Pursuing Competitive Advantage through Knowledge Management Essay
Pursuing Competitive Advantage through Knowledge Management
The main aim of this paper is to provide an in-dept study on how industries, most specially global companies achieve success through integration of innovation and their long-term strategy. In this paper it will provide some of the most relevant theories applied, like SWOT Analysis, competitive advantage and knowledge management which are still the main drivers for development for most companies today. Lastly, it will also provide some cases studies for global companies that shows that with the integration of innovation, effective long-term plans through theories and best practices, there is no way for any company to fail in their business.
CHAPTER 1: Background of the Study
It is still very common these days that for some companies it is still important to maximize profit and reduce expense. But, this has been a little bit changed as the demand for innovation and technology and the need for process improvement are becoming an important factor for success of an organization. With these latest developments and trend in the business, companies with their top executives would always look intently what they need to improve or in other case needed to innovate. The main reason is that, in any case the managers with the executives of the company must carefully look on this need and should not give any drastic and not well-studied decisions. It is also where managers’ inputs are very important and they should not be just deciding for their own sake but it should be for the betterment of the whole company.
Typically like customers ordering systems, payment transactions and even special transactions such as transfer funds in the bank or some of the more high-tech and very critical applications such as supply chain logistics systems, which will manage from the replenishment of materials, going into the production lines up to delivery to customers are where truly the impact of innovation is being felt. It is not just a simple process to make, even analysis on how the system works for some large global manufacturing companies would even take years before it can be developed.
Series of “peer reviews” are also being conducted by business owners and platform and functional architects are needed in order to make sure that all the processes are included and each jump to other sub-processes must be well simulated and studied because integration of this system to other systems will also be affected. That is why in this paper, the main focus is on how these industries overcome these challenges and difficulties. With this paper, it will provide some of the best and reliable theories and concepts in business that has proven a big help in succeeding with the project.
This paper will also show some of the intricate details and very important information on what specific innovation techniques and long-term strategy were applied by some of the well-known companies that will be presented in this paper. Companies such as BMW and Toyota are just some of the big manufacturing industries that will be feature in this paper, which will give a clear picture and understanding for eh reader that business is not just money investment and people, it also involve effective long-term planning and identifying what part of the company needs to innovate.
In addition, this paper also provides some critical analysis and discussions on some companies that failed to apply innovation and strategies in their business, in which we can eliminate or at least minimize in order not to worsen the issue and the operation of the organization.
CHAPTER 2: Literature Review
Competitive advantage, how does this become a very important motivating factor for some companies, particularly the global companies? Actually, there are two very common questions that are commonly address when it comes to competitive advantage and these are: (1) is with regards to attractiveness of industries for long-term profitability, there is no company that does not want to have a long-term profitability. This is one factor that really drives company to continually be competitive. Strategies and efficient approaches are really well-focused and well desired activities that company needs to focus carefully. That is why there was no doubt that there are companies would even invest for research and development because that is one factor that contributes to long-term profitability and not just focusing on the customer satisfaction and efficient internal management.
(2) The second question why competitive advantage needs to apply by a company is in order for them to know their current status in the industry. In the second question it is simply carefully studying the current status of the company, is the company effective in what areas? Does the company established effective long-term plans and strategies? These types of questions would even help in establishing a sort of knowledge base or baseline before actual process improvement take place. (Porter, M 1998:1-4).
But in order to really implement the right process for any competitive advantage that needed to be implemented in a company, there should be an effective long-term strategy that should be establish. And this strategy should focus mainly on operations management, this is very important that every company needs to start improving its own operation, there are other companies that fails to do this, the main focus here is that these companies needs to make sure that they improve first their own turf and that they are well prepared enough to work on for bigger challenges ahead.
Some of the key factors and priorities that relates to operations management are the following: studying carefully what operation management style needs to be applied, secondly, understand the current demand and supply, third, the company’s current product and service offered, and lastly is what are the current consumer demand, variety of needs, diversity concerns, need for flexibility and other important issues that need to be address by the company. That is why with regards to operations management, it does not particularly focus on operations within the company but also more importantly is the external factors that affect it.
In operation management, which starting to become the more modern approach or strategy applied in competitive advantage, it actually can be interpreted in three different definitions: (1) the design, operations and improvement of the systems that creates and delivers the company’s primary products and service. (2) The design, operations and improvement of the current internal and external systems that delivers their current products and services. And, the last one (3) the design, operations and improvement of both internal and external systems that creates new products and services. These three important definitions would help company in finding their current status not only with the organization but also in the type of industry it belongs.
Tactical Factors that Shape an Operation Strategy
In order to have a more effective strategy for competitive advantage, there are also important tactical factors that will help assist companies achieve better success over their competitors in terms of operations management. The following are the three main levels:
- Level of building blocks, which pertains to main competencies, capabilities, processes, resources, and technologies that are vital to operation management.
- Integrating these elements for careful development of operation strategy that are unique and effective.
- Implementing these factors and operation management strategy which will help all levels of management to enhance competitiveness through operational strategy.
In this list above, it only shows that the company must look on the different factors stated, like for instance in the process factor, this is very important because it can be a hindrance for companies if they will not look on how their current process is doing. This is just to make sure that if there is a need for process improvement, then that should go as part of the strategy or it can be in terms of competencies of the employees where there should be trainings and actual practice that needs to be done in the company I in order to be prepared for future challenges where these challenges will be a big factor for competitive advantage and the company should not be slow in anticipating it. (Lowson, R 2002:129-137).
For any company to be considered having competitive advantage, it is reflected if the firm sustains profit that exceed the industry average where the company belongs. In other words the company has surpassed consistently the average revenue expected in the industry. Achieving this status is not also the easy; a lot of change in strategies and process improvement may already take place before achieving competitive advantage. This also follows that the company also has greater advantage over its rivals or competitors. In the formal study of competitive advantage, there are two main types of it: it is either cost advantage or differentiation advantage. Cost advantage when the firm delivers the same solution or services or products to the customers but with lower cost than their competitors or differentiation advantage which refers to the firm’s competitive advantage when it comes to product like in terms of quality.
