Sustainable Competitive Advantage free essay sample

Resources are the assets, capabilities, processes, information, and knowledge that an organization controls. Firms use their resources to improve organizational effectiveness and efficiency. Resources are critical to organizational strategy because they can help companies create and sustain an advantage over competitors. 3 Organizations can achieve a competitive advantage by using their resources to provide greater value for customers than competitors can. For example, iTunes and iPod created competitive advantage for Apple and value for its customers by combining elements of design, price, and capability in a unique way. But the most important advantage was being the first company to make it easy to legally download music to digital devices. (Prior to the iTunes store, the only means of acquiring digital music was illegal file swapping. ) Apple negotiated agreements with virtually all of the major record labels to distribute their songs from a central online library, and iTunes quickly became the premier platform for music downloading. The easy-to-understand site came with free downloadable software customers could use to organize and manage their digital music library. 4 The goal of most organizational strategies is to create and then sustain a competitive advantage. A competitive advantage becomes a sustainable competitive advantage when other companies cannot duplicate the value a firm is providing to customers. Sustainable competitive advantage is not the same as a long-lasting competitive advantage, though companies obviously want a competitive advantage to last a long time. Instead, a competitive advantage is sustained if competitors have tried unsuccessfully to duplicate the advantage and have, for the moment, stopped trying to duplicate it. It’s the corporate equivalent of your competitors saying, â€Å"We give up. You win. We can’t do what you do, and we’re not even going to try to do it any more. † As Exhibit 5. 1 shows, four conditions must be met if a firm’s resources are to be used to achieve a sustainable competitive advantage. The resources must be valuable, rare, imperfectly imitable, and nonsubstitutable. Valuable resources allow companies to improve their efficiency and effectiveness. Unfortunately, changes in customer demand and preferences, competitors’ actions, and technology can make once-valuable resources much less valuable. 5 For sustained competitive advantage, valuable resources must also be rare resources. Think about it: How can a company sustain a competitive advantage if all of its competitors have similar resources and capabilities? Consequently, rare resources, resources that are not controlled or possessed by many competing firms, are necessary to sustain a competitive advantage. When Apple introduced the iPod, no other portable music players on the market used existing hard-drive technology in their design. The iPod gained an immediate advantage over competitors because it was able to satisfy the desire of consumers to carry large numbers of songs in a portable device, something the newer MP3 systems and older individual CD players could not do. One of Apple’s truly rare resources is its ability to reconfigure existing technology into a package that is easy to use, elegantly designed, and therefore highly desired by customers. As the example shows, valuable and rare resources can create temporary competitive advantage. For sustained competitive advantage, however, other firms must be unable to imitate or find substitutes for those valuable, rare resources. Imperfectly imitable resources are those resources that are impossible or extremely costly or difficult to duplicate. For example, despite numerous attempts by competitors to imitate it, iTunes has retained its competitive lock on the music download business. In addition to its customer friendly software and its extensive media library, Apple has developed a closed system for its iTunes and iPod. iPod owners cannot download music from sources other than Apple’s iTunes store, but for many this is not a problem. Many devotees won’t even consider another brand. Kelly Moore, a sales representative for a Texas software company, says of her iPod mini, â€Å"Once I find something I like, I don’t switch brands. †6 She’s not alone: Since iTunes was launched, customers have downloaded over a billion songs. No other competitor comes close to those numbers. Valuable, rare, imperfectly imitable resources can produce sustainable competitive advantage only if they are also nonsubstitutable resources, meaning that no other resources can replace them and produce similar value or competitive advantage. To compete effectively against iTunes, competitors may need to change their business model. That is, competitors need to propose substitutes for iTunes that consumers will accept. For example, Napster founders Shawn Fanning and Wayne Rosso have created a subscription-based service called Mashboxx that charges $15 a month for unlimited downloads. Yahoo! Music uses a similar model but charges as little as $6 per month for complete access to its entire library of 2 million songs. 7 In addition to straight subscription models, some companies are experimenting with price. Where iTunes charges 99 cents per song, period, Amazon’s online store will allow the record companies to charge different amounts for different songs based upon popularity. At Amie Street, a newly posted track can be downloaded for free, but as the number of downloads increases, so does the song’s price, until it reaches the maximum of 98 cents. 8 In response to competitors’ experimentation, Apple has stated that its one-flat-price model has been both effective and lucrative and has no plans to change. It will take years to find out whether these new means of purchase will constitute an effective substitute to iTunes. 9 In summary, Apple has reaped the rewards of a first mover advantage from its interdependent iPod and iTunes. The company’s history of developing customer-friendly software, the innovative capabilities of the iPod, the simple 99-cent-pay-as-you-go sales model of iTunes, and the unmatched list of music and movies available for download provide customers with a service that has been valuable, rare, relatively nonsubstitutable, and, in the past, imperfectly imitable. Past success is, however, no guarantee of future success: Apple needs to continually change and develop its offerings or risk being unseated by a more nimble competitor whose products are more relevant and have higher perceived value to the consumer. Review 1 SUSTAINABLE COMPETITIVE ADVANTAGE Firms can use their resources to create and sustain a competitive advantage, that is, to provide greater value for customers than competitors can. A competitive advantage becomes sustainable when other companies cannot duplicate the benefits it provides and have, for now, stopped trying. To provide a sustainable competitive advantage, the firm’s resources must be valuable (capable of improving efficiency and effectiveness), rare (not possessed by many competing firms), imperfectly imitable (extremely costly or difficult to duplicate), and nonsubstitutable (competitors cannot substitute other resources to produce similar value). 