traditional school of thoughts suggest that a business
should focus its effort and strategy on out-performing or getting rid of the other rivalry
firms, Porter (2008) describes this as a risky strategy. Rather, organisations that will
out-perform others are those that are able to anticipate, read, respond, adapt and take
advantage of changes in the industry (Reeves, Love and Tillmanns, 2012).
3 | P a g e
A continuous analysis and review of the SWOT (Strength, weakness, opportunities and
threats) will reveal the drivers of competition in an industry. Pesonen (2008) argues that
the result from the use of the SWOT technique in analyzing the internal and external
environment in which a company operates can be used to determine the strategic
position an organization can take in its industry of operation to compete effectively.
Managers are therefore able to choose in which and how they should compete in
business through their knowledge of the external and the internal environments
(Marcus, 2005). This can be through its understanding and influencing the market in a
unique way or creating and using its core competencies to create unique opportunities
for itself in the market place. Thus, the business becomes positioned for sustainable
profitability irrespective of the rivals or the competitive factors within its industry (De Wit
and Meyer, 1999).
According to Thompson and Martin (2010), a case in point is that of the first No-frill
airline in Europe – EasyJet. The airline industry is such that the competitive factors are
very strong from all sides with a requirement of intensive capitalization to enter and a
market characterized by slim profit margins (Porter, 1998). Prior to its entrance into the
market, the European airliner has done things differently, but Thompson and Martin
(2010) quoted Stelios Haji-Ioannou, owner of EasyJest, as saying that “having an
external enemy is the best way of focusing on results, rather than fighting each other
and becoming complacent.” The airline was able to position itself to a new set of air
travellers, by offering affordable air travel that is devoid of the excess luxury including a
completely different model of air travel service. Thereby, the company was actually able
to enlarge the market by bringing first time air travellers into the industry and setting
new standards for the industry. This could only have been achieved by a proper
analysis of the industry and choosing a winning position.
Strategic positioning helps organisations not just to be different in the industry where
they operate. But being different in the industry is expected to create a competitive
advantage for the firm by being able to create and add value to its customers
(Thompson and Martin, 2010). The value creation emphasis of competitive advantage
4 | P a g e
was stressed by Maritan and Peteraf (2011) by citing Barney (1991) that a firm that is
able to create value for its customers or within an industry by implementing strategies
that other competitors are not implementing or are not able to implement at that time is
said to have a competitive advantage in that industry. This view is supported by
Sheehan and Foss (2009) where they described an organisation’s competitive
advantage as its “potential to create and appropriate more value than the competition.
Therefore, the issues of value creation and uniqueness stands out in the concept of
competitive advantage and must be addressed to develop it.
3.0 SEARCHING FOR COMPETITIVE ADVANTAGES
It was mentioned earlier that forces that controls competition is the main reason that
managers develop strategies (Porter, 2008). It therefore follows that managers should
focus on doing what their company does best than rivals (Marcus, 2005) in the best way
that no one else can. Marcus (2005) suggests that this could become a source of
competitive advantage for the organisation. From the core concept of competitive
advantage reviewed in the earlier section, a thorough analysis and understating of the
external factors that control the industry i.e. the opportunities and threats and the
internal factors within the company i.e. strengths and weaknesses, managers can
position their organisations strategically to derive competitive advantage in their industry
(Thompson, Gamble and Strickland, 2006).
3.1 Competitive advantage from external environment
There are very few industries that have immunity from the effects of globalization. This
phenomenon allows competitors to purchase cheaper raw material from another
companies, outsource operations overseas to cut cost and supplier have wider options
to choose from. This is just one of the factors with external influence on the operations
of a firm. Other external factors that can provide an opportunity or pose a threat that
can determine the competitive environment in an industry include the general
macroeconomic outlook, the law and government regulations, societal values and life
5 | P a g e
style, demographic changes and technological advancements (Thompson, Gamble and
Strickland, 2006).