It is also considered that for most companies that are experiencing competitive advantage, it means that the company has gain respect from its customers due to super value that it has given to its customers and at the same time getting better profit in return. Cost and differentiation advantage is also known as positional advantage since they have great advantages over their competitors when it comes to either cost or in terms of differentiation in their product. That is also why positioning is very important in any type of business, because if the company position their company in such a way that they would understand what their strengths is and at the same time penetrating what the real customer wants, it is enough to say that the company is moving forward and ready for upcoming challenges since the company will never stop to find better positioning strategy either in terms of cost or change in the product itself.
In differentiation, we can always connect that quality has been the primary factor for differentiation. This is because of the fact that most customers these days are only two types: cost sensitive or customers that will always look for affordable products and not even focusing on the quality itself. Usually these types of customers are categorized as Class C and D and even up to E. These types of customers needs to consider as well, most specially that these composed of the majority customers in the world. For some companies, this can give them enormous number of customers even with little profit for each, but since we are talking about numbers, these customers class can still provide better success in the business as you address the concern of budget and financial constraints of these customers.
While on the other hand, in terms of differentiation, this is more likely more targeted to middle to high class market, companies such as those involving to fashion and cars are just some of the customers that may be classified and most common to these type of competitive advantage.
Because, for most people, like for instance in buying new clothing, it is always important that quality is present as and most of the time price consideration does not really matter a lot. Most specially in terms of car manufacturing companies, it should be quality in the sense that a car needs to be safe and fuel efficient and these can sometimes cannot be compromise with cost as technological innovations and some critical strategies that are applied are costly, but even thought, customers will still buy the product.
But, there is also what is commonly called as resource-based view where the emphasis is for the firm to well utilize the resources of the company, particularly human resource. Expertise and skills that they can do for the company in order to gain advantage in their business and operations.
In terms of resources and capabilities, companies must need to know first their current strengths, because through analyzing the company’s real strength on what they are really capable of doing for their customer, this can be easier for them to innovate or improve their current processes which are important in identifying the capabilities and resources. In other words managers must know where they can exploit and at the same time can further improve in order for the advantage not to disappear and instead will continue to be productive. But there are also some example of resources that can be classified in the business organization: (1) patents and trademarks, (2) proprietary know-how, (3) installed customer base, (4) reputation of the firm, most specially if the firm has already establish some legacy and has been a well respected and trusted company for many years.
Lastly, (5) brand equity. These example resource advantages are continuing to be very critical for companies in keeping it within the organization. Some of the main problems like in the case of trademarks, there are so many companies that operate the same as your company and the problem is that with the easy access to information, there are cases that companies may use other company’s strategy and sometimes they tend to copy it in their actual operation. But, since there are limited control use to control this kind of issues, company’s may just accept the fact that it really happens and what is important is for the company to continue to innovate and find better way in keeping the strategy to the public.
In terms of competitive advantage, it is also brought about by the company’s capabilities. This means that the company has been very focus on improving its way of operating its business and will make sure that they address the need of their customers by finding way on improving their capabilities. Most of the capabilities that really matters are usually the basic ones, which for some companies they tend to see it as a very minor problem. Normal transaction such as customer support and service or the very basic payment services that sometimes become a major issue for customers, most specially if the company is not engage in a more high tech approach of payment system like through the internet or through bank to bank transaction.
This has become the innovations that are sometimes well expected by customers that companies have the capabilities. Because now it is not anymore about cost and quality but also it includes convenience. Try to imagine a highly recognized company in terms of quality products which almost has everything the customer wants, like quality of products, affordable and great customer service. But it only has one problem and it drives many high class customers whom the company did not focus. The main problem is that payment is only accepted through cash basis, no credit cards and no bank to bank or even no installment plans for some selective products. Still this company will not survive as it lacks innovativeness.
It is also being said that if the company has been enhancing its capabilities on how they can serve their customers, it also makes the company creates its own distinctive competencies and this is now where innovations, efficiency, quality, and customer responsibilities form together as a leverage by the company to be competitive and work effectively in its operation. If the company continues to strive and maintain its vision of improving its competencies, it also brings the company in performing value creation in the organization. This value creation will be recognized by the industry or company as the main purpose and drive for the company to look forward and be able to sustain productivity and competitive advantage. (Competitive Advantage n.d.).
There are also other strategies that can be applied by the company in order to sustain competitive advantage. These strategies consist of four major components: the first two consists of the high degree of product differentiation which includes differentiation focus and differentiation and the remaining two consists of the low degree of product differentiation and these are cost focus and cost leadership.
The four components that are widely applied in competitive advantage can be seen in Figure 2.
Figure 2. Four Components for Competitive Advantage Strategies (Strategy – Competitive advantage n.d.).
In the figure presented above, as you can see the differentiation and cost leadership are focus more on how it can target broad range of market and other industry segment. While the differentiation focus and cost focus are in the narrow side of the market or industry segment.
In order to understand how these different strategies in competitive advantage is used and applied, it needs to discuss one by one. For the first strategy, which is the differentiation strategy, this primarily involves selecting one or more criteria that is being used by the buyers or customers in the market and that is also where the company position itself. There are also some cases that company’s would vary its premium price depending on the sudden increase of either production cost, labor cost or even cause that might brought about by oil price hike or others. One of the most common example company or type of industry is car manufacturing industries. Like for instance, BMW Company, the price of its cars may be affected due to global increase in cost of production and also the continuing increase in international tax implemented by the different countries or zone.
