What is Competitive Advantage ?
Competitive advantage can be defined as the superiority that is enjoyed by a firm over its competitors in an industry. Hence, it can be thought of as a strategic advantage of a business. It allows a firm to build its position stronger than before.
The terms strategic advantage and competitive advantage can be used synonymously. It is a superiority of a firm in a specific competitive area. With the help of this supremacy, the firms are able to find a favorable market position. This supremacy can be developed in any of the functions or areas that a firm deals in Therefore, this implies that there are many ways through which the firm can acquire the competitive edge.
Through competitive advantage, the organisation is able to make the target market aware about the supposed value which it can provide more efficiently than the competitors. It can be attained in many ways, such as by presenting goods or services of better quality, competitive pricing, innovative marketing, etc.
When an organisation maintains the competitive advantage in a long-run, then it is called 'sustainable competitive advantage'. It establishes the firm and improves its image among the general public as well as increases the possibility of success in future.
A firm is said to have a competitive advantage when it has an access to the superior quality resources with some additional benefits, such as skilled and trained employees, latest technologies, natural resources, etc. All these resources lead to achievement of competitive advantage by the firm.
Sources of Competitive Advantage
The sources from which the competitive advantage is achieved should not be stretched beyond a certain limit that they stop providing competitive advantage to the firm. Some of the 6 major sources of competitive advantage are as follows :
1) In Marketing :
- Launching new product,
- Offering low price,
- Larger market share,
- Applying creativity and innovation in marketing activities,
- Increasing the level of customer satisfaction,
- More prompt customer service,
- Improving marketing channel,
- Innovative promotional strategies,
- Increasing efficiency of advertisement,
- Effective and productive sales activities.
- Continuous market research.
- Collaborations with other marketing organisation,
- Reducing the costs in marketing,
- Improving the product-mix and product lines of the firm,
- Market standing.
2) In Finance :
- Liquidity,
- Assets,
- Gearing,
- Leverage,
- Costs,
- Cash flow,
- Profitability,
- Cost of capital,
- Efficient tax planning,
- Quality of financial management.
3) In Manufacturing/Operations :
- Improved production capacity,
- Better plant location,
- Better production facilities,
- Post-production facilities,
- Full capacity utilization,
- Efficient utilization of raw materials,
- Maintenance,
- Reduced cost of production,
- Achieving break-even position,
- Improved productivity,
- Better inventory management,
- Experience curve benefit,
- Value engineering capability,
- Improved flexibility,
- Automation.
4) In Research & Development :
- Features, quality and depth of research facilities,
- Proper allocation of financial and other resources for R&D activities,
- Skills, knowledge and experience of researchers,
- Promptness in research activities,
- Technical skills and abilities for carrying-out research and development,
- Maintaining records about patents and copyrights,
- Comparing the cost input and outcome obtained in terms of product.
5) In Human Resources :
- Skills, knowledge and experience of employees,
- Dedication and motivation in employees,
- Low personnel turnover,
- Minimal labour costs,
- Improved industrial relations.
6) In Corporate Factors and Overall Resources :
- Size of the company,
- Corporate image,
- Capability of management,
- Capable and experienced top level management,
- Efficient and co-operative board of directors who can make policies and take decisions,
- Impressive record of organisation's performance,
- Continuous effort towards innovation and creativity,
- Effective strategic planning,
- Productive organisational culture,
- Flexible and adaptable organisational structure,
- Implementation of latest technology.
Types of Competitive Advantage
According to Porter, there can be mainly three types of competitive advantage or strategies :
1) Cost Leadership :
Cost Leadership is an approach, in which marketers sell a regular product at lower prices in a mass market. It helps in minimizing the company expenses, which in turn allows the consumers to enjoy products at low prices.
2) Differentiation :
Differentiation is an approach which emphasizes on presenting a different product in a wide market. The presentation of the product requires creativity and innovation on an on-going basis to meet the needs of highly competitive market scenario.
