based on Michael Porter’s seminal work, Competitive Advantage and famously depicted below.
With so many options, how do you know the right competitive advantage for your business? Most significantly, it needs to be unique and “to lower buyer cost or raise buyer performance through the impact of its value chain on the buyer’s value chain.”(1, p. 132) The trick is to find something unique that customers care about.
Feel free to contact us to determine and possibly assist with the implementation of the most effective differentiator for your firm.
Leadership: Sources of Competitive Advantage
Here, I have replaced Michael Porter’s infrastructure with top management’s role, which inevitably cuts across departments or involves the external environment. We begin with examples of the company’s strategies and impact on the external environment.
1. Localization in Global Markets
Implementing simultaneous strategies of localization and globalization in global market returned Panasonic to a profitable growth path. In 2000, the company suffered its first loss due to Chinese competitors effectively exporting to the US, Europe and South Asia. In response, Panasonic shifted from a US-based to a global view. It set up a center focused both on local Chinese market needs and on globally available and soon-to-be available Panasonic products. The center uncovered a need for narrower refrigerators, allowing fridge sales to increase ten-fold in one year. It also found a need to sterilize laundry. Panasonic was the first major player to bring this capability to market. As a result, the front-loaded washer market share in China increased from 3% to 15%. (3)
2. Strategic Alliance or Acquisition
Strategic Alliances are an important source of capabilities a firm may not otherwise possess. Few firms have all the capabilities needed to compete effectively in our world of fast-paced change. “Despite the fact that an alliance is formed nearly every 90 seconds, failure rates appear to occur in nearly 60 percent of all alliances.(4) In most instances, failure is not a function of the alliance being a bad strategic option; rather, failure is attributable to managerial error.”(4) Consequently, successful strategic alliances can bring significant competitive advantage.
Another option is to purchase the capability. At Sonoco Retail Packaging, we could see that our ability to pack retail products would be complemented by the ability to design, manufacture and pack out popular point-of-purchase displays. As a result, we acquired a premier POP display company, yielding an important capability that customers needed, and so generating additional sales and profits.
3. Competitive Actions
Following an extensive study of competitive actions and responses in the airline industry, Ming-Jer Chen concludes that the more responses a company’s competitive action provokes, the more that company’s profits drop. (5) Highly visible attacks to the core of competitors will draw a lot of response, as confirmed by airline data. Competitive attacks that are difficult to respond to draw less reaction, as demonstrated by considerable airline data in the study. Attacks that are difficult to respond to include those that demand a costly response, significant organizational change, or sophisticated coordination among different departments. These are the competitive actions companies will want to make.
Still, effective competitive actions can vary by environment. In nascent markets, plenty of ambiguity exists and investors prefer companies with more predictable and simple competitive moves. This encourages improved investor valuation and so offers competitive advantage. (6)
4. Customer Clusters
Research has shown that firms located near customers cluster innovate more quickly. (7, 8) This is largely due to more customer participation and a real-time information flow. Far flung customers makes it more difficult to assess and maintain satisfaction. (7)
Internal Leadership Role
5. Company-Wide Market Orientation
A market orientation involves offering more customer value due to an outstanding understanding of the customer and competitors that permeates the organization. Based on 9 years of data, Kumar et al find that ‘market orientation has a positive effect on business performance in the short and the long run.” It can take some time for the market orientation to have a positive effect, so management needs to provide support. At the beginning of the 9 year period, a company with a market orientation had an advantage. Later on, the nature of competition changed and a market orientation was necessary to compete successfully. Still, the study finds that under highly competitive pressure, a company can gain advantage with a market orientation. (9)
At a multi-million packaging company, I led the shift from a product to a market focus. Initially, the company produced the plethora of products the equipment could produce. As a result, the company was mediocre in most markets, and poorly performing in some, having suffered a significant loss the previous year. I coached the management team to explore market options, utilizing the extensive knowledge in Sales, Production and market analyst assistance. Given the company’s sophisticated capabilities, market trends and the high margins, we selected the high end market segment as an area of focus, shedding the high volume, low margin product lines. The company pulled together to pursue high quality packaging accounts and to move into a new, higher end product line. The new business added considerable profits to our bottom line, returning the company to profitability.
