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Literature reviews on competitive advantage

Discuss about the Creating and Managing for Sustainable Competitive Advantage.

The whole idea of competitive advantage requires an ability to seize opportunities when they present themselves. Every company in the 21st-century era is investing heavily in value adding activities that add value to its competitive position. According to Schoemer (2010), competitive advantage is the ability of a firm to be top of a market, superior to all other competitors and producing the most desirable product or service at very low costs. Michael Porter defines competitive advantage as the favor a firm receives about market response as a result of low costs and unique products. This paper aims at reviewing Michael Porter's view and analysis of competitive advantage and the contemporary strategies to gain a competitive advantage so as to contribute to the knowledge of strategic implementation.

It may be easy to formulate a strategic plan, but it is the application framework that becomes an issue since it is more of a craft than a science (Hrebiniak, 2006). The early founders of this school of thought include Michael Porter who has been greatly credited for his contribution in business development. Further research has since then been conducted to add to the existing knowledge. According to Schoemer (2010), the theory of competitive advantage by Michael Porter tries to integrate the basics of comparative advantage by David Ricardo with the business strategies. Michael had his book titled competitive advantage. According to Porter, (1998), Porter gives rise to three generic strategies that enhance the strategic positioning of a company in the market; these include the lowest cost, differentiation, and focus.

Porter 1998 showing the generic strategies of competitive advantage

Figure 1 Porter 1998 showing the generic strategies of competitive advantage

This can is explained according to West, Ford & Ibrahim (2015), stated that a company could outdo its competitors if it is providing the market a product or service of value at more efficient means than competitors with low costs. Also, if they are designing their products and services at a more differentiated strategy that gives the customers more value than competitors (Porter, Levison, & 1980). According to Schoemer (2010), there are two methods of gaining the advantage through costs which are increasing the profit to cost ratio and also lowering prices to get a larger market share.  According to differentiation strategy is more applicable if the company produces customized products and services and aims for customer convenience which aims at reaching repetitive purchases. Differentiation should be based on methods that are hard to imitate (Kim, 2000; Porter, 2001).According to a definition by Schoemer (2010), differentiation involves making products and services according to the expectation of a particular customer base such that they find the product or service unique and therefore prefer its use. Research by Amit and Zott (2001), the various methods of product differentiation include design, performance, the speed of delivery, brand image, and product features. Companies using differentiation can enjoy premium prices of their unique products thus aiding in the achievement of a good competitive advantage (Merrilees, 2001).

Michael Porter's three generic strategies

According to Hrebiniak, (2006), companies should analyze their value chain to determine where to apply the differentiation. According to Porter (2001) the market focus strategy aims at distinguishing the needs of a particular market segment and then producing goods and services that best suit the customer segment requirements. This approach is usually followed by smaller firms which cannot compete against the already established companies enjoying economies of scale. Kim et al. (2004) argue that the cost and differentiation strategies are most applicable in e-commerce and highly competitive environments since it is easier to target customers on online domains and to reduce prices in a crowded industry. However, according to Porter (1980) a firm will not necessarily gain a competitive advantage by combining the two strategies since they are conflicting in resources needed and also implementation, they may therefore be better off applied independently.

Most studies have contrasted this view of Porter (Booth and Philip, 1998; Glazer, 1991; Hill 1988; Murray, 1988).The scholars say that the application of the cost and differentiation strategy is more efficient in unstable environments which call for flexibility in operation than consistent ones which may depend on only one strategy to survive. Kim (2004) also recommends that the combination of strategies is the most efficient way. Porter outlines five major forces that enable the establishment of the three generic strategies that can help in the implementation of various strategies in businesses. The five aspects of the model contribute to determining who will cover the market value and how they will do it. The diagram below is a representation of the five forces according to (McGrath, 2013)

The five force model by Porter (1998)

Fig 2. The five force model by Porter (1998)

According to McGrath, (2013), the five forces are what determines the industries weaknesses and strengths and can help in identification of gaps in the market for strategic implementation. The approach states that the competition is not about who is the biggest but the most profitable. Profitability is determined by the five aspects of the model. There are the buyers who always want to buy more and pay less; the second determinant is the suppliers since they always want to provide less and earn more. Then there are the substitute products or services that are equal to what a company produces. The new entrants also introduce new competition to the industry. Then there are the real rivals who make competition intense and thus lower the customer coverage of a company. According to McGrath (2013), a company should analyze these five forces so as to establish which approach to use for the marketing strategy.