3) Focus Strategy :
Focus business strategy strives to sell the products in a small market segment. The company serves the needs of a small segment by implementing low cost a leadership or differentiation strategy. It is based on the principle that better service can be provided in a target market by completely concentrating on it.
Importance of Competitive Advantage
The significance of competitive advantage is discussed below :
1) Acts a Support for Strategy :
As the competitive advantage is closely related with the strategy, it can be observed that both the factors are complementary to each other. In fact, the competitive advantage provides a support to the strategy as it tries to create a balance between the organisation and the strategy adopted by it.
2) Effective Placement of Strategy :
An organisation cannot operate vigorously, if it lacks in terms of competitive advantage, as it becomes difficult for the organisation to implement the required strategy. This leads to the failure of even the most creative and well-planned strategy. Hence, competitive advantage is essential for effective placement of the strategy.
3) Provides Value to the Customers :
A competitive advantage that is able to generate and provide value to the customers and thus satisfy their needs is considered as the biggest strength of the firm.- firm with competitive advantage provides products that are superior than the offerings made by the competitors and delivers unmatched strategic benefits to the customers. It is especially helpful to enhance the competitive position when the customers are striving low cost products.
4) Provides Sustainable Advantage :
By providing value to the customers, the organisations are able to enhance their level of satisfaction and are able to strengthen relationships with them. It will also help the firms in attaining competitive advantage which would result in producing long-lasting returns and profits by retaining the customers.
5) Provides Power to Set Price :
A competitive advantage which is supported by exclusive feature of the product or its limited availability provides the organisation to enjoy the power to set the price irrespective of the competitors, as it acquires unique and distinctive resources.
6) Outperforms Existing Competitors :
A strong competitive advantage helps in dealing with the present and the evolving competitors. In order to compare their performance with that of the rivals, the firms make use of the customer value analysis, which throws light on the factors that are rated high by the customers while selecting at product or a supplier. These factors help in providing a measure for developing competitive advantage. Strong competitive advantages are built by the firms by creating entry barriers and by beating existing rival firms.
7) Increases Investor Value :
The competitive advantage of an organisation helps in finding-out the capability of the organisation to bring back surplus gains on capital for the shareholders. The relation between the business strategy and its financial and investment strategies helps the shareholders to ensure that they can continuously invest in a resource that provides and maintains the competitive advantage.
Generic Building Blocks of Competitive Advantage
In the modem business scenario, it is highly important for an organisation to outperform the competitors and for this the organisation needs to achieve competitive advantage through efficient utilization of available resources. This will allow the organisation to produce the results greater than the competitors which in turn will lead to success. Following are the four building blocks of the competitive advantage :
1) Increasing Efficiency :
Efficiency can be increased by optimum utilization of organisational resources that are used in the production process. The organisations need to continuously find new ways for the better and effective utilization of resources.
For example, organisations train their employees for various major tasks as well as in latest technologies so that the organisations can optimally use the technical and human resource at the same time to produce better results.
2) Increasing Quality :
In order to counteract the challenges arising from the worldwide organisation such as those from Mexican agricultural production companies. Korean electronic corporation, European marketing and financial organisation etc., the companies have to put in extra efforts enhance the skills and capabilities of the manpower. This will improve the quality of product and services provided by them.
3) Increasing Speed, Flexibility and Innovation :
In the current market scenario, the decision regarding beating in the cut-throat competition relies on the speed, flexibility and innovation.
The first factor i.e., speed, implies the rate which an organisation is able to bring new products in the market. The second factor i.e. flexibility refers to the ability of adapting the changes in the organisation in response to changing organisational environment. Speed a flexibility help the companies in staying alert facing the competitors, as the company managers are able to plan out better strategies and are ab to organise the business operations, by plan for the future, deciding for the present and the acting quickly by activating their resources meet the demands of the changing scenario.
