UNIT 2 STM COMPETITIVE ADVANTAGE

GLOBALIZATION
Globalization is the term to describe the way countries are becoming
more interconnected both economically and culturally. This process is a
combination of economic, technological, socio-cultural and political
forces.
ADVANTAGES
 Increased free trade between nations
 Increased liquidity of capital allowing investors in developed
nations to invest in developing nations
 Corporations have greater flexibility to operate across borders
 Global mass media ties the world together.
 Increased flow of communications allows vital information to be
shared between individuals and corporations around the world
 Greater ease and speed of transportation for goods and people.
 Reduction of cultural barriers increased the global village effect
 Spread of democratic ideals to developed nations.
 Greater interdependence of nation states.
 Reduction of likelihood of war between developed nations
 Increases in environmental protection in developed nations
DISADVANTAGES
 Increased flow of skilled and non-skilled jobs from developed to
developing nations as corporations seek out the cheapest labor.
 Spread of a materialistic lifestyle and attitude that sees
consumption as the path to prosperity
 International bodies like the world trade organization infringe
on national and individual
 Greater risk of diseased being transported unintentionally
between nations.
 Greater chance of reactions for globalization being violent in an
attempt to preserve cultural heritage.
 Increased likelihood of economic disruptions in one nation
affecting all nations.
 Threat that control of world media by a handful of corporations
will limit cultural expression.
 Take advantage of weak regulatory rules in developing
countries.

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 Increase in the chances of civil war within developing countries
and open war between developing countries as they vie for
resources.
 Decrease in environmental integrity as polluting corporations.

Impact of globalization on industry structure

The structure of an industry is affected by globalization. Globalization
gave rise to the following types of industries.
 Multidomestic Industries
 Global Industries
 Transnational strategy
 International strategy
Multidomestic Industries are specific to each country or group of
countries. This type of international industry is a collection of essentially
domestic industries like retailing, insurance and banking. It has
manufacturing facility to produce goods for sale within their country
itself.
Global Industries operate world wide, with MNCs making only small
adjustments for country- specific circumstances. A global industry is one
in which a MNCs activities in one country are significantly affected by its
activities in other countries. MNCs produce products or services in
various locations throughout the world and sell them, making only minor
adjustments for specific country requirements.
Ex: Commercial Aircrafts, Television sets, Semiconductors, copiers,
automobiles, watches and tyres.

Transnational strategy seeks to combine the best of multidomestic

strategy and a global strategy to get both global efficiency and local
responsiveness. For many industries, given the differences across
markets and the similarities being fostered by the flatteners, this form of
strategy is highly desirable and appropriate. The difficulty is that
combining the multidomestic and global strategies is hard to do because
it requires fulfilling the dual goals of flexibility and coordination. Firms
must balance opposing local and global goals.

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Example: The Ford Motor Company and BMW are examples of firms
pursuing a transnational strategy. Ford, for example, is focusing on the
“world car,” building one core car that will be sold globally.
International Strategy
Sometimes, firms expanding into new geographic markets find that they
must adapt certain components of their strategies to accommodate local
environments. In the United States, for instance, Dell is famous for the
business model that allows it to skip middlemen and go directly to
suppliers and customers. Eg. Microsoft Windows

National Context and Competitive Advantage

Inspire of globalization of markets and production, successful
companies in certain industries are found in specific countries. Japan
has most successful consumer electronics companies in the world;
Germany has many successful chemical and engineering companies in
the world; the United States had many of the world’s successful
companies in computer and biotechnology.
According to Michael Porter, the nation’s competitive position in any
industry depends on factor conditions, industry rivalry, demand
conditions and related and supporting industries.

Intensity of Rivalry

Factor National competitive Local Demand

Conditions Advantage Conditions

Competitiveness of
related and
supporting
The country will have competitive advantage in any industry subject to
the following conditions.

