MBA INDIVIDUAL ASSIGNMENT DECLARATION1

SUBJECT: STRATEGIC MANAGEMENT

ASSIGNMENT NUMBER: 1

LECTURER: PROF K. JONKER

STUDENT: AYANKOYA KAYODE

DATE SUBMITTED: 19TH SEPTEMBER, 2012

EMAIL: AYANKAYODE@YAHOO.COM

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Table of Contents

1.0 INTRODUCTION................................................................................................................................2

2.0 THE COMPETITIVE ADVANTAGE.................................................................................................2

3.0 SEARCHING FOR COMPETITIVE ADVANTAGES......................................................................4

3.1 Competitive advantage from external environment...................................................................4

3.1.1 New market entrant.................................................................................................................6

3.1.2 Supplier....................................................................................................................................7

3.1.3 Buyer.........................................................................................................................................7

3.1.4 Substitutes, product and technology development.............................................................7

3.1.5 Competitive Rivalry.................................................................................................................8

3.2 Competitive advantage from internal analysis............................................................................8

3.2.1 Activity based view of organisations for competitive advantage.......................................9

3.2.2 Resource based view of organisations for competitive advantage................................10

4.0 COMPETITIVE STRATEGIES.......................................................................................................10

4.1 Cost leadership.............................................................................................................................11

4.2 Differentiation................................................................................................................................12

5.0 SUSTAINING COMPETITIVE ADVANTAGE...............................................................................12

6.0 CONCLUSION..................................................................................................................................13

References..............................................................................................................................................15

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1.0 INTRODUCTION

Organisations are constantly faced with issues of profitability, growth and sustainability

in today’s business environments that is characterized by fierce competition. The

dynamic business environment where firms operate require them to be able to set

themselves apart, adapt to change very quickly or transform in order for them to remain

relevant or survive (Thompson and Martin, 2010). Therefore it becomes very important

for a business to have a clear pattern of decision making that is based on its perception

of its industry and where it sees itself within the industry known as its strategy (Shafer,

Smith and Linder, 2005). Thompson and Martin (2010) described the adopted strategy

of an organization as its game-plan to achieve its desired goal and objectives and also

concisely relate strategy to the pursuit of purpose.

Porter (1979) noted that the reason organisations create strategy is to be able to handle

competition. Therefore, there is a need for an organisation to establish differentiating

factors in its strategy that will set them apart from the competitors and guarantee

continuous survival and growth (Porter, 1998). Recent literature has described this

factors as competitive advantages and this study will attempt to review the subject.

2.0 THE COMPETITIVE ADVANTAGE

Competition within a particular industry has gone beyond the traditional rivalry among

firms operating in the same industry. The challenge for profit, growth and sustainability

has now been extended to other factors like the behavior of the customers and supplier

in the industry, potential entrants, availability of alternatives among other factors (Porter,

2008). While the firms in the traditional school of thoughts suggest that a business

should focus its effort and strategy on out-performing or getting rid of the other rivalry

firms, Porter (2008) describes this as a risky strategy. Rather, organisations that will

out-perform others are those that are able to anticipate, read, respond, adapt and take

advantage of changes in the industry (Reeves, Love and Tillmanns, 2012).

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A continuous analysis and review of the SWOT (Strength, weakness, opportunities and

threats) will reveal the drivers of competition in an industry. Pesonen (2008) argues that

the result from the use of the SWOT technique in analyzing the internal and external

environment in which a company operates can be used to determine the strategic

position an organization can take in its industry of operation to compete effectively.

Managers are therefore able to choose in which and how they should compete in

business through their knowledge of the external and the internal environments

(Marcus, 2005). This can be through its understanding and influencing the market in a

unique way or creating and using its core competencies to create unique opportunities

for itself in the market place. Thus, the business becomes positioned for sustainable

profitability irrespective of the rivals or the competitive factors within its industry (De Wit

and Meyer, 1999).

