Competitive Strategies Research Paper

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A firm’s competitive strategy concerns how to compete in the business areas the firm operates. In other words, competitive strategy means to define how the firm intends to create and maintain a competitive ad-vantage with respect to competitors. A business area identifies: (a) a distinct set of products or services sold to a uniform set of customers; and (b) a well defined set of competitors to be faced. Holding a competitive advantage over competitors means to be more profit-able than competitors over the long term. Superior profitability over competitors can be achieved in different ways: (a) a company sustains lower costs than competitors and this can lead to either selling the same volume as competitors (if the selling price is the same) with larger margins (because of lower costs) or selling a larger volume of products, obtained as a consequence of the reduction of the selling price (the selling price can be reduced as far as the difference between price and cost is that of competitors and therefore the company has the same margins as competitors); or (b) a company is able to commercialize a differentiated product from that of competitors: this advantage can be exploited either by increasing the selling price and therefore exploiting higher margins at the same volume or attracting a larger number of customers (which means larger volume) keeping the same price as competitors.

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The definition of competitive strategy itself ad-dresses the underlying dynamic character of the issue. Competitive advantages are created as the result of direct actions of the firm (proactive strategies) or as the result of the reaction of the firm to external changes (reactive strategies). As a consequence of the creation of a competitive advantage, competitors react trying to erode the advantage. This can be done either by imitating the holder of the advantage or doing actions that create a new advantage. Therefore, the protection of the advantage is also part of a competitive strategy. This leads to the key concept of the sustainability of the competitive advantage. The stronger the protection of the advantage, the longer the window of time in which the advantage can be exploited by the holder and the higher profitability for the holder. Moreover, an advantage can be maintained exploiting the time factor. Once an advantage has been created, the holder of the advantage can exploit the time competitors spend to close the gap to generate another advantage. The strategy in this case is staying ahead of competitors.

Therefore, a competitive strategy within a given business area is examined looking at two factors: the creation of the competitive advantage and the protection of the competitive advantage. As it can be argued from the discussion below, whatever type of competitive strategy, the ultimate source of competitive advantage and the potential of protection of such advantage reside in the resources of the firm. Resources may be tangible (such as physical or financial assets), intangible (such as technology, reputation, culture), human (specialized knowledge and competencies, communication and inter-relational capabilities, motivation), or organizational (organizational routines and business processes, organizational architecture, interrelations with suppliers and customers).

1. Creating The Competitive Advantage

The creation of competitive advantage within a given business area is examined looking at the two categories of competitive strategies as mentioned above: pro-active and reactive competitive strategies.

1.1 Proactive Competitive Strategies

In proactive competitive strategies, the creation of competitive advantages is the result of the direct actions of the firm. Therefore, in this case, the sources of such advantages are internal to the business: the creation of competitive advantage is the result of the actions such as the introduction of a new product, or the use of a new production process. Such change is successful if it generates higher profitability for the firm than competitors (under one of the forms seen above): this means that the firm has created a competitive advantage over competitors (which is different from saying that ‘the firm holds a competitive advantage’ which means to maintain the advantage and have higher profitability than competitors in the long term). The competitive advantage is therefore the result of a competitive strategy deliberately meant to introduce changes in the business area in order to make the firm more profitable than competitors. It should be noted that such a form of competitive advantage creation not only generates advantages to the holder of the advantage, but may also destroy existing advantages, as the basis of competition may radically change.

The types of competitive advantages and the under-lying competitive strategies can be of two types.

1.1.1 Improvement Of Performance (Same Game Competitive Strategy). If the business area is considered at a certain time, the competition among firms is played around some key performance factors such as cost, time, quality, variety, etc. (see below in this section). These are the performance factors by which customers measure their satisfaction.

A first type of competitive advantage creation concerns the improvement of product service along one or more of the existing performance factors. The basis of competition is still the same as the performance factors are still the same. This form of competitive advantage creation is the most frequent in mature and established business areas, where the basis of competition tends to be more stable.

In more detail, major performance factors and therefore sources of advantage are the following:

Superior functional performance. Each product service is related to specific functional performance. Products with superior functional performance with respect to competitors are sources of advantage.

Complementary services. A performance factor can concern the services added to products. Such services can be embodied into the product or separated from the product. The ability to add services can be a source of advantage.

Quality (compliance). Another performance factor is the compliance of all products produced to the level of quality claimed by the firm. Firms able to commercialize products all of the same quality may create an advantage (it is also referred to as zero defect production).