1) The country has right mix of basic and advanced factors of

production to support the industry,

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2) Intense rivalry among domestic companies forces them to be
efficient,
3) Demanding consumers and demand conditions force the local
industry to be efficient and
4) Low cost and high quality inputs and complementary products are
supplied by related and supporting industries which are
internationally competitive with respect to the give industry.
Competitive Advantage: Low cost and Differentiation:

A company is said to have attained competitive advantage when

the profit rate of a company is higher than industry average. Return on
sales (ROS) and Return on assets (ROA) are ratios calculated to
determine profit rate.
Competitive Advantage
When a firm sustains profits that exceed the average for its
industry, the firm is said to possess a competitive advantage over its
rivals. The goal of much of business strategy is to achieve a sustainable
competitive advantage.

Michael Porter identified two basic types of competitive advantage:

 cost advantage
 differentiation advantage

A competitive advantage exists when the firm is able to deliver the same
benefits as competitors but at a lower cost (cost advantage), or deliver
benefits that exceed those of competing products (differentiation
advantage). Thus, a competitive advantage enables the firm to create
superior value for its customers and superior profits for itself.

Cost and differentiation advantages are known as positional advantages

since they describe the firm's position in the industry as a leader in
either cost or differentiation.

A resource-based view emphasizes that a firm utilizes its resources and

capabilities to create a competitive advantage that ultimately results in
superior value creation. The following diagram combines the resource-
based and positioning views to illustrate the concept of competitive
advantage:

A Model of Competitive Advantage

Resources        

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Cost Advantage
Distinctive Value
or
Competencies Creation
Differentiation Advantage

Capabilities        

Resources and Capabilities

According to the resource-based view, in order to develop a competitive

advantage the firm must have resources and capabilities 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-specific assets useful for creating a cost or

differentiation advantage and that few competitors can acquire easily.
The following are some examples of such resources:

 Patents and trademarks

 Proprietary know-how
 Installed customer base
 Reputation of the firm
 Brand equity

Capabilities refer to the firm's ability to utilize its resources effectively.

An example of a capability is the ability to bring a product to market
faster than competitors. Such capabilities are embedded in the routines
of the organization and are not easily documented as procedures and
thus are difficult for competitors to replicate.

Capabilities are skills, which bring together resources and put

them to purposeful use. The organization’s structure and control system
gives rise to capabilities, which are intangible. In order to posses’
distinctive competence, a company should have both unique and
valuable resources and capabilities to exploit resources and capabilities
to exploit resources and unique capability to manage common resources.
A company is said to have distinctive competence if it possesses both
unique and valuable resources and unique capabilities to manage them.

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The firm's resource and capabilities together form its distinctive
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.

C) COMPETENCIES:
Competencies are firm – specific strengths that allow a company to
differentiate its products and for achieve substantially lower cost than its
rivals and thus gain a competitive advantage.
Types of competency
i) Core competency: It is an activity central to a firm's profitability
and competitiveness that is performed well by the firm. Core
competencies create and sustain firm's ability to meet the critical
success factors of particular customer groups.

Core competence is a fundamental enduring strength, which is a

key to competitive advantage. Core competence may be a competency in
technology, process, engineering capability or expertise, which is difficult
for competitors to imitate. By and large, it is a technological competence,
which provides the firm access to a variety of a variety of products and
markets and contributes to customer delight. One core competence gives
rise to several products. Honda’s core competence in designing and
manufacturing engines had led to several products and business such as
cars, motorcycles, lawn mowers, generators etc.3ms core competence in
substrates and coating adhesives has given rise to 60,000 products
which includes magnetic tapes, photographic films, coated abrasives etc.
Sony has a core competence in miniaturization. Dupont has a core
competence in chemical technology

ii) Distinctive competency: It is a competitively valuable activity

that a firm performs better than its competitors. These provide the
basis for competitive advantage. These are cornerstone of strategy.
They provide sustainable competitive advantage because these are
hard to copy.

Cost Advantage and Differentiation Advantage

Competitive advantage is created by using resources and capabilities to

achieve either a lower cost structure or a differentiated product. A firm
positions itself in its industry through its choice of low cost or

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differentiation. This decision is a central component of the firm's
competitive strategy.