According to Thompson and Martin (2010), a case in point is that of the first No-frill

airline in Europe – EasyJet. The airline industry is such that the competitive factors are

very strong from all sides with a requirement of intensive capitalization to enter and a

market characterized by slim profit margins (Porter, 1998). Prior to its entrance into the

market, the European airliner has done things differently, but Thompson and Martin

(2010) quoted Stelios Haji-Ioannou, owner of EasyJest, as saying that “having an

external enemy is the best way of focusing on results, rather than fighting each other

and becoming complacent.” The airline was able to position itself to a new set of air

travellers, by offering affordable air travel that is devoid of the excess luxury including a

completely different model of air travel service. Thereby, the company was actually able

to enlarge the market by bringing first time air travellers into the industry and setting

new standards for the industry. This could only have been achieved by a proper

analysis of the industry and choosing a winning position.

Strategic positioning helps organisations not just to be different in the industry where

they operate. But being different in the industry is expected to create a competitive

advantage for the firm by being able to create and add value to its customers

(Thompson and Martin, 2010). The value creation emphasis of competitive advantage

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was stressed by Maritan and Peteraf (2011) by citing Barney (1991) that a firm that is

able to create value for its customers or within an industry by implementing strategies

that other competitors are not implementing or are not able to implement at that time is

said to have a competitive advantage in that industry. This view is supported by

Sheehan and Foss (2009) where they described an organisation’s competitive

advantage as its “potential to create and appropriate more value than the competition.

Therefore, the issues of value creation and uniqueness stands out in the concept of

competitive advantage and must be addressed to develop it.

3.0 SEARCHING FOR COMPETITIVE ADVANTAGES

It was mentioned earlier that forces that controls competition is the main reason that

managers develop strategies (Porter, 2008). It therefore follows that managers should

focus on doing what their company does best than rivals (Marcus, 2005) in the best way

that no one else can. Marcus (2005) suggests that this could become a source of

competitive advantage for the organisation. From the core concept of competitive

advantage reviewed in the earlier section, a thorough analysis and understating of the

external factors that control the industry i.e. the opportunities and threats and the

internal factors within the company i.e. strengths and weaknesses, managers can

position their organisations strategically to derive competitive advantage in their industry

(Thompson, Gamble and Strickland, 2006).

3.1 Competitive advantage from external environment

There are very few industries that have immunity from the effects of globalization. This

phenomenon allows competitors to purchase cheaper raw material from another

companies, outsource operations overseas to cut cost and supplier have wider options

to choose from. This is just one of the factors with external influence on the operations

of a firm. Other external factors that can provide an opportunity or pose a threat that

can determine the competitive environment in an industry include the general

macroeconomic outlook, the law and government regulations, societal values and life

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style, demographic changes and technological advancements (Thompson, Gamble and

Strickland, 2006).

However, according to Porter (2008), at the different industries level, the forces that

control profitability (hence sustainability, growth and therefore competition) within each

industry are structurally the same. Porter (2008) explained further that there are five

fundamental forces that drive the competition in each of the industries. Although the

author cautioned that each of the five forces does not affect different industry at the

same degree. Marcus (2005) suggests that a firm can develop or come up with

competitive advantages that they can use to maintain a profitable position in their

industry by “carefully and thoughtfully” looking at the structure of the Porter’s five forces

that shape industry competition in the industry where they function. Figure 1.1 below

shows the five forces that controls competition in different industries.

Figure 1 : Adapted from the five competitive forces that shape strategy (Porter, 2008).