However, according to Porter (2008), at the different industries level, the forces that
control profitability (hence sustainability, growth and therefore competition) within each
industry are structurally the same. Porter (2008) explained further that there are five
fundamental forces that drive the competition in each of the industries. Although the
author cautioned that each of the five forces does not affect different industry at the
same degree. Marcus (2005) suggests that a firm can develop or come up with
competitive advantages that they can use to maintain a profitable position in their
industry by “carefully and thoughtfully” looking at the structure of the Porter’s five forces
that shape industry competition in the industry where they function. Figure 1.1 below
shows the five forces that controls competition in different industries.
Figure 1 : Adapted from the five competitive forces that shape strategy (Porter, 2008).
6 | P a g e
Product and Technology Development
Supplier Power Buyer Power
New Market Entrants
Competitive Rivalry
Marcus (2005) describes the analysis of the Porters five factors that controls
competition in a industry as the industry analysis for competitive advantage. This study
will therefore look at the Porter’s model of competitive forces that shape industry
competition from this perspective below:
3.1.1 New market entrant
From the perspective of a company that already exist in the industry, the porter’s model
looks at new entrants into the market as threat that puts a cap on profitability (Porter,
2008). To maintain a competitive advantage in such environment, the strategy has to be
such that it is difficult for new entrants either to come into the industry all together or to
implement the strategy that provides the competitive advantage created based on this
factor. As explained by Porter (2008), a proper configuration of factors such as capital
requirement, customer switching cost and restrictive government policy among other
factors can give and help maintain competitive advantage in an industry. An example of
this in the South African context is the telecommunication industry where the four major
players have been able to build sophisticated network coverage of the nation. Beside
the government control of the industry with the licensing process, a new entrant into this
industry will require an enormous amount of capital for infrastructure and branding. This
barrier for new entrant in this industry can is a strategic competitive advantage for the
industry players if well configured with other factors and looked after.
On the other hand, from the perspective of a firm entering an industry, new entrants can
create a competitive advantage for itself by carefully analyzing how difficult it will be for
the firms that are already in the industry to respond to its strategy, thereby upstaging the
industry (Marcus, 2005). This was evident in Dell’s personal-computer division’s
competitive advantage over other manufacturer of the same type of computers as
described by Magretta (2002). While others sold to retailers, Dell chose to sell directly to
end users knowing fully well that its rivals will find it difficult to violate existing contracts
with retailers or make changes to their distribution network to compete with Dell. This
became a major competitive advantage to Dell.
7 | P a g e
3.1.2 Supplier
Dealing with suppliers that have the ability to increase or generally influence costs like
that of raw material can put a company or even an industry at a position of
disadvantage (Porter, 2008). However, Oh and Rhee (2010) alludes that a proper
configuration of the supplier network can provide a competitive advantage through
strategies that harness supplier capabilities and collaboration.
3.1.3 Buyer
The Porters model also describes the buyer as a powerful force that influences the
structure of competition in different industries. This force might be a strategic hurdle to
turn into a competitive advantage because the buyer will always bargain for more
quality and cost reduction (Porter, 2008). However an analysis of this factor will provide
an understanding of how easy it is for buyers to control price. Besides, as with the
suppliers, innovative seller-buyer collaboration could either reduce the competitive
pressure or actually create a competitive advantage (Thompson, Gamble, Strickland,
2006).
3.1.4 Substitutes, product and technology development
Consumers are generally attracted to a product because of a need they want met. It is
therefore important to note that they might choose another product line entirely that
meets the same need maybe at an even cheaper cost and with higher quality because
of the technological advancements. Strategist should therefore be concerned about the
technological advancements in creating competitive advantages for their firms (Porter,
2008).
8 | P a g e
3.1.5 Competitive Rivalry
The amount and the basis of rivalry within and industry can give an indication whether
the industry is worth entering. However, the fact that there is an existing strong rivalry
within an industry does not indicate that it will not be profitable to join the industry
(Porter, 2008). According to Kim and Mauborgne (2005), the blue ocean strategy by
shows that with the understanding of the rivalry in an industry, innovative firms can
define their own rules and create their own markets. The existing rivalry therefore
becomes an opportunity to keep away new entrants into the industry.