Another important decision is how broad or narrow a market segment to

target. Porter formed a matrix using cost advantage, differentiation
advantage, and a broad or narrow focus to identify a set of generic
strategies that the firm can pursue to create and sustain a competitive
advantage.

Value Creation

The firm creates value by performing a series of activities that Porter

identified as the value chain. In addition to the firm's own value-creating
activities, the firm operates in a value system of vertical activities
including those of upstream suppliers and downstream channel
members.

To achieve a competitive advantage, the firm must perform one or more

value creating activities in a way that creates more overall value than do
competitors. Superior value is created through lower costs or superior
benefits to the consumer (differentiation).

Every firm is a collection of activities that are performed to design,

produce, and market, deliver, and support its product. All these activities
can be represented using a value chain

PRIMARY ACTIVITIES

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There are five generic categories of primary activities involved in competing in
any industry. Each category is divisible into a number of distinct activities that
depend on the particular industry and firm strategy:

•Inbound Logistics. Activities associated with receiving, storing, and

disseminating inputs to the product, such as material handling, warehousing,
inventory control, vehicle scheduling, and returns to suppliers.

• Operations. Activities associated with transforming inputs into the final product
form, such as machining, packaging, assembly, equipment maintenance, testing,
printing, and facility operations.

• Outbound Logistics. Activities associated with collecting, storing, and

physically distributing the product to buyers, such as finished goods warehousing,
material handling, delivery vehicle operation, order processing, and scheduling.

• Marketing and Sales. Activities associated with providing a means by which

buyers can purchase the product and inducing them to do so, such as advertising,
promotion, sales force, quoting, channel selection, channel relations, and pricing.

• Service. Activities associated with providing service to enhance or maintain the

value of the product, such as installation, repair, training, parts supply, and product
adjustment.

Support Activities
Support value activities involved in competing in any industry can be divided into
four generic categories. As with primary activities, each category of support
activities is divisible into a number of distinct value activities that are specific to a
given industry.

Procurement
It refers to the function of purchasing inputs used in the firm’s value chain, not to
the purchased inputs themselves. Purchased inputs include raw materials, supplies,
and other consumable items as well as assets such as machinery, laboratory
equipment, office equipment, and buildings. Though purchased inputs are
commonly associated with primary activities, purchased inputs are present in
every value activity including support activities. For example, laboratory supplies
and independent testing services are common purchased inputs in technology
development, while an accounting firm is a common purchased input in firm
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infrastructure. Like all value activities, procurement employs a “technology,” such
as procedures for dealing with vendors, qualification rules, and information
systems.

Technology Development.
Every value activity embodies technology, be it know-how, procedures, or
technology embodied in process equipment. The array of technologies employed
in most firms is very broad, ranging from those technologies used in preparing
documents and transporting goods to those technologies embodied in the product
itself. Moreover, most value activities use a technology that combines a number of
different sub technologies involving different scientific disciplines. Machining, for
example, involves metallurgy, electronics, and mechanics.

Human Resource Management.

Human resource management consists of activities involved in the recruiting,
hiring, training, development, and compensation of all types of personnel. Human
resource management supports both individual primary and support activities (e.g.,
hiring of engineers) and the entire value chain (e.g., labor negotiations). Human
resource management activities occur in different parts of a firm, as do other
support activities, and the dispersion of these activities can lead to inconsistent
policies. Moreover, the cumulative costs of human resource management are
rarely well understood nor are the tradeoffs in different human resource
management costs, such as salary compared to the cost of recruiting and training
due to turnover.

Firm Infrastructure.
Firm infrastructure consists of a number of activities including general
management, planning, finance, accounting, legal, government affairs, and quality
management. Infrastructure, unlike other support activities, usually supports the
entire chain and not individual activities. Depending on whether a firm is
diversified or not, firm infrastructure may be self-contained or divided between a
business unit and the parent corporation. In diversified firms, infrastructure
activities are typically split between the business unit and corporate levels (e.g.,
financing is often done at the corporate level while quality management is done at
the business unit level).

