Building Competitive Advantage Through Market Based Management Practices

In 21st Century Management practices,  firms and corporations are constantly seeking the leg-up on the competition to increase pro? ts and long-term value creation. In an increasingly global environment, competition remains stiff if not more competitive than ever before. Representing indirect forces on competitive advantage for companies, globalization and national and international business/trade laws have an increasing impact on competitive measures that firms may take.

In Contemporary Management by Jones and George, Competitive Advantage is de? ned as “the ability of one organization to outperform other organizations because it produces desired goods or services more ef? ciently and effectively than its competition” (2009).

Competitive Advantage is a vast concept that encompasses many ideas and concepts into the overall paradigm in creating value and advantage for a company. It is important to note however that competitive advantage should not be utilized alone as a means for merely creating immediate pro? t. However, in today? competitive and global environment, competitive advantage is often inner-twined with value creation and market based management principles for “creating long-term pro? ts 2 when specializing in activities that create the most value for customers at the least cost” (Koch 1993).

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Within any market or industry, it is outwardly apparent that some ? rms/companies often outperform others. For instance, Wal-Mart has been very successful in strategically outmaneuvering numerous companies throughout the years and gaining a competitive advantage over companies that are now long-gone or dwindling.

When a company sustains pro? ts that exceed the average for the industry, the company is said to possess a competitive advantage (Jones & George 2009).

Competitive advantages exist within a market due to the appropriate application of the core competencies possessed by the enterprise and an appropriate positioning of the enterprise in the relevant industries or market segment (Colin, 2004). In their text, Jones and George identify four building blocks (core competencies) of competitive advantage.

These core competencies include: offering superior effiiency, creating quality in total quality management practices, innovation and speed. However, In order to achieve a competitive advantage in today's global economy, a firm needs to pursue strategies that build on its existing resources and capabilities by creating new strategies that build additional resources and capabilities (develop new competencies). Adaptability is an example of a new competitive advantage concept that companies are implementing in today? s current management environment.

Porter argues that competitive advantage means “taking offensive or defensive to create a defendable position in an industry, to cope with competitive forces, thereby yield a superior return for the ? rm“ (Porter 1980).

The best strategy for a ? rm should re? ect its particular circumstances. 3 What is Competitive Advantage? It is well known that the ultimate objective/challenge is for a ? rm to implement strategies that generate a competitive advantage. A ? rm is said to have gained a competitive advantage “when it is able to create more economic value thana rival ? rms” (Barney and Hesterly 2006).

Economic value is simple the difference between theperceivedd bene? ts gained by a customer that purchases a ? rms products or services and the full economic cost of these products or services. Thus the size of a ? rms? competitive advantage is the difference between the economic value a ? rm is able to create and the economic value its rivals are able to create (Barney and Hesterly 2006). Although most companies seek to develop a sustained “long-lasting” competitive advantage, often times this doesn? t occur. A ? rm? s competitive advantage can be temporary or sustained.

A temporary competitive advantage is a competitive advantage that lasts for a very short period of time. A sustained competitive advantage, on the other hand, can last much longer. Business Level Strategies Any successful business ultimately results from business-level strategies that create a competitive advantage over rivals and achieve superior competitive performance within a particular industry (Collin 2004). Moreover, ? rms who have created a competitive advantage must stabilize their competitive position within the industry or seek to maintain the advantage in which the company has created.

They 4 must first decide on: customer needs, or what is to be satis? ed; customer groups, or who is to be satis? ed; core competencies, or how customer needs are to be satis? ed (Porter 1980). Based on these decisions, a firm will determine which strategies they formulate and implement to put a company? s business model into a plan of action.

Business-Level Strategy deals with decisions and actions pertaining to each business unit in order to make each unit more competitive in its market-place (Collin 2004).

These particular business units are in effect part of the “organizational structure” of a firm and part of the “value chain. ” The Value Chain The value chain is a basic tool for diagnosing competitive advantage and finding ways to create and sustain it (Porter 1985). The value chain however, can also play an important role in designing organizational structure.

According to Jones & George, the organizational structure of an firm is a formal system of task and reporting relationships that coordinates and motivates organizational members so that they work together to achieve organizational goals.