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Product and Technology Development

Supplier Power Buyer Power

New Market Entrants

Competitive Rivalry

Marcus (2005) describes the analysis of the Porters five factors that controls

competition in a industry as the industry analysis for competitive advantage. This study

will therefore look at the Porter’s model of competitive forces that shape industry

competition from this perspective below:

3.1.1 New market entrant

From the perspective of a company that already exist in the industry, the porter’s model

looks at new entrants into the market as threat that puts a cap on profitability (Porter,

2008). To maintain a competitive advantage in such environment, the strategy has to be

such that it is difficult for new entrants either to come into the industry all together or to

implement the strategy that provides the competitive advantage created based on this

factor. As explained by Porter (2008), a proper configuration of factors such as capital

requirement, customer switching cost and restrictive government policy among other

factors can give and help maintain competitive advantage in an industry. An example of

this in the South African context is the telecommunication industry where the four major

players have been able to build sophisticated network coverage of the nation. Beside

the government control of the industry with the licensing process, a new entrant into this

industry will require an enormous amount of capital for infrastructure and branding. This

barrier for new entrant in this industry can is a strategic competitive advantage for the

industry players if well configured with other factors and looked after.

On the other hand, from the perspective of a firm entering an industry, new entrants can

create a competitive advantage for itself by carefully analyzing how difficult it will be for

the firms that are already in the industry to respond to its strategy, thereby upstaging the

industry (Marcus, 2005). This was evident in Dell’s personal-computer division’s

competitive advantage over other manufacturer of the same type of computers as

described by Magretta (2002). While others sold to retailers, Dell chose to sell directly to

end users knowing fully well that its rivals will find it difficult to violate existing contracts

with retailers or make changes to their distribution network to compete with Dell. This

became a major competitive advantage to Dell.

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3.1.2 Supplier

Dealing with suppliers that have the ability to increase or generally influence costs like

that of raw material can put a company or even an industry at a position of

disadvantage (Porter, 2008). However, Oh and Rhee (2010) alludes that a proper

configuration of the supplier network can provide a competitive advantage through

strategies that harness supplier capabilities and collaboration.

3.1.3 Buyer

The Porters model also describes the buyer as a powerful force that influences the

structure of competition in different industries. This force might be a strategic hurdle to

turn into a competitive advantage because the buyer will always bargain for more

quality and cost reduction (Porter, 2008). However an analysis of this factor will provide

an understanding of how easy it is for buyers to control price. Besides, as with the

suppliers, innovative seller-buyer collaboration could either reduce the competitive

pressure or actually create a competitive advantage (Thompson, Gamble, Strickland,

2006).

3.1.4 Substitutes, product and technology development

Consumers are generally attracted to a product because of a need they want met. It is

therefore important to note that they might choose another product line entirely that

meets the same need maybe at an even cheaper cost and with higher quality because

of the technological advancements. Strategist should therefore be concerned about the

technological advancements in creating competitive advantages for their firms (Porter,

2008).

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3.1.5 Competitive Rivalry

The amount and the basis of rivalry within and industry can give an indication whether

the industry is worth entering. However, the fact that there is an existing strong rivalry

within an industry does not indicate that it will not be profitable to join the industry

(Porter, 2008). According to Kim and Mauborgne (2005), the blue ocean strategy by

shows that with the understanding of the rivalry in an industry, innovative firms can

define their own rules and create their own markets. The existing rivalry therefore

becomes an opportunity to keep away new entrants into the industry.

The Porters five forces that shape competition model do not create competitive

advantage directly. But the knowledge of the industry threats and opportunities should

lead to a “good strategy”; one that can create bring about competitive advantage

(Barney and Hesterly, 2012). Furthermore, Porter (2008) extends this tool as useable

for uncovering salient opportunities and creating new trends within industries.

Therefore, organisations can use industry analysis as a determinant in formulating its

competitive strategy and competitive advantage.

3.2 Competitive advantage from internal analysis

In the dynamic and ever changing business environment of today, it can be deduced

from literatures that creating and sustaining competitive advantage might require the

understanding and unique configuration of many factors. Barney (1995) agrees with the

initial discuss of this text that organisations can derive competitive advantage from

scanning its environment and positioning itself uniquely. However, Barney (1995)

makes a case for the integration of internal analysis with the external environment in

developing strategies that will produce competitive advantage. Marcus (2005)

describes internal analysis as evaluating the strength and weaknesses within an

organization, making a case for SWOT analysis, as a tool for crafting strategies, that

should in turn lead to competitive advantage (Barney and Hesterly, 2012).