This means that companies must take into account the effect of cost into the quality of its product. But sometimes intelligent customers would consider it acceptable since the quality may be the same or be improved more in order to supersede the effect of cost. There are also some advantage here in using this type of strategy if only company’s will be effective in properly explaining the effect of cost and again explaining what quality effect of this cost has for the product that you are buying and from there it would be easier for them to understand and again they would still prefer to but the product.
In the second strategy – cost leadership. As it will still the competition of cost out there and companies are still continuing to find a way on how they can reduce the price of their products. For most customers, price really matters the most and for them building up the strategy in these domain could take a lot of extra effort and innovativeness as well in the side of the company.
In theory, this has been the best key component for success in the business, it is because, it actually gain much number of customers or has a larger market share against its competitors and with that it is very sure that it can provide unlimited success for the company. Not only maximizing profit but this would not happen without the company experiencing first maximizing sales. As the company in this type of strategy will be busy on how they can effectively market their product and services particularly focusing on quality and price.
Third is differentiation focus strategy. At this point the difference is that the company focus on one or very small group of market. This is mainly for those medium sized companies who also have other operations in other cities or provinces. Specific market segment for example for perfume business which sometime specific fragrance mainly target to specific group like for teens, age 25 and above females, etc, these type of companies are those that are very effective in conducting review of the market through survey, which can be on of the most reliable techniques in this kind of strategy.
The last strategy – cost focus, this time the focus is more on the very small group of the market. This can also be an advantage of a small group in order for the product to be saleable. Most of the standard companies that are not that big, starting up business are categorized in this level, which only means that the company is only focus on how they can work their way on the specific small market that they belong. These companies are not even give serious competition with big multinational companies since their market is small and their product is far compared to those big companies, like in terms of size and cost. (Strategy – Competitive advantage, n.d.).
SWOT or the strength, weaknesses, opportunities and threats analysis, it is not just an approach that most companies fail to apply when it comes to studying current company performance. Actually it involves not only for understanding the current status, but also it involves market study and most of all a main contributor to the company’s strategic management application.
It is also important that strategies that needed to be developed by companies should consist of not only one but a number of strategies in order to address possible failure in the other strategies and for clarity, it is shown in Figure 3.
Figure 3. Business Strategy Diagram (Williamson, D., Cooke, P., Jenkins, W. & Michael, K 2003:4).
In formulating the strategies which will be very important in applying SWOT Analysis framework, there are factors that company needs to carefully consider. These factors are shown in Figure 4.
Figure 4. Factors Affecting Organizations that is Needed for establishing Business Strategy (Williamson, D., Cooke, P., Jenkins, W. & Michael, K 2003:4).
In this figures above it only means that in order to have a more objective-based and at the same time effective way of developing SWOT Analysis, it is important that companies much focus on understanding the company’s current situation and factors that affects it. Then, there should be well establishes corporate business strategies that may be evaluated and be used in the application of SWOT analysis which will serve as a guide. (Williamson, D., Cooke, P., Jenkins, W. & Michael, K, 2003:3-4).
It might be one of the oldest but still most effective way of studying company’s performance is SWOT analysis. In SWOT analysis, it carefully analyze and study the current status of the company in order to see whether the company is performing as expected or needs to improve in some areas. It is actually used as an audit tool to see as to where the company failed to accomplish and on the other hand where the company does achieved. SWOT is also sometimes an important tool used for marketing strategies in the company. This is because during this kind of study it provides the marketing group as to where the company needs to improve as it relates to the company strengths and also as to where the company should exploit more as it has not been given much attention and that is with regards to opportunities.
While on the negative side, in order to see the complete check and balance of the company, which is weakness and threats, for the weakness, these are the most undesirable and needed to eliminate traits and works of the company. Because if continue to be applied it will affect the business and at the same time can affect the global economy, most specially if the company is one very influential company in the whole world. Lastly, in terms of threats, these are things that if not given much attention, it can become weaknesses as well. In other words, these are future problems that need to be attended to by the company that whether the company may like it or not, it will come a time that it will happen. But again this can be contradicted and be eliminated earlier and most of all can be converted to opportunities which eventually can become the company’s strength.
In studying SWOT analysis, there are internal and external issues. For strength and weaknesses, it is considered more of internal forces or issues. Like for example the company’s weakness was regarding lack of focus on improving its customer service or does not have any new product launching that may target the changing preference of customers. Internal in the sense that the company is the one that can do a lot and make some adjustments and this is what the company should really focus on. They should be sensitive enough in providing new and improved products and services.
Change is very important for any company as people will be bored with the old designs and it will not anymore in demand style. That is why for some companies, like some of the popular ones like Levis and Nike, their product development teams and research teams I would say are two of the busiest teams in these kind of industry which are the fashion industry. This also shows that companies must look into providing better support also for the internal manpower of the company and would make sure that they have all the needed support I order for them to perform well in their jobs and doing the task assign to them.
While for opportunities and threats, these are external factors, external in the sense that these definitely comes from outside problems that the company must also be sensitive in addressing such issues relating to it. Issues like politically driven ones, like security, tax and oil increase or government control and even sometimes sudden increase in the labor market. (Strategy –SWOT Analysis, n.d.).
In each of the key areas in SWOT analysis, there are some important aspects that companies also needs to consider and these are shown in See Figure 5.
Figure 5. Key Areas of SWOT Analysis (Strategy –SWOT Analysis, n.d.).
To further studies the importance of SWOT analysis, most particularly in relation to internal and external factors. First of all in terms of external analysis there are many related issues or domains in the business that it may affect it and these are:
- Market trends
- Social changes
- New technology
- Economic environment
- Political and regulatory environment
In the list presented above, it only shows that in the external factors, it is mostly brought out by bigger aspects in business like competitors, market trends and suppliers which are very important that the business must well understand because if not it will also affect the internal factors.