Variety (mix). Another performance factor concerns the range of products the firm is able to offer within the business area considered. A wider mix of products can be a source of advantage.

Delivery time. A further performance factor is the ability to deliver products when customers want. The most desired time for customers is not always the earliest: if a firm produces industrial goods the re-quired performance (and source of advantage) is to bring products to customers exactly when the customers use them in their production process.

Time-to-market. Time-to-market is the time spent to have a new product idea brought onto the market. Reducing time-to-market enables the firm to introduce new products earlier than competitors.

Environmental compatibility. In certain businesses the environmental compatibility can represent a source of advantage. Helping customers to comply with norms and legislation can be a form to dif-ferentiate products from those of competitors.

Cost. Cost is often a key performance factor in established businesses and reducing costs, a major competitive weapon. Major sources of cost advantage are here reported.

(a) Scale economies. Scale economies occur when an increase in the production scale determines a reduction of the cost per product unit. It means that an increase of the resources used determines a more than pro-portional increase of the output. The production scale at which the economies of scale are completely exploited is the minimum optimal scale (which is the minimum scale to obtain the minimum cost). This means that firms operating the minimum optimal scale have cost advantages with respect to firms operating lower scales.

(b) Learning curve. The learning curve shows the relation existing between cumulated production and cost per product unit. There is a reduction of 20–30 percent of the cost when the cumulated production doubles. Learning curve advantages mainly refer to savings in production, because of fewer scraps, shorter idle times, and incremental innovations. This means that firms which start producing a product before competitors can benefit from cost advantages because of learning effects.

(c) Process technologies. A certain production process using a defined process technology may be technically superior and more efficient than other process technologies.

(d) Input costs. There may be cost advantages related to the cost of input factors (materials or labor). Firms that directly own sources of raw materials or have access to input factors at lower cost have cost advantages.

(e) Localization. Cost advantages can also be based on the geographical location. The proximity to raw material sources or the localization of labor-intensive activities in low labor cost countries is a typical example.

(f) Production capacity utilization. If market demand fluctuates a major problem is the adaptation of production capacity. Firms with more flexible production systems benefit from cost advantages.

Finally, within a certain business area, a firm’s competitive strategy can be based on a niche strategy. This means that competitive advantages are based on the ability to offer products services tailored to the specific needs of a limited number of customers within the business area.

1.1.2 Change Of The Rules Of The Game (New Game Competitive Strategy). Competitive advantages can be reated introducing a new performance factor in the business area. In such cases, the ‘rules of the game’ in the business area change as the basis of com-petition changes. It should be noted that there is a difference between cost and the other performance factor. The introduction of cost as a performance factor gives an advantage to the firm in absolute terms, whereas the introduction of another performance factor gives an advantage if that factor is perceived by the customers as critical.

1.2 Reactive Competitive Strategies

The creation of competitive advantages in proactive competitive strategies is the result of the actions of the firm. Competitive advantages can also be the result of the reaction to external changes.

External factors, which may determine profitability differences among firms, may be: changes in the consumer demand, price changes (for example, changes of the price of a raw material, price changes due to changes of the exchange rates), and technology changes. All these changes affect firms’ profitability. The impact of such changes on firms operating the same business may strongly differ according to the responses of the firm to such changes, which in turn depend on the resource profile of the firms themselves. The quickness and the effectiveness of response to changes affect the profitability. The capability to respond quickly and effectively is based on a key resource (information) and a key competence (flexibility). Firms able to grasp information quickly are able to analyze weak signals through early warning systems. The ability to respond effectively depends on a firm’s flexibility, which is in turn strongly linked to characteristics such as organization, decision systems, culture, values. Such competitive advantages are purely the result of reactive strategies, i.e., strategies taking place as reaction to external changes.

2. Protecting The Competitive Advantage

The company that holds the advantage tends to maintain this position (in certain cases it can exploit a monopolistic position), whereas competitors tend to erode (destroy) the advantage. The erosion of the advantage can take place either through imitation or creation of a new advantage.

Therefore, whereas the holder of the advantage has to defend its competitive advantage, the competitors have to erode (destroy) this advantage. The time window in which the competitive advantage can be held over competitors brings to the concept of the sustainability of the advantage: the larger time window, the more sustainable advantage. The sustainability is related to the capability opportunity to protect the firm’s source of advantage. Factors of protection are the following.