The logic of this system is that activities have similarities that should be exploited by putting them together in a department (Porter 1985). The value chain provides a systemic way to divide a firm into its discrete activities, and thus can be used to examine how the activities in a firm are and could be grouped. An organizational structure that corresponds to the value chain will improve a firm's ability to create and sustain competitive advantage (Porter 1985).

It is also important to note that the value chains of firms in an industry differ, refiecting their histories, strategies, and success at implementation. One important difference is that a firm' s value chain 5 may differ in competitive scope from that of its competitors, representing a potential source of competitive advantage (Porter 1985). Differences among competitor value chains are a key source of competitive advantage. A firm's value chain in an industry may vary somewhat for different items in its product line, or different buys, geographic areas, or distribution channels (Porter 1985).

The value that a company creates is measured by the amount that buyers are willing to pay for a product or service. A business is profitable if the value it creates exceeds the cost of performing the value activities. Value activities are the “technologically and economically distinct activities it performs to do business” (Porter 1998). To gain competitive advantage over its rivals, a company must either perform these activities at a lower cost or perform them in a way that leads to differentiation and a premium price [more value]” (Porter 1980).

Functional-Level Strategies Functional-Level Strategies represent the key ingredients for supporting the business-level strategies (Porter 1985). According to Porters five forces model, the key drivers for competitive advantage are cost leadership and differentiation of product (Jones & George 2009). The four building blocks of competitive advantage are efficiency, quality, innovation, and speed, which represent the generic core competencies. These building blocks represent a list of direct forces that affect a manager? ability to obtain resources and dispose of outputs on a regular basis and thus have a significant impact on short-term decision making (Jones and George 2009). Superior efficiency enables a company to lower its costs; superior quality allows it to charge a higher price and lower its costs; and superior customer service lets it charge a 6 higher price. Superior innovation can lead to higher prices, particularly in the case of product innovations, or lower unit costs, particularly in the case of process innovations.

Core competencies shape the functional-level strategies that a company can pursue and that managers, through their choices with regard to functional-level strategies, can build resources and capabilities that enhance a company? score competencies (Collin 2004). Companies that increase the utility consumers get from their products through differentiation, while simultaneously lowering their cost structure, create more value than their rivals, and this leads to a competitive advantage and superior profitability and profigrowth. To achieve superior innovation, a company must build skills in basic and applied research; design good processes for managing development projects; and achieve close integration between the different functions of the company, primarily through the adoption of cross-functional product development teams and partly parallel development processes. Customers generally choose a product based on the way a product is differentiated from other products of its type and the bargaining price of the product (Porter 1998).

A particular company that is well established and with a strong customer base often enjoys a high degree of customer loyalty which discourages ? rms from competing directly. However, the durability of a company' s competitive advantage depends on various environmental dynamics including: the threat of entry of new producers, the threat of rivalry, the threat of substitutes, the threat of buyers, and the threat of suppliers. These environmental factors could lead to a damaging price wars. On the functional level, a ? rm must perform one or more value creating activities in a way that 7 reates more overall value than do competitors. Superior value is created through lower cost (cost leadership) and differentiation. Cost Leadership With cost leadership strategy, the objective is to become the lowest-cost producer in the industry. If the achieved selling price can be at or approach the average for the market, then the lowest-cost producer may enjoy the best pro? ts. Sometimes, a low-cost leader will also discount its product to maximize sales, increase its market share, particularly if it has a signi? cant cost advantage over the competition.

Through cost leadership, a company might choose to ignore differences and make a product targeted at the average or typical customer, therefore focusing on gaining advantages by reducing costs below those of competitors (Barney and Hesterly 2006). This doesn? t mean however, that a ? rm or business abandons their main business or corporate strategies: A “single minded focus on just reducing costs can lead a ? rm to make low- cost products that no one wants to buy” (Barney and Hesterly 2006). However a ? rm that pursues a cost leadership strategy focuses much of its efforts on keeping costs low.