On the other hand in terms of internal factors of SWOT analysis, there is however some of these factors include:
- Company culture
- Company image
- Organizational structure
- Key staff
- Access to natural resources
- Position on the experience curve
- Operational efficiency
- Operational capacity
- Brand awareness
- Market share
- Financial resources
- Exclusive contracts
- Patents and trade secrets
In the list presented above it only shows that the company can directly manage issues relating to internal factors. It is also important that in the internal factors it may also affect culture and behavior of the organization. That is why it is a must that leaders within the organization should be able to overcome these internal factors by providing effective strategies and management style. (SWOT Analysis, n.d.).
In addition to these very relevant and important information, there are also some important information that needs to be done in order to have a more meaningful and objective type of SWOT analysis. First, it is important that in applying SWOT analysis there should be strict following of policies. These policies can be directed or given by the top executives like the Board Members of the company. This policy will also be the guiding principle of the team who will be conducting SWOT analysis for the company. The lists of policies that need to be carefully applied are the ff:
- Authoritative directives to attain results
- Implementation strategies: what and how of inputs and processes
- Outcomes (ex. Access and completion rate)
- Impacts (ex. Gender parity in completion rates)
- attained changes due to the implementation strategies
- Then, it should also be in conjunction or careful mapping to the analysis of the policy conditioning of the factors in PESTLE (Political, Economic, Sociological, technological, Legal, and Environment).
- Political – authoritative support “political will”, popular support
- Economic – resources mobiliation
- Sociological – organizational, institutional support
- Technological – technical, logistical
- Legal – legislation, laws, rules, regulations
- Environment – immediate and external
Lastly, in SWOT Analysis, there are also effective strategies that can be applied, which can be different based on the issues that need to be attended by the company.
S-O strategies: or strength and opportunities strategy, it focuses on how to build on success, good practices, models S-T strategies: or strength and threat focus, mainly focuses on how it can use success to minimize threats W-O strategies: or weakness and opportunities strategy, it uses opportunities to address weaknesses W-T strategies: lastly, weakness and threat strategy as in this part the company is experiencing its lowest stand, at this point there should be a defensive actions that needed to be done and areas that are making the company in its losing situation must be eliminated instead it should focus on how it can change dramatically the process and improve the way its operation is doing.
In order to have a batter way of analysis and at the same time plotting strategies appropriate to each section of SWOT Analysis, the table below will help evaluator or analyzing team. This is presented in Table 1.
In the table presented above, the company can formulate a more feasible and effective SWOT strategy in each of the major areas affecting the important factor listed in the table.
Actual Application of SWOT Analysis
After all the theories and concepts that were presented about SWOT analysis and strategies, this time it is important how to get started and actually apply the framework. This is very important for companies to know exactly how they will apply it. In the succeeding part, it will provide the standard way of applying SWOT Analysis. This is simply enumerating the important factors and then provides relevant questions that are being provided below:
- What is the cash and profit performance of the business?
- How sensitive is the business to a change in the level of demand?
- What are the levels of fixed and variable costs?
- At what level of activity does the business fail to breakeven (i.e. cover its costs and its cash commitments)?
- What is the management and organizational structure?
- Does it meet the needs of the business?
- What is the general level of manager’s skills, their level of expertise, drive and energy?
- What is the leaders/owners philosophy — why are they in the business? Q What is the business strategy and plan?
- What is the quality of the people employed?
- How good are team relationships?
- How well are people motivated and rewarded?
- What is the current state of plant, workshop equipment, handling equipment etc?
- What is the replacement policy?
- Is the policy being actively implemented?
- How well utilized are the facilities?
- What is the level of output quality achieved? Premises
- What is the condition of the premises?
- How suitable are they for present/future needs?
- What is their location?
- What alternative uses is there for the site/premises and what is the impact on realizable value?
- What levels of stocks are held — what is the stockholding policy?
- What are the stock turn performances?
- What are the levels of work-in-progress?
- Is too large a proportion of capital tied up in stocks and WIP?
- Are there redundant/obsolete stocks?
- What influence does the company have over supplier’s prices?
- What is the mix of business?
- What are the volumes sold and what is the profit margin performance?
- How secure is the customer base?
- What is the trend of customer satisfaction performance?
- What is the penetration of the market?
- What are the competitive advantages — how does the business differentiate itself from the competition?
- What is the customer profile?
- Who are the main competitors?
- What is the state of the market?
- What is the level of customer loyalty?
- What influence do customers have over prices?
- How well informed are the management team about the financial position of the business?
- How relevant and accurate is the financial information produced?
- Are the financial systems and controls in operation adequate?
- How well prepared/accurate are the business plans, budgets and forecasts?
- How intense is the competition?
- Are there new competitors likely to enter the market?
- How secure is the position of the business in the market?
- How will changing technology affect the business — products and processes? Social changes
- What effect will changing life-styles have on the business and product mix?
- How will these affect employees/managers/customers? Political changes
- What will be the impact of changes in government policy or changes at the wider European level? Taxation changes
- To what extent is the business likely to be vulnerable to new or changing taxes? Economic changes
- What will be the likely impact on the business of inflation recession or an increase in interest rates?
- Legislative Change
- Legislative changes Q How likely are potential legislative changes (either domestic and/ or European) to affect the business?
With these lists of related and most relevant factors, it will help company to really see what they need to analyze and the power of analytical thinking will be practice for the managers. By carefully addressing each of the questions in each of the factor, it will only give the company a much detailed and clearer picture on how they can penetrate the market as well, because here they deeply scrutinized the current status and process of the company. (Elkin, P, 1998).
Michael Porters Five Forces Model
Before proceeding on Porter’s Five Forces, it is important that companies must look into the importance of strategic planning.
In the study of strategic planning, there are important factors and processes that are working and thus are presented in Figure 6.