The Porters five forces that shape competition model do not create competitive
advantage directly. But the knowledge of the industry threats and opportunities should
lead to a “good strategy”; one that can create bring about competitive advantage
(Barney and Hesterly, 2012). Furthermore, Porter (2008) extends this tool as useable
for uncovering salient opportunities and creating new trends within industries.
Therefore, organisations can use industry analysis as a determinant in formulating its
competitive strategy and competitive advantage.
3.2 Competitive advantage from internal analysis
In the dynamic and ever changing business environment of today, it can be deduced
from literatures that creating and sustaining competitive advantage might require the
understanding and unique configuration of many factors. Barney (1995) agrees with the
initial discuss of this text that organisations can derive competitive advantage from
scanning its environment and positioning itself uniquely. However, Barney (1995)
makes a case for the integration of internal analysis with the external environment in
developing strategies that will produce competitive advantage. Marcus (2005)
describes internal analysis as evaluating the strength and weaknesses within an
organization, making a case for SWOT analysis, as a tool for crafting strategies, that
should in turn lead to competitive advantage (Barney and Hesterly, 2012).
9 | P a g e
While Barney (1995) raised the questions of value, rareness, imitability and
organization, other factor that will be worth reviewing is the concept of resource based
view of the organization (Thompson and Martin, 2010) and the activity based view of
organization (Sheehan and Foss, 2009) that is based on the value chain analysis
(Porter, 1998).
3.2.1 Activity based view of organisations for competitive advantage
Marcus (2006) cites Porter (1985) that organisations creates value from the margin or
profit derived from carrying out different activities. A proper evaluation and strategic
configuration of the activities that an organisation carries out in creating value therefore
can help in establishing competitive advantage (Porter, 1998). Porter postulates that a
firm would create a competitive advantage for itself by carrying out strategic activities
cheaper or better than its competitors. The activity based view provides a framework
that provides how organisations can derive competitive advantage by looking at its
activities as subject of analysis.
Porter (1998) provides a generic framework for understanding the main activities carried
out by different industries in creating value called the “generic value chain” and makes a
strong case that has become the basis of many literatures that competitive advantage
can be created by developing innovative variations of value chain to stay ahead of
competitions. This fact has now been supported by other work on activity based view of
organisations for competitive advantage by studying the concept of the value chain. The
study of the value chain as the activity template that can be used to study, hence
improve a firm’s competitive position (Sheehan and Foss, 2009) therefore represent the
core concept of how organisations can generate competitive advantage by looking
inward.
10 | P a g e
3.2.2 Resource based view of organisations for competitive advantage
This view looks at an organisation and how it can either create value or make profits
from the perspective of the resources available within the organization, its capabilities
and competencies (Marcus, 2006). Marcus further explained that the focus of this view
links the performance, profitability and hence ability to stay ahead of competition to a
firm to three factors. Barney (1991) cited in Knott (2009) describe the resource based
view of a firm for competitive advantage as the unique position that organisation is able
to attain in the industry because of resources that peculiar to the firm. It therefore
becomes clear that a firm can carve a competitive advantage for itself in its industry by
looking inward to identify resources that it has or can use differently than other
competitors in the industry.
However, it is important to note that the availability of unique resources within a firm
does not necessarily translate into a competitive advantage. The role of organizational
leadership would be key to taking advantage of such resources for competitiveness
(Fahy, 2000; Clulow, Gerstman and Barry, 2003; Andersen, 2011). Besides the role of
leadership in harnessing resources to produce competitive advantage, a proper
configuration of those resources is required (Andersen, 2011). Also, literatures (Barney,
1995; Knott, 2003; Andersen, 2011) over the years has suggested that the competitive
advantage derived from the resource-based view of an organisation will be sustainable
only if the resources that created or creates the advantage adds unique value enough to
explore opportunities and neutralize threats. Such resources should also be rare in such
a way that competing firms are unable to acquire such resource easily, beside it has
been said such resources need to be difficult to imitate to generate an enduring
competitive advantage.
