3 fundamental reasons why you don’t have competitive advantage

Companies strive to gain competitive advantage through effectively tapping into the marketplace with “the right product, at the right price, place and time” to outperform market competitors. There are 3 main perspectives (or views) on how competitive advantage is achieved. When you find yourself having difficulty achieving high performance, it usually because you may be lacking according to one or more of the 3 views on competitive advantage.

Reason 1: Your industry structure is flawed

The Market Based View (MBV suggests that a high performance depends upon the market which you operate in. It is one of the oldest theories of strategic marketing and it still very popular nowadays. The MBV further stipulates that it is vital for the strategist to effectively address the firm’s opportunities and risks as well as the long term organizational goals and aspirations. The Market Based View originates from Mason and Bain in the 1950’s and the Structure- Conduct- Performance Paradigm, which was later on further developed by Michael Porter with theories that have marked the history of strategic thinking.

The 5 structural pillars of any industry

According to Porter, a firm must perform an in-depth examination of the external and macro environment in order to fully understand the underlying structure of its industry. For this reason, strategic managers must consider all the underlying competitive pressures which were analyzed by Michael Porter in the 1970s through the widespread ‘Porter’s Five Forces’ model. These 5 forces are discussed below.

Competitive Rivalry

This force concerns the competition within the marketplace and is influenced by the number of competitors, their activity and so on. Competitive rivalry is high when there are only a few organizations that sell a product or service and consumers can easily switch to a competitor’s product at a very little cost. When internal rivalry is high, then businesses can limit it through the effective differentiation of the product on non-price attributes, such as customer service to flexible delivery times. Rivalry is at the core of the 5 forces model and is mostly affected by the other 4 forces.

Threat of Substitutes

When there are close substitute products in the market, consumers are more likely to switch to alternatives when price increases. When this force is high the strategist must examine current and potential substitutes and carefully set the maximum price appropriate for its products. The business should also differentiate itself by offering high quality products and services – this way the threat of substitutes decreases.

Threat of new entrants

This force examines how easily competitors can enter the market in the relative industry – the easier it is, the greater the risk. To border this pressure, the business may use a limit pricing strategy in order to establish barriers to entry. Other barriers to entry include economies of scale, exclusive technologies, cost advantages, etc.

Bargaining power of suppliers

This factor looks at the number of suppliers in the market how powerful suppliers of a business are and how easy it is for them to drive prices up, which as a result would lower a firm’s profitability. For example, when there are only a few suppliers in the market, then it is highly likely that they will possess a lot of control.

Bargaining power of customers

The last force of the model examines the bargaining power of consumers and how easy or difficult it is to drive prices down. This factor is influenced by the number of consumers in the market, the cost of the buyer to switch to another offering, and so on.

Porter’s Generic Strategies

Moreover, another tool used for assessing strategic choices is Porters generic strategies framework which discusses three strategic options for gaining competitive advantage.

Cost Leadership strategy

The first competitive position is the cost leadership and it is based on the notion that having lower costs and prices than competitors leads to a competitive advantage. This can be achieved through efficient production and distribution practices. This approach possesses high barriers to entry due to the low costs but it possesses the risk of being perceived as inferior among the industry or its business model being replicated by a competitor. An example of a cost leadership strategy is seen by Aldi and Ryanair, which remove all unnecessary activities in order to save costs and offer lower prices to the customer.

Differentiation strategy

On the other hand, a firm may pursue a differentiation competitive strategy in which the firm offers a slightly or significantly differentiated offering so that it secures a premium price and higher margins. In this case, the offering is usually of higher quality and design and conveys brand attributes that are valued by the consumer. An example of a differentiation strategy is seen by Emirates airlines which although they charge a premium price, they offer far more benefits than their low cost rivals. However differentiation runs the risk of changes in customer preferences which may not value the perceived benefits as a rational trade for the increased price. It also runs the risks of easy imitation by competitors.

Focus strategies

Porter also looks at the focus strategies as another competitive option; either in a cost focus or differentiation focus. This competitive position is a matter of competitive scope and reduces the breadth of targeting to a market niche. The cost focus is achieved through serving a smaller market on a cost leadership strategy while a differentiation focus serves a small market by following a differentiation strategy. Porter highlights that if a firm does not adopt a generic strategy, it will then become stuck in the middle and lose its competitive advantage. However, there are conflicting opinions on the matter with several opponents arguing for a hybrid strategy, employing a low cost and high quality.

Caution!

Although the contribution of the Market-Based View in the field of Strategic Marketing has been an immense cornerstone, it is equally important to consider the other side of the coin; and look at the drawbacks and shortfalls of the Market-Based View. While the MBV approach places increasing emphasis on the external environment, it neglects to consider internal organization factors, which are often equally important. Along these lines the Market Based View is also time ineffective and costly since all external analysis require time and effort from specialized professionals.

Reason 2: Your resources portfolio is flawed

The problem of not having competitive advantage doesn’t always originate from the outside. So having  gained an understanding of the Market Based View, it is equally important to also examine the opposite approach, also known as the Resource-Based View (RBV).  This approach focuses on the organization’s resources rather than the external and macro-environment.