Figure 6. Factors Contributing to the Strategic Plan (Oster, S 1999:3).
These factors will help company to establish their goal and direction. In this way also it will help companies carefully analyze and evaluate the current process and problems they faced regarding competition and other internal and external factors as well which is affecting the performance or improving the performance of the company. (Oster, S, 1999:2-3).
Competition until now remains one of the main problems in any business and the main driver to these are mainly brought out by both changing preferences of customers and the continuing influence of technology or innovation that most companies are employing in order to have a competitive advantage over the other. Competition also has been the main barrier to progress, it becomes a very important concern by most companies particularly those that are not that big enough to compete and where their market are small. With the Porter’s five forces model, these challenges and changes can easily be addressed and it also provides a clear action as to how things should be done that can help the company not only to overcome the issues they faced but more importantly creating opportunities for the company.
It was also true that for the different industries in the world, it is common that each of these industries may have their own levels of profitability and that depends primarily in their industry structure. In other words by using the Porter’s theory, it will help you closely analyzed specifically how your business can be competitive and achieve sustainability over the competition. Also, for Porter, it was mentioned that it is not only competing with some specific companies that directly competes your own company or a certain group where it can possibly kill your business. But, more importantly it is studying the industry where you belong and nothing else. Meaning there should be a well developed study on the current status of the industry.
Like for instance, why the sales in most theatres does now are not that high as compare to 5 to 10 years ago. This can be a good starting point that will help companies not only deeply analyzing the situation nut what is needed is to find how the company can survive on this issue and not dwell on the issue itself. This is also the proven with other countries, they were very attached to the government status and situation, which instead of doing that they can focus more on how they can developed a product that will address the current issue and this is through new product development or promotional programs and others.
For Porter’s five forces, it includes: rivalry, barriers to entry, supplier power, threat of substitute and buyer power. In the five forces you can see that there is certain concentration that needs to be done by companies in order to be successful in applying this theory by Porter.
In order to have a better understanding on how Porter’s five forces interacts to one another, it can be viewed in Figure 7.
Figure 7. Diagram of Porter’s 5 Forces (Porter, M 1998:5).
For the first item in Porter’s five forces which is rivalry this only means that there are no companies without rivalry. As company continues to evolve and others starting to be more sensitive and always looking for better way on how they can improve their process. It is important that we also have to look at our rivals. The main reason is that from them we can also learn a lot and that will also make our life more decent and respectable.
In this rivalry forces, it would only look into the competitive advantage of the company over the competition. This is a way on how you can be on top of the competition provided you have applied the right theory and best practices. For most economists provide an effective measurement of rivalry through industry concentration and one kind of measure is CR (Concentration Measure), actually the Bureau of Census is the main responsible group that handles CR periodically specifically for major Standard Industry Classification (SIC). The CR mainly provides a percentage in the market share which usually held by the top four largest firms.
In this kind of study, it is easy to make some analysis and study if there are few industry involve in one type of industry and this only shows that the industry is less competitive. While on the other hand once the company consists of many members, this time it becomes a very competitive stand for all the companies included in that certain industry. This is more of the essential information that is needed to be generated since there are companies that would like to find out where their company has landed in order to know how they can pick it up the following year and what are the problems that they have encountered on it.
In rivalry as part of the five forces, the company can choose what appropriate competitive moves it can do in order to overcome challenges and competition in the industry where it belongs. The first move is in terms of changing prices this is actually a temporary move that usually done by the company which will only be used to attract more customers to come in to the business. This strategy is again for short-term plan where companies need to have a little of drastic moves or measures in order to recover for lost market ground with its competitors. The only problem here is that the company must be careful in applying this because too much giving of lowering cost might also be dangerous as customers can easily be dissatisfied if there are again sudden changes in the prices and consistency is really the essence here.
This should be carefully be studied first and be able to look for better timeline as to when it can be stop and return to its standard operations with its standard cost. The other change that can be done is change through differentiation. At this time it is more than just a cost or price. This is very important move as well for companies, most specially if the concern is quality of products or service rendered by employees or other aspects that affects the product itself.
Generally in this kind of strategy it work for long-term strategy for some companies since this would be the main basis for real patronage of customers to products or services that you will render. Another advice in this area of concern is that it should also be very important that companies should look on this one carefully because this is just like a second chance that some industries or companies must not waste. This is like re-inventing your product lines and be able to address this time that the product really have changed a lot and it mainly focus now on the important aspect of the business.
The third move that can be done is however with regards to creating using channels of distribution. This is sometimes one of the hidden and blind side issues that companies do not really focus a lot. Actually, this is a way on how the company looks for some better and profitable opportunity. Finding new territories or expanding market ground to such area is just some of the actual works that can be done in this move. However, it is again very important for the company to conduct a very serious study on this one because investment may also be wasted. In order for the company to either expand or find new profitable opportunities instead it may resulted to failure of doing business.
Companies with the help of some respectable consultants that are expert in conducting analysis over profitable opportunities should take place. The last move that can be done is through exploiting relationship with suppliers. This time it is more on how the company can work its way by minimizing or finding better deals with its suppliers. Suppliers are one of the cost centered investment that may also help in having a good bottom line in the business.
This is more helpful to companies involving manufacturing and multi-transactional organizations. In this way company can leverage its investment through better study and exploitation of its suppliers by finding the best deals and minimizing orders but having many suppliers and other things may be a good help and adjustments that can be done in order to have better adjustments and better financial statements.
Actually, rivalry is greatly influenced by some very influential industry characteristics: (1) a larger number of firms, particularly these days where companies are just coming in and the numbers are starting to tighten the competition and it becomes an enormous and one of the biggest problem of competition among companies. This also results to much smaller market share since people will change preferences from time to time as they wish. (2) Slow market growth, since there are many new developments in the environment, also included some global economic and political issues which are driving the business backwards, it has been the main reason why business starting to slow down these days.