In cost leadership, there are some economic consequences and assumptions that may arise including the threat of entry of new producers, the threat of rivalry, the threat of substitutes, the threat of buyers, and the threat of suppliers (Jones and George 2009). All of these threats and/or consequences must be taken into consideration when devising a cost leadership plan for a particular firm or corporation. A Cost leadership competitive strategy helps to reduce the threat of new entrants by creating cost-based barriers to entry. This comes with the assumption that the 8 incumbent firm has lower costs than the potential entrants” (Barney and Hesterly 2006). If an incumbent firm is a cost leader, then new entrants may have to invest heavily to reduce their costs prior to entry. Often new entrants will enter using another business strategy rather than attempting to compete on costs (Barney and Hesterly 2006).

Firms with a low-cost position also reduce the threat of rivalry. The threat of rivalry is reduced through pricing strategies that low-cost firm can engage in and through their relative impact on the performance of a low-cost firm and its higher-cost rivals (Barney and Hesterly 2006). Substitutes become a threat to a firm when their cost performance, relative to a firm's current products of services, become more attractive to customers. For example, “when the price of crude oil goes up, substitutes for crude oil become more attractive” (Barney and Hesterly 2006). Suppliers may also become a threat to a firm by “charging higher prices for the goods or services they supply or by reducing the quality of those goods or services” (Barney and Hesterly 2006).

However, when a supplier sales to a cost leader, that firm has greater fexibility in retaining high cost supplies than does a high-cost ? rm. Higher supply costs may lead to the demise of any above-normal profits for high-cost firm but still allow a cost leader firm to earn above normal pro? ts Barney and Hesterly 2006). Cost leadership may also reduce the threat of buyers. Buyers and customers represent a powerful entity in making or breaking a company. Powerful buyers are a threat to a firm when they insist on low prices or higher quality and service from their suppliers (Barney and Hesterly 2006).

Cost leaders can have their revenue reduced by 9 buyer threats and still have normal or above-normal performance. These firms can also absorb the greater costs of increased quality or service and may still have a cost advantage over their competition (Barney and Hesterly 2006). A cost leadership strategy may come with a drawback however. Low-costt strategy is vulnerable to an even lower cost operator. As the technology improves, the competition would be able to catapult the production capabilities, thus eliminating the competitive advantage that once was.

Differentiation “Your competitors are your enemies, and the key to prevailing against them lies in differentiation” (Hayes 2005). Through a differentiation strategy, a company can choose to recognize the differences between customer groups and make a product targeted toward most or all of the different market segments. A differentiation business model is based on creating a product that customers perceive as different or distinct in some important ways that competing products cannot (Jones and George 2009).

Companies that utilize a differentiation strategy can often afford to charge premium prices for their products because they represent a premium brand or something that is unique to a particular market segment. Firms that succeed in differentiation strategy often have internal strengths such as access to leading scientific research, highly skilled and creative product development team, strong sales team with ability to successfully communicate the perceived strength of the products and corporate reputation and brand equity (Barney and Hesterly 2006).

The risks associated with a differentiation strategy include changes in customer tastes, wants of needs. In addition, customers may become increasingly price sensitive, as competitors might narrow the differentiation. 10 With the implementation of a focused differentiation strategy in creating competitive advantage, a company might choose to target or serve just one or two market segments by trying to be the most differentiated organization serving the segment (Jones and George 2009).

Companies choosing this platform have chosen to specialize in some way by directing their efforts at a particular kind of customer or even the needs of customers in a speci? c geographic region (Jones and George 2009). Any business adopting differentiation focused strategy must ensure that customers really do have different needs and wants that existing competitor products are not meeting. A ? rm following focus strategy and targeting a narrower market segment may be able to achieve lower costs within their segments.

Some risks of focus strategy include limited opportunities for growth, and changes in target market and imitation (Porter 1980). Furthermore, it may be possible for a broad-market cost leader to adapt its competing products to compete directly. Focus strategy may also consist of focused cost minimization. In focused low-cost strategy, a ? rm will continue serving only one ar two market segments of the overall market, but by also trying to be the low-cost organization serving that particular segement.

The product in focused cost minimization will be basic – perhaps a similar product to the higher-priced and featured market leader, but acceptable to a particular sect of consumers (Jones and George 2009).

The Global Environment and Competitive Advantage

The global environment is a set of conditions and forces in the world outside an organizations boundaries that affects the way it operates and shapes its behaviors (Jones and George 2009). Because these forces are beyond the control of the 11 company, these forces present businesses with both opportunities and threats depending on the situation.