This approach originates from Porter’s value chain logic and was later on further developed by Barney in the early 1990’s. He investigated the attributes of a firm’s resources and capabilities that explain a competitive advantage.

Resources in the organization portfolio are evaluated for it’s ability to drive competitive advantage by means of the VRIN model.

VRIN Model

The conception of the Resource Based View focuses on the VRIN model which stands for “Valuable, Rare, Inimitable and Non-Substitutable” and aids in the analysis of a firm’s resources. Once the resources of an organization meet the below criteria, and the organization is in place to make use of them, we can then talk about a sustained competitive advantage

Valuable

This criterion involves the generation of strategies that are effective and efficient in order to outperform competitors in the market.

Rare

This factor encapsulates the resources which are rare and are thus hard to get from other market participants.

Inimitable

This point looks at resources that are only governed by one firm and cannot therefore be duplicated.

Non-Substitutable

Lastly, this criterion means that resources cannot be substituted by any other resources.

It is important that strategic managers continually organize efficient organizational processes to result in valuable, inimitable, rare and non-substitutable resources. Physical and financial resources together with human resources and intangibles must be assessed and effectively used. On that note, the Starbucks CEO Howard Schultz in an interview stated that the company’s competitive advantage lies behind “its people bringing the Starbucks experience to everyday life and building emotional connections with customers”.

Caution!

Although the Resource Based View provides a clear direction to the firm based on the organizational resources; yet there are again a number of limitations that have to be taken into account. Along with its development, the RBV has been extensively criticized. One of the most widespread critics of the Resource Based View is that is solely focused on the internal resources of the firm and thus ignores to consider the external environment and the market competition. It has been argued that there no managerial implications arise; since the theory does not clearly explain the role of management in achieving Valuable, Rare, Inimitable and Non-Substitutable resources.


Reason 3: Good resources, but no capabilities

One of the primary critiques of the Resource Based View argues that a resource is too indeterminate to provide for useful theory and that the definition of a resource is unworkable.

Within this context, Grant (1991) suggested that resources are only a source of the capabilities and those capabilities are the source of competitive advantage. Other researches have agreed on the above proposition; claiming that it is not the resources that lead to competitive advantage but a firm’s capabilities. For this reason, we also talk about a Capability Based View which focuses on a businesses’ core capabilities as a source of competitive advantage.

Dynamic Capabilities

One type of capability – the Dynamic Capability – has been frequently discussed in the literature. The logic behind dynamic capabilities is that the organization possesses the capability to adapt the organizations resource base optimally and purposefully to address the rapidly changing and evolving environment. Dynamic capabilities are a very important to topic, especially nowadays that the business playground is changing every minute.

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Hybrid Model to Strategic Management

It has been repeatedly suggested that the best option would probably be to follow a hybrid model of the three approaches in order for a competitive advantage to be achieved. On this note, a dynamic perspective on the organizational capabilities was developed by Teece, Pisano and Shuen(1997), arguing that a competitive advantage depends upon the distinctive coordination of internal and external capabilities to address to changing market environments. Therefore, competitive advantage is achieved when current capabilities are effectively responding to the changing environment but competitors are unable to imitate those capabilities quickly enough (Sanchez and Heene, 2004). Such a dynamic framework will allow for a holistic strategy that takes advantages of a firm’s resources and capabilities; yet while considering what is going on within the external environment.

Conclusion

Having considered everything mentioned above, it is important to highlight that both approaches have their benefits and limitations. While the Market Based View hinges upon the full understanding of the macro and competitive environment, the Resource Based View takes note of the objective assessment of the resources that are valuable, rare, imperfectly imitable and non-substitutable. Employing a sole approach to strategic management will lead in either neglecting the external environment and competitors, or not focusing on the organizational resources and capabilities

Each of these theoretical positions make an important contribution to our understanding of how competitive advantage can be achieved. While all of the approaches, the Market-Based View, Resource-Based View and Capability Base View are very useful in attaining competitive advantage; using an isolated approach may result in incorrect strategic decisions.  For this reason, it is vital to examine not only the organization’s macro environment, but also the resources and capabilities of the firm. Having considered these, the strategist must decide on the organization’s positioning in the market along with the identification of key strategic issues and the best strategic options. From a critical perspective, strategic management is now more important that has ever been, since the 21st century demands clear strategic vision and clearly focused strategic plans in order for organizations to survive the chaotic corporate strategic environment.

References

Barney, J1991, ‘Firm resources and sustained competitive advantage’ , Journal of Management, vol. 17, no.1, pp. 99-120.

Grant, R1991, ‘The resource-based theory of competitive advantage: implications for strategy formulation’ , California Management Review, vol. 33, no. 3, pp. 114-135.

Porter, M. E. (1980). Competitive strategy: Techniques for analyzing industries and competitors, New

Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard Business Review, 86(1),

Sanchez, R. and Heene, A. (2004). The new strategic management. New York, N.Y.: Wiley

Teece, DJ, Pisano, G& Shuen, A1997, ‘Dynamic capabilities and strategic management’, Strategic Management Journal, vol. 18, no.7, pp. 509-533.

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