Innovation is a process through which organisations develop new products or service and/or improvise the existing products and services as per the customers taste and preference. Organisations that bring innovation and creativity in their business operations become a potential threat to their competitors. Usually, innovation occurs in groups or teams of few members, to whom the authority and responsibility has been delegated by the Here an organisational culture is created where the employee that takes initiatives and risks for carrying-out a particular task gets recognition and rewards.
4) Increasing Responsiveness to Customers :
Since the competition between different organisations is mainly for the provision of the goods and services to the customers, it becomes very essential for the company, especially the service sector to train the employees to become responsive to the requirements of the customers. The services at the retail stores, banks and hospital primarily depend upon the behavior of their employees which helps them in delivering superior quality services economically. The empowerment of non-managerial staff helps in transforming the role of the first line mangers and helps in more effective utilization of the assets.
Avoiding Failures and Sustaining Competitive Advantage
The organisations can be regarded as failure if they stand below average and earn negligible gains or generally losses. Following are the three major reasons of failure:
1) Inertia :
According to this argument, the companies are not able to modify or change their strategies and adapt with the changing competitive scenario. Since the capabilities of the firm are not easy to change, they create inertia, within the organisation. The change in capabilities is opposed as it calls for restructuring and re-allocation of and authority among power the chief decision-makers, which may result in conflicts. Hence, the capabilities can either help in providing competitive advantage or competitive disadvantage.
2) Changing Organisational Resources :
Some of the organisational commitments regarding deploying new and specialized resources. It can who lead to the competitive failure, as these new resources may not co-ordinate with the current and trending utilities Altering and changing the existing resources may lead to heavy investments along with implied difficulties.
3) Icarus Paradox :
The Icarus paradox has emerged from a Greek mythology, according to which Icarus prepared wings made up of wax and feathers, which enabled him to fly. As he flew to great heights, he went very near the sun which led to burning of his wings and at the end he died. The irony of the story is that his greatest strength to fly brought his downfall. In the similar way, various companies get overwhelmed with their success in the initial stages, that they assume that the same strategies would always ensure success. However, implementing similar strategies each time causes the companies to become highly specific and focused and they become rigid and fail to adapt according to the changing market scenarios. This results in failure, either at an early stage or at a later stage.
Guidelines to Avoid Failure
In order to avoid failure, the organisations should strengthen their building blocks, so that they can achieve the competitive advantage. This can be accomplished by improving the organisational performance consistently in a continuous manner, -implementing best in-class organisational activities, setting benchmarks in the industry, etc. Following are the guidelines to avoid failure :
1) For the purpose of sustaining the competitive ,advantage, the companies need to emphasize on the four basic building blocks of the competitive advantage, i.e., efficiency, quality, innovation and customer responsiveness. The companies should implement different strategies for developing unique competencies for ensuring better performance.
2) In order to maintain competitive edge in the long-run, the companies need to enhance their effectiveness, quality, creativity and customer responsiveness in an on-going basis as per the fast-paced and changing market scenario. Those organisations which continuously try to find-out for ways improving their operations and continuously upgrading their distinctive competencies or creating unique competencies, are proved to be more successful.
3) For developing distinctive competencies, the best approach is the identification of the best-in-class organisational practices and implementing it. This would allow the firm to make and sustain the resources and abilities so as to provide superiority in the areas of productivity, quality. creativity and customer responsiveness.
4) The primary need for continuously sustaining the competitive edge is the ability of winning over the barriers created by organisational inertia.
Resource Based View of a Firm
According to the Resource Based View (RBV), a system of resources may help in providing sustainable competitive advantage by developing the organisation specific competencies and also by forming a system of multifaceted relationships. These competencies rooted deep down in the organisational history and culture, which help in producing implicit organisational awareness. Resource based view helps in analyzing and interpreting the organisation's internal assets and focuses on using resources and capabilities in order to formulate strategy for attaining competitive advantages in the long-run Resources can be considered as inputs which help the firm in pursuing its activities. The strategic alternatives chosen by the firms to compete with external challenges are determined by its internal resources and capabilities.