Core competence

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Core competence is a fundamental enduring strength, which is a key to
competitive advantage. Core competence may be a competency in
technology, process, engineering capability or expertise, which is difficult
for competitors to imitate. By and large, it is a technological competence,
which provides the firm access to a variety of a variety of products and
markets and contributes to customer delight. One core competence gives
rise to several products. Honda’s core competence in designing and
manufacturing engines had led to several products and business such as
cars, motorcycles, lawn mowers, generators etc.3ms core competence in
substrates and coating adhesives has given rise to 60,000 products
which includes magnetic tapes, photographic films, coated abrasives etc.
Sony has a core competence in miniaturization. Dupont has a core
competence in chemical technology

Generic Building Blocks of Competitive Advantage

Efficiency, quality, innovation and customer responsiveness are

four basic ways for lowering costs and achieving differentiation. The four
factors are inter related in the sense, superior quality leads to superior
efficiency and innovation will increase efficiency, quality and customer
responsiveness.

SUPERIOR QUALITY

 
COMPETITIVE ADVANTAGE SUPERIOR CUSTOMER
SUPERIOR SERVICE /
 
EFFICIENCY
LOW COST / RESPONSIVENESS
DIFFERENTIATION

SUPERIOR INNOVATION

Efficiency

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In a business organization, inputs such as land, capital, raw
material, managerial know-how and technological know-how are
transformed into outputs such as products/ services. Efficiency is
measured as a ratio between the costs of inputs required to produce a
given output. The more efficient a company is the fewer inputs required
to produce a given output for eg if it takes General Motors 30 hours of
employee time to assemble a car it takes Ford 25 hours, we can say
that Ford is efficient than GM. And as long as other things are equal,
such as wage rates we can assume from this information that Ford will
have lower cost structure than GM. Thus efficiency helps a company
attain competitive advantage through a lower cost structure.
Two important components of efficiency for many companies are
employee productivity and capital productivity. Employee productivity
is usually measured by output per employee and capital productivity
by output per unit of invested capital. The concept of productivity is
not limited to employee and capital productivity. For example
pharmaceutical companies often talk about the productivity of R&D
spending, by which they mean how many new drugs they develop from
their investment in R&D. the important point to remember is that high
productivity leads to greater efficiency and lower costs.

Quality
Quality of goods and services indicates the reliability of doing the
job, which the product is intended for. High quality products create a
reputation and brand name, which in turn permits the company to
charge higher price for the products. Quality is also influenced by greater
efficiency. The attributes of many physical products include the form,
features, performance, durability, reliability, style and design of the
product. A product is said to have superior quality when customers
perceive that the attributes of a product provide them with a higher value
than attributes of products sold by rivals. For examples Rolex watch
has attributes such design, styling, performance and reliability-that
customers perceive as being superior to the same attributes in many
other watches. Thus we can refer to a Rolex as a high quality product:
Rolex has differentiated its watches buy these attributes.

Innovation
Innovation means new ways if doing things. Innovation results in
new knowledge, new product development, new production processes,
management systems, organizational structures and strategies in a

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company, innovation offers something unique, which the competitors
may not have, and allows the company to charge high price.
Photocopiers developed by Xerox and sony’s walkman are typical
examples of successful product innovation of pioneering companies.
Innovation refers to the act of creating new products and services there
are two types of innovation one is product and another is process
innovation. Product innovation refers to development of new products
that are new to the world or superior attributes to existing products.
Examples intel’s invention of microprocessors in the early 1970’s.
Cisco’s development of the router for routing data over the internet.
Process innovation often allows a company by creating more
value by lowering production costs. Toyota’s lean production offers the
products with less cost of production.
Customer Responsiveness

Companies are expected to provide customers what they are exactly in

need of by understanding customer needs and desires. Achieving
superior customer responsiveness involves giving, customers value for
money. The unique needs of individual customers require customization
of goods, which is an aspect of customer responsiveness.
The key to providing customers with outstanding service is to keep
your employees focused on effective customer communication at all
times. It's a good idea to incorporate ongoing customer communication
training into staff meetings and training sessions. Vary the message so
people don't get bored with hearing the same information.

