Sources of competitive advantage

2.1.1 Structure-conduct-performance school

The core issue of strategic management is why some firms outperform others.

Mainstreams of strategic management attribute superior performance to competitive advantage of the firm. A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices (Porter, 1985). When the firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals (Porter, 1980; 1985). The goal of much of business strategy is to achieve a sustainable competitive advantage. According to Porter (1980; 1985), competitive advantage is created by using resources and capabilities to achieve either a lower cost structure or a differentiated product. A firm position itself in its industry through its choice of low cost or differentiation. Once the firm has identified its position in the market, it should build up barriers to prohibit potential competitors enter into this market segment. The hiher concentration the market is, the more competitive advantage the firm would have. Therefore, the industry structure determines the competitive advantage of the firm (Porter, 1987: p. 46).

However, many empirical studies showed that the high-concentrated industries were not significantly superior to lower-concentrated industries (Gale and Branch , 1982; Ravenscraft, 1983). Other studies showed that there is no consistent relationship between market concentration and profitability (Jacobson, 1988; Jacobson and Aaker, 1985).

2.1.2 Porter’s genetic strategies

Michael Porter identified two basis types of competitive advantage:

- Cost advantage

- Differentiation advantage

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

Cost advantage: This strategy emphasizes efficiency. By producing high volumes of standardized products, the firm hopes to take advantage of economies of scale and experience curve effects. The product is often a basic no-frills product that is produced at a relatively low cost and made available to a very large customer base. Maintaining this strategy requires a continuous search for cost reductions in all aspects of the business. The associated distribution strategy is to obtain the most extensive distribution possible. Promotional strategy often involves trying to make a virtue out of low cost product features.

To be successful, this strategy usually requires a considerable market share advantage or preferential access to raw materials, components, labour, or some other important input.

Without one or more of these advantages, the strategy can easily be mimicked by competitors.

Successful implementation also benefits from:

- Process engineering skills

- Products designed for ease of manufacture - Sustained access to inexpensive capital - Close supervision of labour

- Tight cost control

- Incentives based on quantitative targets.

- Always ensure that the costs are kept at the minimum possible level.

Examples include retailers such as Wal-Mart and KwikSave as well as IT firms such as Dell and Lenovo.

Differentiation advantage: Differentiation is aimed at the broad market that involves the creation of a product or services that is perceived throughout its industry as unique. The company or business unit may then charge a premium for its product. This specialty can be associated with design, brand image, technology, features, dealers, network, or customers

service. Differentiation is a viable strategy for earning above average returns in a specific business because the resulting brand loyalty lowers customers' sensitivity to price. Increased costs can usually be passed on to the buyers. Buyers loyalty can also serve as an entry barrier-new firms must develop their own distinctive competence to differentiate their products in some way in order to compete successfully. Examples of the successful use of a differentiation strategy are Hero Honda, Asian Paints, HLL, Nike athletic shoes, Perstorp BioProducts, Apple Computer, and Mercedes-Benz automobiles.

2.1.3 Blue ocean strategy

- Blue ocean strategy (BOS) is the result of a decade-long study of 150 strategic moves spanning more than 30 industries over 100 years (1880-2000).

- BOS is the simultaneous pursuit of differentiation and low cost.

-The aim of BOS is not to out-perform the competition in the existing industry, but to create new market space or a blue ocean, thereby making the competition irrelevant.

-While innovation has been seen as a random/experimental process where entrepreneurs and spin-offs are the primary drivers – as argued by Schumpeter and his followers

– BOS offers systematic and reproducible methodologies and processes in pursuit of blue oceans by both new and existing firms.

- BOS frameworks and tools include: strategy canvas, value curve, four actions framework, six paths, buyer experience cycle, buyer utility map, and blue ocean idea index.

-These frameworks and tools are designed to be visual in order to not only effectively build the collective wisdom of the company but also allow for effective strategy execution through easy communication.

- BOS covers both strategy formulation and strategy execution.

- The three key conceptual building blocks of BOS are: value innovation, tipping point leadership, and fair process.

- While competitive strategy is a structuralist theory of strategy where structure shapes strategy, BOS is a reconstructionist theory of strategy where strategy shapes structure.

- As an integrated approach to strategy at the system level, BOS requires organizations to develop and align the three strategy propositions: value proposition, profit proposition and people proposition.

2.1.4 Resource-based view

Another school, resource-based view emphasizes that a firm utilizes its resources and capabilities to create a competitive advantage that ultimately results in superior value creation.

The resource-based view (RBV) is an economic tool used to determine the strategic resources available to a firm. The fundamental principle of the RBV is that the basis for a competitive advantage of a firm lies primarily in the application of the bundle of valuable resources at the firm‟s disposal (Wernerfelt, 1984; Rumelt, 1984).

According to the resource- based view, in order to develop a competitive advantage the firm must have resources and capabilities that are superior to those of its competitors. Without this superiority, the competitors simply could replicate what the firm was doing and any advantage quickly would disappear.

Resources are the firm-specific assets useful for creating a cost or differentiation advantage and the few competitors can acquire easily as following:

- Patents and trademarks - Proprietary know-how - Installed customer base - Reputation of the firm - Brand equity

To investigate competitive advantage of firms, mainstreams of strategic management have developed many frameworks, among which SWOT, Porter‟s five-market-force analysis and BCG framework are the most popular.

2.2 Research methodology