The five force model by Porter

In the contemporary world, a lot of diversions and improvement have been developed so as to enhance existing marketing strategies and survive the intense competition. According to McGrath (2013), companies cannot survive while operating in domestic markets only; they need to expand in the global scene. According to Jagdev, Browne, & Brennan (2004), global marketing is being used by companies to gain a competitive advantage over their rivals. According to Rahman, (2008), global marketing refers to when managers and marketing department use various channels and techniques to reach customers in the international market. According to Jagdev, Browne, & Brennan (2004), globalization as a strategy to gain competitive advantage has led to the production of more quality goods and services due to the intense competition. According to Rahman, (2008), the blue ocean strategy is a new approach that is being used by companies to determine their place in the market and what can be done to improve the market position. Globalization has become most appropriate especially for manufacturing enterprises that target the markets in developing countries where there is a deficiency in manufactured goods (McGrath, 2013).


According to Lynch (2006) joint venture and alliances are among the modern business strategies to control most of the market and gain a competitive advantage. When companies join forces, they can combine resources, capabilities, and information thus leading to better production and marketing opportunities (Lynch, 2006). Companies that may not be involved in joint ventures are also applying methods like outsourcing and resource-based competition to reduce costs of operation. According to Rahman, (2008), outsourcing includes the alternative by a company to make a product instead of buying it, if its production is more expensive than ordering the product from another company.

Another major strategy is the ethics and corporate social responsibility which ensure order and discipline. According to Dwivedi (2010), the approach has been proven to improve a company's image and thus giving it favor over part of the market. Corporate social responsibility refers to initiatives taken by businesses to ensure that the environment is kept safe and that the welfare of the citizens is empowered (Jagdev, Browne, & Brennan 2004).

The internet analysis as a competitive strategy has evolved in the recent years, and many companies are now using e-commerce for part of their activities and operations (Dwivedi 2010). The internet has become a hub of business activities making the world look like a small village. Companies like the Amazon can reach market segments of customers all over the world and therefore gain a sustainable competitive advantage over other companies not using the internet for their operations.

Contemporary strategies for sustainable competitive advantage

Technological advancements and investment in innovation have become like a must do for companies seeking competitive advantage. According to Pattinson & Low (2011), technological investment not only provides organization better methods of production and marketing but also influences the cost structure of a company. This way a company that invests in appropriate technology can operate on economies of scale thus enhancing its position in the market and improving its chances in sustainable competitive advantage.

Michael Porter made a lot of contribution toward the achievement of competitive advantage (Leng & Hsu, 2015). The aim of this section is to analyze how the contemporary world has put these suggestions into practice and if the methods are useful. Competitive strategies require strategic planning and implementation (Dwivedi,2010). For this to happen, then the three foundations of Porter need to apply. The new trends in driving competitive position are diverse, but all converge at adding value to the customer goods and services, marketing channels and the overall production process so as to gain competitive advantage (Herschel, 2012).The trends can be categorized into value adding strategies, cost reducing strategies or both.

The stream of technological innovation continues and will continue to provide the companies with up to date technologies that enable the reduction of costs and also add value to the production process which in turn leads to the production of quality goods and services. Technology is also allowing for the development of online marketing which enables companies to access more customers and make more sales. According to Pattinson, & Low (2011), the major limitation with this strategy is that companies may not be aware of the most appropriate technology and may make random investments that may lead to losses since there will be little or no returns to investment.

The game theory as a strategy for competitive advantage is being used by companies to gain an advantage. According to Pattinson, & Low (2011), the game theory analyses the current trends in the market, and thinks ahead to the future whereby there is consideration of what the competitive market will be. The process is like a game of chess whereby a company checks their possible moves and those of the competitors and then assess which move is the most appropriate for a later win. This way a company designs techniques to emerge in a good market position. All that is required is that an organization should know the players, scope of competition, added values, and tactics and also be aware of the rules so as to be able to make the right move (Pattinson, & Low 2011). The main areas in the application of the strategy include research and development, new product innovation, pricing and advertising. By understanding the current and future trends of this then an organization can come up with a game changer that acts to their advantage. A limitation is that the process is complicated and may involve some risks since it is involved with mere assumption but if done correctly the results are expected to be fruitful

Joint ventures and strategic alliances

Hyper-competition is emerging as a trend in the modern world. According to Herschel, (2012), hyper competition is a strategy that has developed and which aims at destroying the competitive initiatives of a rival. Competition has become like a political game whereby some of the environments are losing the ethical professional practices and instead of working their way to being the most productive companies, they have opted to destroy that which makes a rival more competitive (Isik, 2013).

Supply chain management and retailer values are emerging as a trend in the competitive arena as some of the new methods of conducting supply and procurement have improved and this is enabling companies to be able to reduce their costs through effective bargaining and use of cheaper and convenient supply channels (Pattinson, & Low 2011). This strategy mainly applies to multi-national companies like Coca-cola which operate in most parts of the world and which require complexity in distribution.