From the perspective of RBV, all the resources of a firm cannot be regarded as the strategic resources. For the resources to be strategic resources, two utmost important criteria should be met. Firstly, there should be resource heterogeneity which implies that there are varied resources across different firms. Secondly, the resources should be immobile, Le, the firms should not be able to acquire resources from the other firms. These two criteria help in obtaining competitive advantage over the rival firms.
The RBV can be referred to as an approach that helps in analysis and identification of the organisational strategic advancements based on distinctive amalgamation of its resources, abilities and non material resources. The principle of RBV says that, the organisations fundamentally differ from one resources another on the basis of a distinctive set of resources and capabilities for the utilization of those resources. The competencies of each firm are generated from organisational resources and as soon as these resources are well developed, they turn out to be the source of competitive advantage for the firm.
Resources Providing Sustainable Competitive Advantage
The emphasis of the RBV is on the resources of the firm which can help in bringing competitive advantage for the firm. Following are the three basic types of the resources which help in providing sustained competitive advantage :
1) Physical Capital Resources :
These are the resources of an organisation which are developed or created by human beings. These resources are the non-human resources developed by human itself to be utilized in the process of production and manufacturing.
For example, tools and machineries are manufactured by the humans themselves that are directly used in the production process. Other examples include plant, production amenities, warehouses, office buildings, vehicles, etc. All of these resources are directly or indirectly used in business operations.
2) Human Capital Resources :
The skills, experience, education, training, knowledge, awareness and competencies which are contributed by the employees to a business are known as human capital resource. It can also be described as the values which organisational personnel can add to. These contributions are measured in terms of skills and competencies of employees. Human resource is one of the crucial elements of the process of production. Hence, it is extremely important for the organisation to hire the staff having appropriate education. knowledge, skills, experience and training, in order to enhance efficiency, production and gains.
3) Organisational Capital Resources :
The organisational capital resources are also the non-material resources of the organisation like the human resource. These resources encompass a proper structure for reporting, a of planning, a framework. for system of planning. controlling and coordinating and a network of informal relationships among the groups in and across the organisation. Generally, the routines of the organisation remain stable in short-run, but in spite of this stability it is continuously under the risk of getting out-dated by the rivals on account of imitation or innovation. The part of the organisation capital which is difficult to imitate. ensures sustainable competitive advantage for the firm. The organisation: capital is its distinctive feature which can be traded only if the organisation is sold. Hence, the organisational capital resources are priceless. For finding out the organisational capital resource, the relations should be seen in the light of its effects on the gain, additional value system or the measurement of the performance.
Using the Resource-Based Approach in Internal Analysis
For the purpose of using RBV in case of internal analysis, the foremost step for the organisation is to recognize and assess its assets which lay the foundation for the competitive advantage of future. After recognizing, the strategists define different assets of the firm and examine them on the basis of a discussion for determining the resources which have strategic significance. This process helps in the following ways :
1) Breaking of Resources :
RBV helps in breaking down the competencies into specific categories instead of placing them in broad ones.
For example, simply saying that Flipkart has better marketing skills than Snapdeal provides very less information, but instead sub-dividing it into different categories such as promotional offers like discounts, provision of coupons, offers such as 'one on one' etc., helps in better comparative assessment.
2) Taking a Functional Perspective :
Various value building resources and activities that need to be analysed further can be revealed by simply looking at various functional areas of the firm. This in turn helps in fragmentation of the material and non-material resources of the firm along with its capabilities.
3) Looking at Organisational Processes :
It helps in looking not only at the assets or abilities, but also as the processes of the organisation at whole and views it as the grouping of resources. Though the disintegration of the organisational processes and resources is vital, yet an integrated and innovative view helps in determining the competencies possessed by the firm that can help in producing the competitive advantage.
4) Using the Value Chain Approach :
With the help of value chain approach, many organisational abilities, procedures and activities. can be revealed which are possible useful sources of the competitive advantage.