Secrecy. It is a form of protection especially if the source of competitive advantage is the production process. Although information can be obtained from products and there is an inevitable leakage of know-how through a variety of channels (technical com-munity, suppliers, etc.), firms can keep secrecy over that. Firms that do not open their plants to anyone external to the firm may succeed in keeping their own process innovations secret.

Accumulated tacit knowledge. If the knowledge at the basis of the advantage is strongly embodied into people and technical systems, and relies upon people’s experience, it is difficult to make the knowledge explicit, and the related advantage can be highly protected. The well-known case of Italian small firms, often world leaders in niche markets and traditional manufacturing industries, is largely based on the accumulation of tacit knowledge. In very concentrated geographical areas (districts), there are networks of small firms that are strongly specialized in highly specific manufactures. Knowledge is, to a large extent, embedded in people living in that area.

Lead times. The ability to generate and quickly put new products on the market is a major source of advantage and is itself a major source of protection against imitation. It helps establish brand loyalty and credibility, accelerate feedback from customer use, accelerate learning effects, and consequently increase cost of entry for imitators. The market leadership is based on the ability to provide new generations of products frequently and stay ahead of competitors.

Complementary assets. The ability to make profits from the commercialization of a new product or service often depends on the availability of assets or competencies, such as production capabilities, marketing, distribution, after-sale service, which are complementary to the product and its technology. These complementary assets determine who exploits the new product introduction and the appropriation of the related benefits and to what extent. As a matter of fact, they are often the reason for failures of firms, that, having once generated the new product do not have the required complementary assets to exploit it or have to invest largely to acquire them. Both these conditions may cause the firm not to create a competitive advantage from the new product introduction. On the other hand, the availability of complementary assets for the firm may represent not only the means which ensure that profits are made from new product introduction but also a barrier against imitation by competitors especially when such assets may be difficult to acquire, access, or imitate.

Product complexity. In some sectors, product complexity is a major barrier against imitators. The large electromechanical equipment industry or the aircraft industry is a typical example.

Standards. In certain industries, making the firm’s own product accepted as a standard opens and develops the market and raises barriers against competitors. This is especially true in network markets, where the compatibility of a product with related products (for example a software package with the related hardware) is a prerequisite for the product’s success. Once the product is diffused throughout the market as a standard, it is difficult for competitors to erode the advantage. In fact, new products marketed by competitors should replace the existing product but may also involve the replacement of the other related products. This represents a major barrier. Computing, telecommunication, consumer electronics industries show examples in which standard setting is a key factor to appropriate the benefits of new product introduction and create a sustainable competitive advantage.

Pioneering radical new products. If a product is radically new, i.e., represents a strong discontinuity with the existing products processes services and lies upon a base of knowledge that is completely different from that behind traditional products, the firm is more protected against imitation. Potential imitators cannot rely on the existing knowledge base to replicate the product.

Strength of patent protection. Patenting is also a major means of protection. This is especially true in some sectors, chemical and pharmaceutical for example, where products can be clearly and rigorously described (often with a structural formula) and imitation by small differences is not easy as in most industries.

3. Other Competitive Strategies

Finally, it should observed that so far competitive strategies have been examined considering a given business area and that the actions or the reactions involve only the firms operating in such business areas. In reality, higher profitability can be pursued implementing other strategies that are here mentioned but not treated in depth.

3.1 Creation Of A Completely New Business Area (New Business Competitive Strategy)

A competitive strategy may be meant to create a completely new business area. If the business area is profitable for the firm, the firm creates a competitive advantage. The firm holds a monopolistic position as far as new firms enter the business area. This case especially occurs in highly innovative and emerging industries.

3.2 Enlarging The Geographical Scope Or The Business Scope (Cross-Market Or Cross-Business Competitive Strategy)

There are other two types of competitive strategies that can generate competitive advantage. They do not concern the specific business area considered but, in one case, the fact the firm operates that business in different geographical markets and, in the other, the fact that the firm operates different business areas.

In the first case, it is the geographical scope of the strategy that may represent the source of advantage. A firm can pursue a global strategy being present in different geographical markets. The global market is seen as one. The sources of advantage over competitors who compete on a local basis are mainly twofold: the homogeneity of market demand in different countries and the exploitation of economies of scale in different activities (R&D, production).

In the second case, the source of advantage resides in the range of business areas operated. The ad-vantages are based on the interrelationships across distinct business areas. Interrelationships may concern the following: infrastructure (accounting, legal department, government relations, human resource management, finance); technology; purchased inputs; manufacturing (location of raw materials, production process, assembly, quality control, factory support activities); marketing (buyer, distribution channel, geographic market).


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