Another emerging trend which is very common is the mass customization which involves the production of customized goods and services that are personalized using manufacturing techniques that allow for low costs and mass production. According to Hsu (2015), Customization involves making alterations to a product for it to suit consumption needs of a particular group. According to Li,(2014), there are four forms of customization, the first is collaborative customization whereby the company engages customers in talks aiming to find out their need and how they wish products would be designed to best suit their needs. Adaptive customization is involved in the production of one standard good that allows for flexibility and which can be customized to suit dynamic needs (Li, 2014). Pennsylvania's Lutron Electronics Company is an excellent example of a company with adaptive techniques since they produce customized light bulbs that are adjustable to give various forms of lamination since some of its customers believe that different lighting creates different moods (Netland, & Aspelund,2013). The colour of the light can, therefore, range from bright white to dark blue among others and is adjusted according to the required atmosphere. Cosmetic customization is where a company uses different advertising techniques to various groups according to the structure and composition of the group to create the desired awareness to all customer groups (Li, 2014). The Planters Company (Nabisco) makes various adverts in response to the different product demands.

According to Li, (2014), transparent customization is a move by companies to produce goods for specific markets without necessarily letting them know that the products are made for them. An example is Ohio's Chem Station that provides various soaps for different markets like soap for scrubbing floors in factory's and cleaning toilet bowls. Mass customization is enabled by well-established distribution channels and also the advancement in technology. Challenges with mass customization occur when a product is returned or when the supply chains are not efficient (Li, 2014).

Outsourcing

Nike is a company that has been employing globalization as a competitive advantage strategy for the last decade and more. Nike has made their foreign operations effective by participating in sponsorship and corporate social responsibility so as to gain favor over local citizens. The most common one is the sponsorship with Manchester United where they sponsored their matches and other necessities. Nike is located in over five continents and continues to prosper. In the past years, Nike has engaged in mass customization of their products so as to enhance the competitive position. The company is making customized shoes and products to satisfy the growing needs of customers and other businesses. The process has been a success though the initial costs of setup and operation were high. Returns to investment are expected to rise as the products gain more and more popularity.

Coca- Cola company is also a multi –national company that has had a competitive advantage in the market for a long time and whose products are distributed by almost every company in the world. No company has been able to outdo the goods and services of the enterprise. The company seems to have established a sustainable competitive advantage for itself.

The Google Company is an online service company that is popular among its users due to the production of customized services that include advertising, web design, and search engines all which are aimed to suit the needs of various companies. The company also gains an advantage over its rivals due to constant investment in technology and research which enables them to reduce costs of production and making production more efficient (Herschel,2012).

The business environment has evolved significantly since the days of Michael Porter among other scholars who contributed to the understanding of competitive advantage. The generic strategies by Porter that include gaining competitive advantage through techniques of lowering costs, differentiation and market focus (Pattinson, & Low 2011). The question to be asked is, are these contributions still valid or not in the contemporary world or has everything changed? Modern strategies to outdo competitors and acquire a favorable position in the market are based on the very foundation that Porter built. Many of the strategies aim at reducing costs and being unique while focusing on market segmentation to understand the needs of the various market components. Globalization, for example, is a strategy that aims at gaining competitive advantage as it allows focus on diverse groups in different countries (Hughes, 2001), through international operations a company can understand the nature and composition of the market and thereby establishes gaps in the provision of goods and services in which it invests. Mass customization is a new method which is also based on the focus and differentiation strategies postulated by Porter.

Ethics and corporate social responsibility

The mass customization is characterized by lowering costs and increasing mass production which is the theory of Porter (Stojkovic,Djordjevic,&Sajfert,2012). The use of technology aims  at improving means of production that allow for brand uniqueness or differentiation of products, marketing and also to lower the costs of production. The game theory is an emerging trend in the business world that involves making an analysis of the environment which is similar to the five-way model by Porter that describes the components of the market that affect the competitive position of the company (O'Shaughnessy,1996). Joint ventures and alliances are intended to collaborate resources and information so as to reduce costs and increase the scope of operation in an attempt to experience economies of scale. The principal aim of outsourcing is to buy products which the company deems expensive to produce, and thus Porters cost reduction is observed (Dwivedi, 2010).

Porter talked about value to customer initiatives which are what the latest methods are aiming at doing, providing customers the best value of goods and services to gain their loyalty (Alfadda, 2010). All these are strategies by companies to gain a competitive advantage by applying the basic ideas given by Porter. It is true to say that, yes, the theory of Michael Porter is still relevant to the business world since it provides a basis for companies to exploit and develop competitive strategies (Dwivedi, 2010). Porter made an excellent contribution in the five sources of competition for the business, and so the contemporary world has benefited since they know the value of studying the environment before they formulate a strategy.

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