Distinctive Competence

Distinctive competence is a unique strength that allows a company

to achieve superior efficiency, quality, innovation and customer
responsiveness. It allows the firm to charge premium price and achieve
low costs comported to rivals, which results in a profit rate above the
industry average.
A distinctive competency is a competency unique to a business
organization, a competency superior in some aspect than the
competencies of other organizations, which enables the production of a
unique value proposition in the function of the business. A distinctive
competency is the basis for the development of an unassailable
competitive advantage. The uniqueness differentiates this competency
from all others, whether a core competency or simply a competency.

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Sources of distinctive competency –
Distinctive competencies, the basis for competitive advantage, can come
from technology, industry position, market relations, cost, business
processes, manufacturing processes, people, customer satisfaction, or
just being first.
The insightful integration of complementary elements of the business
model is the strongest form of competitive advantage known. This is
because it is so difficult for competitors to understand and even more
difficult to replicate, especially when the business model elements of
value, purpose, vision, culture, and identity are intertwined in a powerful
business solution.
Examples of distinctive competency –
Toyota has a distinctive competency in lean manufacturing. GE has
a distinctive competency in management development. These
companies also have core competencies, core to their particular lines of
business. They also have competencies necessary to operate their
business but of not of strategic significance, such as payroll, the
processes used to pay their employees.
Distinctive competencies don’t just naturally happen over time nor is
every distinctive competency advantageous. For a distinctive competency
to be advantageous there must be a market demand and value for it.
Only then it can help the firm in gaining advantage. For example,
Wal-Mart competes against other large chains of stores. It has the
advantage of lowest prices and vast variety. These competencies give
it advantage over other chains because there is demand and value for
those characteristics in the market. If a company has one or more
competency more than its competitors but there is no demand for those
competencies in the market, then they do no good to the company.
Rather, they show the lack of management vision and market knowledge
of the company. Same is the case with the individuals as they compete in
their respective fields.
Competency and advantage –
For a business to develop and sustain a competitive advantage, it must
have some sort of competitive advantage, based on a distinctive
competency, which enables it to produce a unique value proposition.
A distinctive competency is a competency that is maintainable in the face
of competition. It is not imitable, at least for a while.

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In a dynamic environment, ultimately distinctive competencies, or the
uniqueness of the value proposition produced using them, becomes less
distinct or less unique. Therefore, in order to sustain advantage,
competencies must be dynamic, evolving to more favorable forms in
order to sustain advantage over the long haul.
Distinctive competency should be explicitly defined to insure that it is
profoundly understood, it should be protected from loss to competitors
whether through trade secrets, intellectual property, or simply by making
it such an integral component of an overall competitive business model
that it cannot be replicated. Leadership must nurture, tune, and renew
the distinctive competency in order to have it remain distinctive.

Resources

A resource is an asset, competency, process, skill or knowledge.

Resources may be classified as tangible such as land, buildings, plant
and machinery and intangible such as brand names, reputation, patents,
know-how and R&D. resources are financial physical, human,
technological and organizational in nature.
Evaluation of key Resources

Barney has evolved VRIO framework of analysis to evaluate the

firm’s key resources.

The following questions are asked to assess the nature of resources

1) Value-Does it provide competitive advantage?

2) Rareness-Do other competitors possess it?
3) Imitability - is it costly for others to imitate?
4) Organization-does the firm exploit the recourse?

Technology related Scientific research expertise; product

innovation capability expertise in a given
technology; capability to use internet to
conduct various business activities
Manufacturing Low-cost production efficiency; quality of
related manufacture; high use of fixes assets; low-cost
product design; flexibility to make a range of
products.
Distribution related Strong network of wholesale
distributors/dealer; gaining ample space on
retailer shelves; having company-owned retail

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outlets; low distribution costs; fast delivery.
Marketing related Fast, accurate technical assistance; courteous
customer service; accurate filling of orders;
breadth of product line; merchandising skills;
attractive styling; customer guarantees; clever
advertising.
Skills related Superior workforce talent; quality control know-
how; design expertise; expertise in a particular
technology; ability to develop innovative
products; ability to get new products to market
quickly.
Organizational Superior information systems; ability to
capability respond quickly to shifting market conditions;
superior ability to employ internet to conduct
business; more experience& managerial know
how.
Other types Favorable image/ reputation with buyers;
overall low cost; convenient locations; pleasant
courteous employees; access to finance; patent
protection.

