Issues In Strategic Management
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THE SOURCES OF COMPETITIVE ADVANTAGE
DIFFICULTIES IN MAINTAINING
In a competitive business environment, many businessmen keep in their mind a concept as “marketplace is battlefield, doing business such as fighting”. So what “weapons” does the firm use in that “battlefield”?. It is possible to say that competitive advantage is one of “weapons” helps the firm fighting effectively. To mention to the concept of competitive advantage, it is appropriate to start by distinguishing causes, characteristics and consequences. As it described “The causes: an appropriate application of the core competencies possessed by the enterprise and an appropriate positioning of the enterprise in the relevant industries or market segments. Characteristic: the ability to provide utility, or to satisfy, customers better than competitor can. Consequence: the ability to win market share or make higher profit than competitors” (White, p.269). A simply understanding. when a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. Michael Porter identified two basic types of competitive advantage: cost advantage and differentiation advantage (Porter, p.11). The firms need to understand the sources which bringing about its competitive advantage and then, have a strategy to maintain and develop its competitive advantage. It is one of the critical issues to ensure for the existence and development of the firm.
A competitive advantage exists when a firm is able to deliver the same benefits as competitor but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, competitive advantage enables the firm to create a superior value for its customers and superior profits for itself.
The competitive advantage which the firm achieves through utilizing its resources and capacities that ultimately results in superior value creation. In order to develop a competitive advantage, the firm must have resources and capacities that are superior to those of its competitors. Without this superiority, the competitors simply could replicate what the firm was doing and any advantage quickly would disappear.
Resources are the firm’s specific assets useful for creating a cost or differentiation advantage. There are two kind of resources, tangible and intangible. As classified by Colin White (2004, p.239), the audit list of resources including: Tangible resources (Physical resource: production facilities, buildings, plant, equipment, land. Technological or intellectual resources: intellectual property rights such as patents, trade marks, copyrights, trade secrets, as well as the capacity of an R&D dept with its lap and research staff. Financial resources: the ability to borrow from financial institutions, find funds internally, raise money on the stock market. Organizational and human resources: the formal structures for control, command, communication and coordination, and for the reporting of financial information, together with the human capital of its managers and employees). Intangible resources (Reputation: but with whom? Competitor, customer, suppliers, employee, Government, the community at large. Human qualities of individual staff: creativity, honesty, trust. Organizational qualities: capacity to provide leadership, innovate, think strategically. Intangible attributes of products or service: brand).
Capacities refer to the firm’s ability to utilize its resource effectively. For example, when a firm brings a product to market faster than its competitor, it could say that it has a stronger capacity. Such capacities are embedded in the routines of the organization and are not documented as procedures and thus are difficult for competitors to replicate.
The firm’s resource and capacities together form its core competencies. These competencies enable innovation, efficiency, quality, and customer responsiveness, all of which can be leveraged to create a cost advantage or a differentiation advantage. Competitive advantage is created by using resources and capacities to achieve either a lower cost structure or a different product. A firm positions itself in its industry through its choice of low cost or differentiation. This decision is a central component of the firm’s competitive strategy.
The firm creates value by performing a series of activities. To achieve a competitive advantage, the firm must perform one or more value creating activities in a way that creates more over value than do competitors. Superior value is created through lower cost of superior benefits to the customer (differentiation).
To find the difficulties which the firms have to face with to maintain its competitive advantage, or in other word, have a sustainable competitive advantage, we have to know what business strategy the firm pursues. A firm positions itself by leveraging its strengths. Michael Porter has argued that a firm’s strengths ultimately fall into one of two headings: cost advantage and differentiation. By applying these strengths in either a broad or narrow scope, three generic strategies result: cost leadership (cost reduction), differentiation, and focus (Porter, 1985). These strategies are applied at the business unit level. They are called generic strategies because they are not firm or industry dependent.
Cost leadership strategy means the firm sells its products either at average industry price to earn a profit higher than that of rivals, or below the average industry prices to gain market share. The price war probably happens but the firm can maintain some profitability while the competitor suffers losses. Even without a price war, as the industry matures and price decline, the firms that can produce more cheaply will remain profitable for a long period of time. The cost leadership strategy usually targets a broad market.
The firms can acquire cost advantages by improving efficiencies, gaining unique access to a large source of lower cost materials, making optimal outsourcing and vertical integration decisions, or avoiding some costs altogether. If competing firms are unable