2Strategy-Making Process Companies use a strategy-making process to create strategies that produce sustainable competitive advantage. 10 Exhibit 5. 2 displays the three steps of the strategy-making process: 2. 1 assess the need for strategic change, 2. 2 conduct a situational analysis, and then 2. 3 choose strategic alternatives. Let’s examine each of these steps in more detail. Review 2 STRATEGY-MAKING PROCESS The first step in strategy making is determining whether a strategy needs to be changed to sustain a competitive advantage. Because uncertainty and competitive inertia make this difficult to determine, managers can improve the speed and accuracy of this step by looking for differences between top management’s intended strategy and the strategy actually implemented by lower-level managers (that is, looking for strategic dissonance). The second step is to conduct a situational analysis that examines internal strengths and weaknesses (distinctive competencies and core capabilities), as well as external threats and opportunities (environmental scanning, strategic groups, and shadow-strategy task forces). In the third step of strategy making, strategic reference point theory suggests that when companies are performing better than their strategic reference points, top management will typically choose a risk-averse strategy. When performance is below strategic reference points, risk-seeking strategies are more likely to be chosen. Importantly, however, managers can influence the choice of strategic alternatives by actively changing and adjusting the strategic reference points they use to judge strategic performance. Corporate-Level Strategies Corporate-level strategy is the over all organizational strategy that addresses the question â€Å"What business or businesses are we in or should we be in? † Exhibit 5. 4 shows the two major approaches to corporate-level strategy that companies use to decide which businesses they should be in: 3. 1 portfolio strategy33 and 3. 2 grand strategies. Review 3 CORPORATE-LEVEL STRATEGIES Corporate-level strategies, such as portfolio strategy and grand strategies, help managers determine what businesses they should be in. Portfolio strategy focuses on lowering business risk by being in multiple, unrelated businesses and by investing the cash flows from slow-growth businesses into faster-growing businesses. One portfolio strategy, the BCG matrix, suggests that cash flows from cash cows should be reinvested in stars and in carefully chosen question marks. Dogs should be sold or liquidated. Portfolio strategy has several problems, however. Acquiring unrelated businesses actually increases risk rather than lowering it. The BCG matrix is often wrong when predicting companies’ futures (as dogs or cash cows, for example). And redirecting cash flows can seriously weaken cash cows. The most successful way to use the portfolio approach to corporate strategy is to reduce risk through related diversification. The three kinds of grand strategies are growth, stability, and retrenchment/recovery. Companies can grow externally by merging with or acquiring other companies, or they can grow internally through direct expansion or creating new businesses. Companies choose a stability strategy—selling the same products or services to the same customers—when their external environment changes very little or after they have dealt with periods of explosive growth. Retrenchment strategy, shrinking the size or scope of a business, is used to turn around poor performance. If retrenchment works, it is often followed by a recovery strategy that focuses on growing the business again. 4Industry-Level Strategies Industry-level strategy addresses the question â€Å"How should we compete in this industry? † Let’s find out more about industry-level strategies by discussing 4. 1 the five industry forces that determine overall levels of competition in an industry and 4. 2 the positioning strategies and 4. 3 adaptive strategies that companies can use to achieve sustained competitive advantage and above-average profits. Review 4 INDUSTRY-LEVEL STRATEGIES Industry-level strategies focus on how companies choose to compete in their industry. Five industry forces determine an industry’s overall attractiveness to corporate investors and its potential for long-term profitability. Together, a high level of new entrants, substitute products or services, bargaining power of suppliers, bargaining power of buyers, and rivalry between competitors combine to increase competition and decrease profits. Three positioning strategies can help companies protect themselves from the negative effects of industry-wide competition. Under a cost leadership strategy, firms try to keep production costs low so that they can sell products at prices lower than competitors’. Differentiation is a strategy aimed at making a product or service sufficiently different from competitors’ that it can command a premium price. Using a focus strategy, firms seek to produce a specialized product or service for a limited, specially targeted group of customers. The four adaptive strategies help companies adapt to changes in the external environment. Defenders want to â€Å"defend† their current strategic positions. Prospectors look for new market opportunities by bringing innovative new products to market. Analyzers minimize risk by following the proven successes of prospectors. Reactors do not follow a consistent strategy, but instead react to changes in their external environment after they occur. 5Firm-Level Strategies Microsoft brings out its Xbox 360 video-game console; Sony counters with its PlayStation 3. Sprint Nextel drops prices and increases monthly cell phone minutes; Verizon strikes back with better reception and even lower prices and more minutes. Starbucks Coffee opens a store, and nearby locally run coffeehouses respond by improving service, increasing portions, and holding the line on prices. Attack and respond, respond and attack. Firm-level strategy addresses the question â€Å"How should we compete against a particular firm? † Let’s find out more about the firm-level strategies (direct competition between companies) by reading about 5. 1 the basics of direct competition and 5. 2 the strategic moves involved in direct competition between companies. Review 5 FIRM-LEVEL STRATEGIES Firm-level strategies are concerned with direct competition between firms. Market commonality and resource similarity determine whether firms are in direct competition and thus likely to attack each other or respond to each other’s attacks. In general, the more markets in which there is product, service, or customer overlap, and the greater the resource similarity between two firms, the more intense the direct competition between them. When firms are direct competitors in a large number of markets, attacks are less likely because responding firms are highly motivated to quickly and forcefully defend their profits and market share. By contrast, resource similarity affects response capability, meaning how quickly and forcefully a company responds to an attack. When resource similarity is strong, attacks are much less likely to produce a sustained advantage because the responding firm is capable of striking back with equal force.