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While Barney (1995) raised the questions of value, rareness, imitability and

organization, other factor that will be worth reviewing is the concept of resource based

view of the organization (Thompson and Martin, 2010) and the activity based view of

organization (Sheehan and Foss, 2009) that is based on the value chain analysis

(Porter, 1998).

3.2.1 Activity based view of organisations for competitive advantage

Marcus (2006) cites Porter (1985) that organisations creates value from the margin or

profit derived from carrying out different activities. A proper evaluation and strategic

configuration of the activities that an organisation carries out in creating value therefore

can help in establishing competitive advantage (Porter, 1998). Porter postulates that a

firm would create a competitive advantage for itself by carrying out strategic activities

cheaper or better than its competitors. The activity based view provides a framework

that provides how organisations can derive competitive advantage by looking at its

activities as subject of analysis.

Porter (1998) provides a generic framework for understanding the main activities carried

out by different industries in creating value called the “generic value chain” and makes a

strong case that has become the basis of many literatures that competitive advantage

can be created by developing innovative variations of value chain to stay ahead of

competitions. This fact has now been supported by other work on activity based view of

organisations for competitive advantage by studying the concept of the value chain. The

study of the value chain as the activity template that can be used to study, hence

improve a firm’s competitive position (Sheehan and Foss, 2009) therefore represent the

core concept of how organisations can generate competitive advantage by looking

inward.

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3.2.2 Resource based view of organisations for competitive advantage

This view looks at an organisation and how it can either create value or make profits

from the perspective of the resources available within the organization, its capabilities

and competencies (Marcus, 2006). Marcus further explained that the focus of this view

links the performance, profitability and hence ability to stay ahead of competition to a

firm to three factors. Barney (1991) cited in Knott (2009) describe the resource based

view of a firm for competitive advantage as the unique position that organisation is able

to attain in the industry because of resources that peculiar to the firm. It therefore

becomes clear that a firm can carve a competitive advantage for itself in its industry by

looking inward to identify resources that it has or can use differently than other

competitors in the industry.

However, it is important to note that the availability of unique resources within a firm

does not necessarily translate into a competitive advantage. The role of organizational

leadership would be key to taking advantage of such resources for competitiveness

(Fahy, 2000; Clulow, Gerstman and Barry, 2003; Andersen, 2011). Besides the role of

leadership in harnessing resources to produce competitive advantage, a proper

configuration of those resources is required (Andersen, 2011). Also, literatures (Barney,

1995; Knott, 2003; Andersen, 2011) over the years has suggested that the competitive

advantage derived from the resource-based view of an organisation will be sustainable

only if the resources that created or creates the advantage adds unique value enough to

explore opportunities and neutralize threats. Such resources should also be rare in such

a way that competing firms are unable to acquire such resource easily, beside it has

been said such resources need to be difficult to imitate to generate an enduring

competitive advantage.

4.0 COMPETITIVE STRATEGIES

It has been said that the essence of strategy is for a firm to be able to stay ahead of

competition (Porter, 2008) and that competitive advantage should emerge from a good

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strategy (Barney and Hesterly, 2012). As mentioned in the earlier sections, the internal

analysis of strength and weaknesses and the external analysis of the opportunities and

strengths does not culminate into competitive advantage in themselves, but an effective

configuration and understanding of the environment should be help strategists in

determining strategic positioning within an industry or a competitive strategy that will

help the firm create values uniquely in its industry (Thompson and Martin, 2010).

Therefore the actual competitive advantage emerges from strategic positioning within

an industry by being able to “create value, create competitive advantage in delivering

the value and operating the business effectively” (Thompson and Martin, 2010).