For instance, many business practices are often regulated and overseen by government agencies for standards of fairness and legality reasons. The highly publicized Enron scandal represents one of the most notorious business scandals in modern business history. In trying to maintain competitive advantage, the management team at Enron implemented many unethical decisions including defrauding the government, misrepresentation, and embezzlement. Subsequently, their unethical behavior and lack of social responsibility lead to the companies demise.

In the effort to thwart and/or prevent future events from happening, government agencies have developed plans and laws that seek to curtail unethical business practices. Political and legal forces are one of the major forces behind the global environment which affects competitive advantage strategies. Changes in the global environement, such as the development of efficient new production technology, the availablity of lower cost components, or the opening of new global markets, create opportunities for managers to make and sell more products, obtain more resources and capital, and thereby strengthen their organization (Jones and George 2009).

Along with political and legal forces, globalization represents another key force in competitive advantage. The rise of global competitors, a global economic recession or an oil shortage poses threats that can devastate an organization if managers are unable to sell its products and revenues and profits plunge (Jones and George 2009).

A companies ability to manage and respond to these global forces will determine how 12 uccessful a company will be in the competitive scope of things. In order for companies to identify opportunities and threats caused by forces int he environment, it is helpful for managers to distinguish between the task environment and the more encompassing general environment which represent forces that can be controlled on the business and functional levels of management. The Boeing company has dealt with the political/legal environmental force very well in recent years.

Boeing has been able to not only meet that standards of safety and performance for its aircrafts, but the company has also been able to manage a network of global suppliers that allows the company to keep costs down and quality high, therefore allowing for the maintenance of competitive advantage. For example, “Boeing’ popular 777 jet airline requires 132,500 engineered parts produced around the world by 545 suppliers” (Jones and George 2009). Boeing makes the majority of these parts, but they also get supplies from eight Japaneese suppliers, a Singapore supplier, and three Italian suppliers.

Boeing’s rationale for buying from so many different global suppliers is that these suppliers are the best in the world for performing their particular activity and doing business with them helps Boeing to produce a high quality product, which meets the safety and reliability standards of the government (Jones and George 2009). Boeing’s global approach to business in creating a competitive advantage in the commercial aircraft industry adds value to their organization.

Not only does Boeing make decisions that will lead to a successful business, but they also make decisions that contribute to the overall safety and effectiveness of their products, and services. From the outside looking in, Boeing makes decisions that will affect people in a positive manner, whether they are the customers or the company as a whole. Boeing is also 13 adding value to it’s buyers by doing business with buyers who make great and reliable products. By doing this, Boeing is making a statement to the aircraft industry on making the best products and services.

This may, in affect, inspire other companies who make aircraft parts to make the best products and increase technological advances. In market based management, the ends to a situation is not always about making money or making the most profit. It is all about value and contributing to a greater good. Koch, the CEO of Koch industries stated “like societies that adopt market based rules, organizations can vastly increase their effectiveness by using the market system as a guide for redesigning their own systems. ” This is exactly what Boeing is doing in the competitive scope of the aircraft carrier market.

Strategic Flexability Speed, innovation, efficiency, and flexibility represent the building blocks of competitive advantage for a company. However, in order to maneuver in today’s global and competitive business environment, strategic flexibility remains the most important aspect of building competitive advantage. According to Hitt, Keats, and Demarie, “a new competitive landscape is developing largely based on the technological revolution and increasing globalization. The strategic discontinuities encountered by firms are transforming the nature of competition” (Hitt 1998).

Success in the 21st century organization will depend first on building strategic flexibility (Hitt 1998). In order to develop strategic flexibility, firms must do several things including exercising strategic leadership, building dynamic core competencies, focusing on developing human capital, effectively using new manufacturing and information 14 technologies, employing valuable strategies and implementing new organization structures and culture. This the new competitive landscape will require new types of organization and leaders for survival and global market leadership (Hitt 1998).

In a study done by Abbott and Banerji, three variables were formulated for evaluating performance measures in strategic flexibility. Return on Sales, Return on Assets, and Earnings before interest and Tax Margin (EBITM) represent three areas of strategic flexibility that were found to be significantly related to firm performance measures. “The first step in creating the flexible transnational/global company is to identify clearly what forms of flexibility can be important in its competitive environment. (Abbott and Banerji 2003).