This also sometimes affected by the global recessions that are happening in some major global market like in the US, Europe and in Asia pacific. What is important here is that companies should be aggressive enough in experimenting new products with new ideas and new styles. Because this is the only way that can eliminate market growth. Business minded people must be brave enough to look ahead and see how they can perform business well and not be stagnant in providing such business tat sometimes run already for years and this is what the market rejects. (3) High fix cost, since the market are experiencing some tough competition, this will result to minimum production since the cost is the main driver to production, the higher the cost the smaller the production and this results to small number of supplies and if the supplies is not enough there will be problem for the demand and if that is the case the price of goods will also be high.
For the fourth (4) increasing cost of storage for highly perishable goods. This is mainly due to the serious competition among other companies. Since most of these providers know that they are important for these products in order to keep it fresh fro their customers. What they do is to monopolize the industry and what happen is that small investors are affected. But more importantly, it creates an imbalance in the business and for those global companies, they will also be affected since production and supply is needed and small investors will not anymore be interested in forming their own business. The main reason is that with small market, it can only produce minimal revenue and they need to compete with biog companies.
(5) Low switching cost, this is however the problem with some developing countries when they switch products with some developing countries, since their local currency is far lower than the developed countries what will happen is that they definitely have low switching cost, since the developed countries will not used their own currency in buying the product of the developing countries. (6) Low levels of production differentiation, (7) strategic stakes are high, which means that it is more dangerous to do business since there are a lot of risks that need to be addressed.
(8) High exit barriers, this means that the cost of exporting the product that would somehow should be with the help of the local country, but has become a major problem because higher tax and shipment cost and other related costs are becoming are affecting the business. (9) Diversity of rivals, this only means that rivals or competitors are very difficult to faced at the present, it is because these companies has been very diversified and promotes different kinds of business. And lastly (10) Industry shakeout, almost all companies in the world cannot hide and remove itself of not being affected by the global changes in the economy. This only means that there are some cases that changes in the industry patterns that brought about by economic changes will always take effect in all the companies.
For the second force which is the threat of substitutes, this refers to new or current products tat may replace your current product or services. This is very common these days that most companies are easily being changed by customers. The reason there maybe brought about by dissatisfaction in terms of services, high cost of the product or services, or some changes in the actual product itself. It is important that most companies must see this in advanced before it may happen.
The problem is that for some companies they are very reluctant that their business will not be affected, and instead they innovate their products or services they are too much confident and this has been the main contributor to the downfall of some companies. All firms should always know that competition is always there and change should be the driving force of the business, changes that customers can satisfy. For some companies the strategy of not only introducing new, innovative and best product for their customer is needed but more importantly it should be well introduced to its target market.
One of the best strategies to strengthen customer awareness is by having a strong and very effective way of promoting the product. In this way it should not only make the product easily be known to the public but also could help inform the public about the latest developments and changes that you’ve made for the product. Always look for the effective media partners and be able to make sure that your product will be well known. Actually, this is also where most companies invest a lot, most specially if you are trying to introduce or re-introduce your product to the market.
On the third force of Porters five forces, which is buyer power. Companies still need to understand that buyers or customers are still one of the most important aspects of business. Understanding their needs by analyzing or studying their buying power is highly necessary. It is important that companies should look into the capacity of their customers, whether if they can afford to have the product or not. If not, up to how much or what size, because here are also times that buyers would adjust in terms of size since price also adjusted.
In terms of buyer power, there are important key areas that are needed to be considered. For better understanding with examples, it is presented in Table 2.
Table 2. Factors Affecting Buyer Power (Porter’s Five Forces n.d.).
In the table that were presented above it shows that there are many instances that affects the buying power of the person and in these case again the company must be sensitive enough in addressing that issue since customers or buyers are important in the business.
For the fourth force in Porter’s five forces, which is the supplier power, there are also some cases that supplier must also be well organized in a company. In fact there are other companies that would prefer to have a single supplier worldwide in order for them to have a better deal since they can make used f the global contract as a powerful leverage for the company. Take for instance a company that forms a global partnership with an outsource company like IBM, all of its hardware and software licenses are tied up to only one supplier.
So what happen was instead they pay for a per country licenses they only pay for a single license server that is sitting somewhere in their main control office and all countries and offices will just connect to the license server before they can install the software. With this it becomes very convenient and when it comes to cost and support, it will also be easy because you are only talking to one global partner and that is IBM.
In the side of supplier, where it’s also affects strategies implemented by the company, it also has some factors that needs to be address and this is presented in the Table 3.
For the last force in the Porter’s five forces, it is the barriers to entry or threat to entry. At this point the main concern is o the entry of new firms that may greatly affect the current business. With this new entrants in the business it will create some difficulty in customer loyalty for some because there will be some customers that will be more enticed to try the new product in the new company and with this it will be a big problem for the current companies that are existing.
If this is the case the company should anticipate this problem and before this happen, companies can implement some innovations that may help the company to overcome these new threats. Particularly the main factor that needs to be considered against these new entrants is regarding price. Companies must look on this as an important aspect for change and companies should be able to adjust automatically and be able to provide instant changes that the customer will still appreciate and easily adopt.
Table 3. Factors Affecting Supplier Power (Porter’s Five Forces, n.d.).
The following are just some of the most common barriers to entry from several sources: (1) government creates barriers, sometimes it is the governments are the one creating the barrier to these new entrants. It is actually due to lack of proper management of businesses that just exist in the local market. The government instead should be the one that controls these companies in order to have a balance and protection to some existing companies.
(2) Patents and proprietary knowledge serve to restrict entry into an industry, for some there are also some barriers that brought out by introducing new products and this is due to patents, trademarks or other proprietary issues that are preventing companies in doing the right business. (3) Asset specificity inhibits entry into an industry, and lastly is (4) Organizational (Internal) Economies of Scale.