4.0 COMPETITIVE STRATEGIES
It has been said that the essence of strategy is for a firm to be able to stay ahead of
competition (Porter, 2008) and that competitive advantage should emerge from a good
11 | P a g e
strategy (Barney and Hesterly, 2012). As mentioned in the earlier sections, the internal
analysis of strength and weaknesses and the external analysis of the opportunities and
strengths does not culminate into competitive advantage in themselves, but an effective
configuration and understanding of the environment should be help strategists in
determining strategic positioning within an industry or a competitive strategy that will
help the firm create values uniquely in its industry (Thompson and Martin, 2010).
Therefore the actual competitive advantage emerges from strategic positioning within
an industry by being able to “create value, create competitive advantage in delivering
the value and operating the business effectively” (Thompson and Martin, 2010).
The ability to manage costs effectively in a way that is unique within an industry,
innovative differentiation and creating value in the process have been identified as the
main sources of creating and sustaining competitive advantage (Porter, 1998;
Thompson and Martin, 2010). In the process of creating value, firms can create
competitive advantage by optimizing its surplus as a customer and revenue obtained
from customers as a supplier (Bowman and Ambrosini, 2007). On the other hand, “a
firm differentiates itself from its competitors if it can be unique at something that is
valuable to buyers” (Porter, 1998). The product or service that delivers value must be
perceived to have distinct qualities by the consumer for it to be considered differentiated
(Thompson and Martin, 2010). According to Thompson and Martin (2010) citing Porter
(1985) describes the Porter’s generic competitive strategy framework that shows how a
firm can position itself for competitive advantage using cost leadership and
differentiation within an industry.
4.1 Cost leadership
A firm deriving competitive advantage from the configure of the cost-quality parameters
in a way that puts it ahead of competitors and leaving competition with no room to
challenge its position based on cost is said to maintain a cost leadership with the
industry (Thompson and Martin, 2010). The author explained that the cost leadership
does not necessarily mean the lowest cost in the industry, but could be the ability to
12 | P a g e
serve a broad industry segment or several industries uniquely and gaining a unique cost
advantage using methods such as economies of scale, unique access to raw material or
uncommon/innovative cost reduction method (Hsieh and Chen, 2011). This is particular
evident in the banking industry where some banks are able to differ on cost structure by
implementing highly streamlined processes and paperless transaction initiatives.
4.2 Differentiation
The differentiation strategy is when a firm aims a product or service to its buyers and
the buyers can perceive the product or service as unique, though it adds the value that
they require (Hsieh and Chen, 2011). A firm can create and sustain competitive
advantage from differentiation sources such speed, reliability, service, product design,
features, technological advancement, corporate personality and the way it relates to its
customers (Thompson and Martin, 2010).
5.0 SUSTAINING COMPETITIVE ADVANTAGE
Based on how a firm is able to configure the factors that generate competitive
advantage for it, there is no guarantee that the advantages and opportunities that a firm
relies on will produce a permanent competitive advantage (Thompson and Martin,
2010). It is therefore important that a firm is continuously scanning its environment for
changes and responding to such ahead of competition.
Kim and Mauborgne (2005) allude that a firm can sustain competitive advantage by
remaining innovative in what they called the “Blue ocean strategy”. The authors
describe the firm using the blue ocean strategy as one that does not fight the rival for
market share, but discovers untapped market space, able to create its own demand
within and outside the existing market. Porter (2008) describes this as a positive-sum
competition where the firm operates in the future of the industry. Operating with this
13 | P a g e
strategy will mean that a firm evolves continuously making it to remain ahead of
competition and sustaining its competitive advantage.
6.0 CONCLUSION
The review of literature in this study has shown that the analysis and understanding of
the environments – internal and external where a firm operates is very important to stay
ahead of competition. The understanding and analysis of the environment should
provide strategists with information about the strengths, weaknesses, opportunities and
threats. Each of these can be used to decide on a strategic position to take that can
lead to competitive advantage.
The main reason that organisations embark on creating strategy for their firms is so that
they can maintain a position in their industry that can separate them from their rivals.
The discovery of this position together with effective leadership is what produces
differentiating factors for firms that they can use to create value uniquely in a way that
competition is not able to either in the short or long term. That firm is therefore said to
have competitive advantage if the competition is unable to achieve the same position
either in the long or short run.