The ability to manage costs effectively in a way that is unique within an industry,

innovative differentiation and creating value in the process have been identified as the

main sources of creating and sustaining competitive advantage (Porter, 1998;

Thompson and Martin, 2010). In the process of creating value, firms can create

competitive advantage by optimizing its surplus as a customer and revenue obtained

from customers as a supplier (Bowman and Ambrosini, 2007). On the other hand, “a

firm differentiates itself from its competitors if it can be unique at something that is

valuable to buyers” (Porter, 1998). The product or service that delivers value must be

perceived to have distinct qualities by the consumer for it to be considered differentiated

(Thompson and Martin, 2010). According to Thompson and Martin (2010) citing Porter

(1985) describes the Porter’s generic competitive strategy framework that shows how a

firm can position itself for competitive advantage using cost leadership and

differentiation within an industry.

4.1 Cost leadership

A firm deriving competitive advantage from the configure of the cost-quality parameters

in a way that puts it ahead of competitors and leaving competition with no room to

challenge its position based on cost is said to maintain a cost leadership with the

industry (Thompson and Martin, 2010). The author explained that the cost leadership

does not necessarily mean the lowest cost in the industry, but could be the ability to

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serve a broad industry segment or several industries uniquely and gaining a unique cost

advantage using methods such as economies of scale, unique access to raw material or

uncommon/innovative cost reduction method (Hsieh and Chen, 2011). This is particular

evident in the banking industry where some banks are able to differ on cost structure by

implementing highly streamlined processes and paperless transaction initiatives.

4.2 Differentiation

The differentiation strategy is when a firm aims a product or service to its buyers and

the buyers can perceive the product or service as unique, though it adds the value that

they require (Hsieh and Chen, 2011). A firm can create and sustain competitive

advantage from differentiation sources such speed, reliability, service, product design,

features, technological advancement, corporate personality and the way it relates to its

customers (Thompson and Martin, 2010).

5.0 SUSTAINING COMPETITIVE ADVANTAGE

Based on how a firm is able to configure the factors that generate competitive

advantage for it, there is no guarantee that the advantages and opportunities that a firm

relies on will produce a permanent competitive advantage (Thompson and Martin,

2010). It is therefore important that a firm is continuously scanning its environment for

changes and responding to such ahead of competition.

Kim and Mauborgne (2005) allude that a firm can sustain competitive advantage by

remaining innovative in what they called the “Blue ocean strategy”. The authors

describe the firm using the blue ocean strategy as one that does not fight the rival for

market share, but discovers untapped market space, able to create its own demand

within and outside the existing market. Porter (2008) describes this as a positive-sum

competition where the firm operates in the future of the industry. Operating with this

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strategy will mean that a firm evolves continuously making it to remain ahead of

competition and sustaining its competitive advantage.

6.0 CONCLUSION

The review of literature in this study has shown that the analysis and understanding of

the environments – internal and external where a firm operates is very important to stay

ahead of competition. The understanding and analysis of the environment should

provide strategists with information about the strengths, weaknesses, opportunities and

threats. Each of these can be used to decide on a strategic position to take that can

lead to competitive advantage.

The main reason that organisations embark on creating strategy for their firms is so that

they can maintain a position in their industry that can separate them from their rivals.

The discovery of this position together with effective leadership is what produces

differentiating factors for firms that they can use to create value uniquely in a way that

competition is not able to either in the short or long term. That firm is therefore said to

have competitive advantage if the competition is unable to achieve the same position

either in the long or short run.

Although the environmental analysis does not create competitive advantage in itself, the

tools found in the literature shows that competitive advantage can emerge from

understanding the environment, taking advantage of opportunities and building

defenses against threats. Figure 2 below shows a perceived model of how competitive

advantage can be achieved and sustained in a firm based on this study.

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Figure 2: Creating sustainable competitive advantage

Figure 2 above summarizes a perceive model of how firms can create, evaluate and

sustain competitive advantage within their firms.

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Continuous evaluation and

change management

Competitive advantage

Competitive Strategy

Macro Economic Advantage

Leadership

Activity base view

External Environmental Analysis

Internal Analysis

SWOT

Resource base view

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