6. Strategic Fit between Marketing and Manufacturing
“Organizing marketing activities in ways that fit a business’s strategy type can form a significant source of competitive advantage.” (10) The crux of this is to ensure the customer requirements of the company’s marketing strategy are met by the manufacturing strategy. Misalignments need to be identified and transformed into strategic fit.
Strategic fit between marketing and manufacturing can drive such strong relationships of trust and reputation that “the potential exists for any organization to develop intimate relations with customers to the point that they may be relatively rare and difficult for rivals to replicate”(11). “The “best” products do not necessarily win. The best-networked ones usually do.” (10) This phrase highlights the necessary partnership of manufacturing and marketing.
For manufacturing-focused companies, it is essential to note that “three organizational challenges at the heart of entrepreneurial strategy fall squarely in the bailiwick of marketing: (1) scanning and projecting current, emerging and potential environmental change; (2) Perceiving the outlines of potential opportunity lurking but rarely manifestly evident in such change; and (3) Translating (perceived) opportunity into (potential) solutions that generate value for some set of customers.” Effective marketing is essential to a successful company. (11).
7. Implementation of Strategy
It is possible to compete successfully with superior implementation of strategy rather than superior strategy. (12) As markets become more mature, the environment becomes less dynamic and there are fewer opportunities to develop a better product or new strategy. Consequently, superior implementation can win the day.
It is important to realize that “an implementation leader has an internal focus, possessing great organizational and motivational abilities” while a strategy of differentiation demands a leader with an external focus who is a “great strategist — brilliant, capable of seeing what others do not see” while (12)
Human Resources: Sources of Competitive Advantage
8. Human Capital
Human capital in the form of a highly trained workforce can be the source of competitive advantage, particularly if employees do not take their skills to competitors. (13, 14) Firm-specific capital is not valuable when transferred to a new firm, and so it in particular is a good source of competitive advantage. (15, 16) However, if a firm is able to retain employees then the skills of interest to competitors can be a source of competitive advantage. (15, 16)
9. Employee Engagement
Many studies demonstrate that employee engagement can be a source of competitive advantage. One study, taking place in the labor-intensive hotel industry, found that the ‘highly satisfied, motivated, committed and fully engaged’ employees yielded a higher market share than their competitor. (18)
Technology Development: Sources of Competitive Advantage
10. Technological Change
In this time of great technological advances, there are many opportunities for gaining competitive advantage through technological innovation. However, a company needs to create a culture that is open to adopting new technology effectively. One study concerning adopting electronic data interchange (EDI) in the automotive industry notes that the company benefited from: “cost saving, time saving, increased efficiency, better communication, less error and delays. Consequently, customer satisfaction and performance level has been dramatically increased.” (19) However, the value is only achieved with the selection and effective implementation of the correct technology, which is not easy.
11. Business Analytics
Recently, “58% of the more than 4,500 respondents to a survey conducted by MIT Sloan Management Review, in partnership with the IBM Institute for Business Value, said their companies were gaining competitive value from analytics — up from just 37% who said that last year.” (20) Data-oriented cultures implement analytics more effectively. However, creating this culture can be difficult. 44% of respondents considered organizational challenges difficult to resolve as compared to 21% who found them easy to handle. Those early in business analytic implementation find these issues most difficult. (20) Logistics and Operations: Sources of Competitive Advantage
12. Production System
Implementing an effective production system can bring companies competitive advantage. One study shows that industrial companies in Jordan who implemented Just-In-Time (JIT) attained positive and statistically significant advantages in costs, quality and financial results. (21) At an RR Donnelley facility I ran, we implemented JIT in a small run, quick turn pressroom. It yielded considerable customer satisfaction and maintained sales in a highly competitive market.
13. Business Processes
Managing consistent business process seamlessly is another source of competitive advantage. For example, Toyota added product value due to the Six Sigma and product design processes. Business process improvement can be a cost-effective strategy as it can occur without technological change. However, it is critical that the processes are tied closely to the business strategy and objectives. (22)
Government Programs: Sources of Competitive Advantage
14. National Export Promotion
Countries adopting specific export promotion programs can offer companies competitive advantages in products, services and costs. This has a stronger positive effect on smaller firms and those less experienced in exporting. (23)
There are many possible sources of competitive advantage. As mentioned, the key is that the chosen advantage would provide value to your market. Feel free to contact us to determine and possibly assist with the implementation of the most effective differentiator for your firm.
©Partners Creating Growth 2013
- Michael Porter, Competitive Advantage, 1985
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