In Porter’s Five Forces, it also discusses some relevant and very important entry and exit barriers that may be used to anticipate by companies and this is can be viewed in Table 4.
But, there are also some findings that Porter’s five forces also faced some difficulties when company applies it due to increasing complexities and changes that is happening in our present economy. Changes like for example that may be brought about by technology, for example has been a problem for companies in applying the tool. But, this has also been defended by some that it all boils down to better understanding of the situation in the economy that can still bring the company down or up. Effective quantitative and qualitative study stills the answer to all of these problems. (Thomas, H., Pettigrew, A. & Wittington, R 2002:17). Another good application of Porter’s five forces that has been proven effective not only just for commercial companies that mainly focuses in the attractiveness of profitability and sustainability, but is also been effective in managing compliance in engineering certification.
This only means that the method is a substantial tool in managing compliance of some highly industrial companies. (Kulsky, W 1992: 23-26). Even though the tool is well applied and has developed most companies, there are still some that are not convinced in the Porter’s Five forces tool because for some it does not applied well in global companies. (Cho, D. & Moon H 2000:55). One of the common reasons that were mentioned is the difficulty of the tool to address the different type of organizations that are working in many global industries where it is formed in a more complex and matrix type of organizations.
This has become a problem since it will not apply the standard approach and there are instances that the approach and procedures will be changed. (Cho, D. & Moon H 2000:95-100). On the other hand, still the tool provides a power for industries most specially for some companies they can strategize and start exploring coming implications that may affect the company. This tool can provide that, with the consultants and managers themselves, this method may not only be used for improving the process but also can address and mitigate risk as well. (McGrath R., & MacMillan, I 2000: 13).
Porter’s five forces tool has also been an effective industry analysis tool which can be used in studying every segment that the company is focusing. In this approach the tool, will be plotting each factors in the industry either “+” or a “-“. The plus means that it gives an over-all increase in the forces within the industry which means that the company or industry needs to strengthen that factor for better leverage while the minus sign in the factor will be a serious attention and careful study should be made. (Jeangrand, J 2005: 64-70).
There are also some generic strategies that can be applied in order to counter the five forces of Porter and these are: (1) corporate level, which entails more of the executive directions and plans that usually being given during major and critical meetings in the company. (2) Business unit level, organized by business management team that address issues consisting of some of the major adjustments that the company should have in terms of business initiatives.
And last (3) Functional or department level, this is where the middle managers and the technical leads or supervisors may also have imparted some of their initiatives for the benefit of improving the process which will help the company overcome challenges and attain sustainability in its major operations. This is sometimes very effective since this is really where the real frontliners are and supervisors and middle managers are actually the direct contact to it. (Porter’s five forces, n.d.).
In the succeeding part of this paper, it will be some of the proven industries that proven that innovations and long-term strategies are an essential key for the success and stability of any company.
Critique/Debate on Michael Porters Five Forces Model
In the five forces of Porter’s model that significantly signifies the strengthening of companies strategic management. It mentioned that in order to have a better result of research it should include the following: (1) needs to be careful in developing theoretical work, (2) more theory based data analysis, and (3) must less prioritize on the immediate applicability of results. Instead it needs to have a more thorough analysis and research. (Montgomery, C., Wernerfelt, B. & Balakrishnan, S 1989: 189-197). Based from studies, Porter’s five forces has become a well appreciated tool in carefully analyzing company structure which specifically focus on the performance of the firm itself, which in many cases the most important aspect of an organization.
In fact, Porter’s Five forces method has been on the top 10 tool used by most companies, whereas the SWOT analysis claimed the top spot. (Jarzabkowski, P. & Giulieti, M n.d: 3-23). What better things that Porters five forces does is that it actually makes the company over-power its competitors by focusing on how to increase its bargaining leverage.
This also address issues concerning suppliers, potential new products and services which can really weaken the competitors if they will not focus in developing their own strategy that applies this method. There are also some issues regarding political that for most companies may also used to gain advantage over their competitors, but this method mainly focus on overcoming every challenges by only adopting and carefully analyzing the competition and perform and apply the method for the best purpose of the company. (Levy, D., Alvesson, M. & Willmoth, H n.d:12).
Sustained Competitive Advantage
When it comes to sustained competitive advantage, most companies that have already achieved this status know that it is not only advanced techniques but it is more of strengthening its internal forces is essential. Like in particular in supply chain management, most companies would now limit external support instead they work closely in their process and invest more on how they can sustained their won operation in their own most specially these external support will not always there when they need it. (Poirier, C 1999:2-4). In learning sustained competitive advantage, there are four key indicators that need to address: value, rareness, imitability, and substitutability. These means that it is not just the simple process that is being focus but all the unexpected, the unattainable circumstances that would still be present and affect the industry operations must be recognized. (Barney, J 1991).
But, more importantly it is still addressing organizational culture is mainly the key for sustainability in the company. Enhancing the culture of the company is the answer in order to achieve better sustainability which will result to competitive advantage. Specific aspects in cultural management such as improving the employee’s morale and quality of work are just some of the proven effective ways in achieving this goal. (Barney, J 1986: 656). Information technology is also another factor that can give a company a sustained competitive advantage. But this cannot easily be achieved; there should be first systematic approach in studying the current process of the organization that is needed.
That is why for some it is not that easily being attained, better analysis and understanding on the company processes is essential in developing an effective IT systems. (Mata, F., Fuerst, W. & Barney, J 1995:487). Facilitating employee’s competencies as part of the human resource management is one of the favorable key that is also being seen and applied by most company to achieve sustained competitive advantage. Particularly addressing some issues regarding new trends in the business, it is needed that employees or people resource are ready for these challenges and instead of not able to compete, the company can continue to be competitive and operations can be perform efficiently. (Lado, A. & Wilson, M 1994: 699).