Although the environmental analysis does not create competitive advantage in itself, the
tools found in the literature shows that competitive advantage can emerge from
understanding the environment, taking advantage of opportunities and building
defenses against threats. Figure 2 below shows a perceived model of how competitive
advantage can be achieved and sustained in a firm based on this study.
14 | P a g e
Figure 2: Creating sustainable competitive advantage
Figure 2 above summarizes a perceive model of how firms can create, evaluate and
sustain competitive advantage within their firms.
15 | P a g e
Continuous evaluation and
change management
Competitive advantage
Competitive Strategy
Macro Economic Advantage
Leadership
Activity base view
External Environmental Analysis
Internal Analysis
SWOT
Resource base view
References
Andersen, J. 2011. Strategic resources and firm performance. Management Decision,
volume 49, 1, pp.87-98.
Barney, J.B. and Hesterly, W.S., 2012. Strategic management and competitive
advantage. 4th edition. New Jersey: Pearson/Prentice Hall.
Barney, J.B. 1995. Looking inside for competitive advantage. The academy of
management executive, volume 9, 4, pp. 49-61.
Bowman, C. and Ambrosini, V., 2007. Firm value creation and levels of strategy.
Management Decision, volume45, 3, pp. 360-371.
Clulow, V., Gerstman, J. and Barry, C., 2003. The resource-based view and sustainable
competitive advantage: the case of a financial services firm. Journal of European
industrial training, volume 27, 5, pp. 220-232.
De Wit, B. and Meyer, R., 1999. Strategy synthesis: Resolving strategy paradoxes to
create competitive advantage. London: Thomson Learning.
Fahy, J. 2000. The resource-based of the firm: some stumbling- blocks on the road to
understanding sustainable competitive advantage. Journal of European industrial
training, volume 24, 2, pp.94-104.
Hsieh, Y.H. and Chen, H.M., 2011. Strategic fit among business competitive strategy,
human resource strategy, and reward system. Academy of strategic management
journal, volume 10, 2 pp. 11-20.
16 | P a g e
Kim, W.C. and Mauborgne, R., Blue Ocean Strategy: From theory to practice. California
management review, volume 47, 3, pp. 105-121.
Knott, P. 2009. Integrating resource-based theory in a practice-relevant form. Journal of
strategy and management, volume 2, 2, pp. 163-174.
Magretta, J. 2002. Why business models matter. Harvard business review, pp. 3-8.
Marcus, A.A. 2005. Management strategy: achieving sustained competitive advantage.
New York: McGraw-Hill Companies, Inc.
Maritan, C.A. and Peteraf, M.A. 2011., Competitve strategy: volume II. Glos: Edward
Elgar Publishing Ltd.
Oh, J. and Rhee, S., 2010. Influences of supplier capabilities and collaboration in new
car development on competitive advantage of carmakers. Management Decision,
volume 48, 5, pp.755-773.
Pesonen, P. 2008. Innovation and dynamic strategy.3rd European conference on
management of technology and innovation, pp. 17-19.
Porter, M.E. 1979. How competitive forces shape strategy. Harvard Business Review,
pp. 1-10.
Porter, M.E. 1998. Competitive advantage : creating and sustaining superior
performance. New York: The free press.
Porter, M.E. 2008. The five competitive forces that shape strategy. Harvard Business
Review, pp. 79-93.
Reeves, M., Love, C. and Tillmanns, P., 2012. Your strategy needs a strategy. Harvard
business review, pp. 76-83.
17 | P a g e
Shafer, S.M., Smith, H.J. and Linder, J.C., 2005. The power of business models.
Business Horizons, volume 48, pp. 199-207.
Sheehan, N.T. and Foss, N. J., 2009. Exploring the roots of Porter’s activity-based view.
Journal of strategy and management, volume 2, 3, pp. 240-260.
Thompson, A.A., Gamble, J.E. and Strickland, A.J., 2006. Strategy: core concepts
analytical tools readings. 2nd edition. New York: McGraw Hill Companies, Inc.
Thompson, J. and Martin, F., 2010. Strategic management awareness and change. 6th
edition. Hampshire: Cengage Learning.
18 | P a g e