To achieve strategic flexibility and therefore competitive advantage, a global company must work to enhance flexible capabilities and should be focus exclusively on developing specialized routines that work well in one competitive situation, but that may be appropriate in a changed competitive context (Abbott and Banerji 2003). Strategic flexibilty enable a corporation to anticipate changes in competitive requirements, draw on a broad base of knowledge, absorb new knowledge and ways of doing things, allow managerial experimentation, expand managerial mindsets, and support higher-order learning processes.

The greatest challenge to managers who want to create flexible firms is to create the “right” amount and kind of flexibility that a firm needs in its competitive environment (Abbott and Bajeri 2003). New Bases of Competitive Advantage: Adaptability In the July 2011 issue of the Harvard Business Review, Michael Deimler discusses his thoughts on the new competitive advantage: Adaptability. He asserts that 15 “traditional approaches to strategy---though often seen as the answer to change and uncertainty---actually assume a relatively stable and predictable world” (Deimler 2011).

The goal of most strategies is to build an enduring competitive advantage by establishing clever market positioning or assembling the right capabilities and competencies for making or delivering an offering. Deimler and his colleagues are now proposing undertaking measures that would allow for the knowledge of where one industry ends and another begins in order for companies to become more adaptable in such a flexible market. Deimler goes on to assert that organizations with adaptive advantage recognize the unpredictability of today’s environment and the limits of deductive analysis.

Adaptive advantage allows companies to unite reflection with execution and to balance deduction with experimentation (Deimler 2011). A good example of a company that has developed adaptive advantage at the level of the business portfolio is the Virgin Group, “which boldly enters, scales up, and exits new businesses in diverse industries. ” Specifically, Virgin owns airplanes, mobile phones, and venture capital. Virgin constantly launches offerings that challenge incumbents’ business models to deliver greater value to consumers.

It usually partners with others for assets and talent. Virgin creates and maintains dynamic advantage in a fluid environment by sowing a broad range of portfolio seeds, setting the conditions of success, orchestrating the assets and capabilities required, and continually applying strict criteria for existing investments (Deimler 2011).

16 Conclusion

There is no more important task than ensuring that one? s company is optimally positioned against its rivals to compete for customers. Achieving competitive advantage is dif? cult but maintaining it is much more dif? ult, especially in the increasingly competitive market. In order to survive and develop, company would have to improve its core competencies as well as its performance ceaselessly. Or in other words, appropriate strategy should be formulated and implemented. In addition, long term value creation should be assessed. Specifically, market based management practices that emphasize “focusing on discovering organizational structures, responsibilities, values, and incentives that motivate people to advance a common mission” (Koch 1993).

A Market based ? rm should promote cooperation while channelling competition into activities that actually promote the common mission” (Koch 1993).

17 REFERENCES

Abbott, Ashok; Banerji, Kunal. “Strategic Flexibility and Firm Performance: The Case of US Based transnational Corporations. ” Global Journal of Flexible Systems Management. Volume 4: 2003.

Barney, Jay B; Hesterly, William S. Strategic Management and Competitive Advantage: Concepts and Cases. Prentice Hall: New Jersey: 2006.

Deimler, Michael. “Adaptability: The New Competitive Advantage. ” Harvard Business Review. July 2011.

Hammer, Michael. The Agenda: What Every Business Must do to Dominate the Decade. New York: Crown Business, 2001.

Hitt, Michael A. ; Keats, Barbara; DeMarie, Samuel. Navigating in the New Competitive Landscape: Building Strategic Flexibility and Competitive Advantage in the 21st Century. The Academy of Management Perspectives. November 2008.

Jones, Gareth R. ; George, Jennifer M. Contemporary Management. McGraww HIll: Nw York. 2009.

Koch, Charles G. 1993. Introduction to Maket Based Management. Retrieved September 11, 2011 from http://www. huizenga. nova. edu/5012/textbooks mbm. html

Marshall, Don R. 1999. The Four Elements of Successful Management. New York. Porter, Michael. On Competition.

The Harvard Business Review Book Series. Boston: 1980.

Porter, Michael. Competitive Advantage; Creating and Sustaining Superior Performance. New York: Free Press, 1985. 18 19