Strategy and competitive advantage

The propose of any strategy is to achieve a competitive

advantage. The term strategy refers to all types of strategies like global
strategies, corporate strategy, business level strategy and functional
level strategy. Companies build strategies on the basis of existing
resources and capabilities and try to adopt strategies based on
additional resources and capabilities to sustain their competitive
position; Walt Disney’s successful turnaround in 1984 was mainly
based on existing resource base whereas Xerox’s financial recovery
was due to functional level strategy.

Durability of competitive advantage

Durability of completive advantage refers to the rate at which

the firm’s capabilities and resource depreciate or become obsolete.
Companies try hard to sustain competitive advantage since
every other company tries to develop distinctive competencies and
gain competitive advantage. Durability depends on three factors
 Barrier to imitation
 Capability of competitors and
 Dynamism of industry

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 Core Competence
.
Barriers to Imitation
Barriers are those factors which make it difficult for a competitor to copy
company distinctive competencies. The longer the period for the
competitor to imitate the distinctive competence, the greater the
opportunity that the company has to build a strong market position and
reputation with customers.
Imitability refers to the rate at which others duplicate a firms underlying
resources and capabilities.
Tangible resources such as land, capital, building and equipment are
visible and imitable. Intangible resources like brand names are difficult
to imitate.
Capabilities are by-products of internal operations and decision making
process of a company and it is difficult for competitors to comprehend it.
If the firms’ core competence emanates from explicit knowledge (i.e)
knowledge expressed, articulated and communicated it is easily imitated
by competitors. When capabilities come from the tacit knowledge
imitation will be tough for competitors.
Capability of competitors
When a firm is committed to a particular course of action in doing
business and develop a specific set of resources and capabilities such
prior commitments serve as a deterrent to imitate the competitive
advantage of successful firms.
Industry Dynamism
Dynamic industries are characterized by high rate of innovation and fast
changes. In dynamic industries product life cycle will be short and
competitive advantage will not last for a long time. It gives rise to hyper
competition. The consumer electronic and computer industry examples
of dynamic industries.
Why do Companies Fail?
A failing company is one whose profit rate is substantially lower than
average profit rate of competitors. Declining profit and loss of competitive
advantage are some of the reasons for failure of companies. The reasons
are:
 Inertia
 Prior strategic commitments
 Too much inner directedness and specialization
Inertia:
In changed market conditions, companies find it difficult to change their
strategies and structure accordingly. The changed competitive conditions

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put pressure on the decision makers to introduce suitable changes in
developing capabilities. It is difficult to change capabilities because they
are embedded into the established decision making and management
process.
Prior Strategic commitments:
The commitments which are already made in terms of huge investments
direction and facilities prove to be a setback and results in competitive
disadvantage
Too much Inner directedness and Specialisation
Companies turn out to be inner directed and lose sight of market
realities and lose competitive advantage. Procter and Gamble and
Chrysler were overconfident of their selling and paid no attention to new
product development and ended up in inferior products.

AVOIDING FAILURE AND SUSTAINING COMPETITIVE ADVANTAGE

Usually imbalance between various dimensions of competitive
advantage such as efficiency, quality, innovation and customer
responsiveness are considered to be the main reason for failure of many
firms.

Analysing best industrial practices through benchmarking will facilitate

organizations to build distinctive competencies. Benchmarking involves
identification of best practices adopted in other companies. It involves
measurement of the firm against products, prices, practices and services
of some of the most efficient global competitors

The most significant step in avoiding failure is identification of barriers

to change and overcoming such barriers. This step will point out the
need for new organizational structure and control systems in
response to the changed environment. Appropriate leadership style and
prudential use of power will be of help in maintaining competitive
advantage.

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