That is why applying effective human resource management would need to have well dedicated and knowledgeable person to handle it. This is order for the company to be sure that it applies the best practices and HR methodologies and from there the company can also rest assured that sustained competitive advantage will truly be achieved. (Wright, P., Mcmahan, G. & Williams, A 1994: 310-313). One way that we can consider that a company has achieve sustained competitive advantage is through its assets and stocks. This is mainly the real value that most companies really keep and protected. This is also a way of measurement as to how the companies work with its investments through effective management of its assets and stocks. Barney, J 1989:1511-1513).
There are some known company strategies that may contribute to sustained competitive advantage and these are the following: customer retention, databasemarketing, and lastly is creating a strong, close, and positive relationship within and around the organization. This has been the main strategies, most specially in the case of retaining customers, this has been the challenge and most of the time some companies failed. (Rowe, W.G. & Barnes, J 1998).
Resources-based of the company and how company gain competitive advantage through Knowledge Management
Resource-based view has always been a factor for sustained competitive advantage. This is not only because of the fact that a company develops and identify the right resources needed in the company, but more importantly in how these resources interactively working together to achieve single goal. This is also one of the main importance for global companies, most particularly companies who has different approach of management and organization in every territory they operate. (Black, J. & Boal, K 1994:131-135).
But more importantly it is mainly the skills that matters the most, this is because it is the one that really counts the most. Particularly at the business strategy level, it is important that the company work closely on the exploration of relationship between resources, competition, and profitability in the analysis of competitive advantage. The main reason is that the company must not be over-prioritized in one aspect since it will affect the other.
There should be careful study that needs to be made and analysis as well on some relevant external factors may also help for better application of resource-based study. (Zack, M. 1999:3-5). But, this cannot be managed easily since there are some institutional issues that works within the company of organization. In most studies, the impact of culture and behavior applied within the organization are just some of the tangible issues that may affect the resource-based view in the company. Oliver, C 1996).
On the other hand, in terms of knowledge management, this is considered to be a good approach also in gaining advantage over the competition. But, first experts would say that in order to apply this effectively the company must first look on what they want to prioritize in producing a knowledge management, is it in the supplier side or in the demand side which the latter mainly focus on the customer’s side as well. In this way the knowledge management can provide the company leverage on how they can effectively perform in the business. It also helps them work closely with the customer, most specially understanding their need and eventually can give them an effective way on what product or services is needed. (Ofek, E. & Sarvary, M 2001: 1441-1446).
Knowledge management is also proven to be effective in addressing the changing world of the business. Like for instance the shift from technologies, the number of competitors that are coming, obsolesces of products. These are some factors that knowledge management becomes very essential. This will help them look into these changes and eventually will give the company a better look on what will be the new need in the market or trends that most users or customers look for. (Neef, D., Siesfeld, G.A. & Cefola, J 1998:175-178).
In fact there were proven study like in South Africa, it becomes an effective strategy for business leaders in anticipating barriers in the business, but they would only want to suggest that in order for this approach be more effective it should be applied in a more holistic approach. Because in that way, it will be more effective in addressing all aspect of the organization. (Ndlela, L.T. & du Toit, A.S.A 2001:151-165).
CHAPTER 3: Findings, Studies, and Analysis
Case Studies from Some Global Companies
In most of the studies that you can find, it is always on top of the effective strategies that they applied in order to be competitive is focusing on managing their human resource. Like what happen to PEPSICO, training their store managers well has given the company competitive advantage. Because in this way store managers, since they are also the one in contact directly with the customers, they learn how to deal with them effectively, with better approach and techniques how to please customers, is enough for the company to achieve better sales performance. This also happens to Nissan and Honda as two of the top manufacturing of cars, they see that it is important that they trained extensively their parts suppliers in order to really fit in to the gaining demand of their customers. And most specially, who would not know the name McDonalds, a company that is well known around the world.
With its close relationship with all of its global franchise owners, training them how to sell and operate the store effectively has continuously been the key for their success. And this is all about targeting what is needed. But this will not be possible without trust. Trust has been the simple and yet very effective key for success as well. (Schuler, R. & MacMillan, I n.d: 3-6). For Toyota’s success it is mainly about knowledge sharing network is the key for their competitive advantage. It has provided a centralized knowledge based of information that all of its network companies used and from there the consistency in terms of quality and operation has been achieved.
It even resulted to better outcome such as: innovate members to effectively participate and this includes partners, employees, managers, etc., secondly, it prevents free riders, and lastly, it reduces the cost. (Dyer, J. & Nobeoka, K 2000). Lastly, we have to learn about the success of Japanese companies in terms of focus. Focus maybe a simple term but it really provides success to most organization.
Application in a way that limiting and sometimes being sensitive if the market wants to have new models for example for a car, there companies would not just developed new brands or models if needed. This has produce low cost and quality for every product they developed. Focused also in a way that they would always find time in analyzing the needed features in every product they make. Value and efficiency is also part of their strategy. This is the main reason why most products developed in Japan has been always on top. (Stalk, G n.d.).
CHAPTER 4: Conclusion
In this paper it shows that for any company to achieve sure success in the business it is important that it applies the right and well trusted and reliable business “best practices” and theories which not only improve the performance of the company but more importantly help the company achieve stability.
In this paper it has been proven that many companies to attain success, it needs to apply the right competitive advantages, efficient SWOT analysis and strategies, sustained competitive advantage and most specially the five Porter’s forces which is very evident in this paper that most companies has achieve great success along with innovation in its processes. It is also very important for companies that it is not only understanding behaviour and culture that counts the most in the company, but it also helps if the company must focus on improving its operation through innovative initiatives which should also be in line with the over-all strategy of the company.
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Subject: Human resources,
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 16 February 2017
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