Economics of Competitive Advantage

Economics of Competitive Advantage

Question Four: Creating and Sustaining Competitive Advantage

For firms to build competitive advantage, they primarily require a consistent focus on identifying strategies for differential products, obtaining distinctive technologies, constructing or remodeling core competencies, as well as the accumulating intellectual property. In essence, all these elements constitute an innovation, and they can then be coupled in a bid towards making firms successful in highly competitive markets. On one side, innovation helps create and sustain competitive advantage through value creation. In essence, through innovation, companies can achieve a rarity in their products, add to the products’ aesthetic appeal, or even allow the company to offer their products at a satisfactory and competitive price for what is on offer[ CITATION Dob10 l 1033 ]. On the other hand, firms can leverage technological innovation and their human resources to establish effective and efficient processes that enable the reduction of unit costs while also enhancing productivity.

Constant innovation also allows firms to construct a differential advantage that arises when a firm uses innovative strategies to produce goods or services that are different from those of the competition. Indeed, companies can also use innovation to offer products or services that are perceivably superior to those in an offer by the competition[ CITATION Reg14 l 1033 ]. In this context, innovation driving differential advantage for a firm can arise from superior strategies and personnel, more advanced technology, or through the protection of innovative processes or products by the use of patents. Such dynamics help in supporting large market shares and wide margins that help sustain the competitive advantage gained by a particular firm. For instance, Apple Inc. is well known for the production of innovative goods such as the iPhone while maintaining its market leadership by using innovative marketing campaigns that strengthen the firm’s leading brand.

Conclusively, innovation offers companies new approaches towards future consistency and sustainability in their business operations. As such, future-focused innovation also requires strategic planning as a crucial attribute. Mostly, well-designed business strategies typically use the supporting innovation as an implement for the enhancement of a firm’s competitive advantage in its industry sector. Strategic innovation, either cost or benefit, help in increasing the growth and profitability of a firm. For instance, by having the lowest costs linked to a firm’s provision of its products, the company can place its business in the unique position of charging its clientele the lowest market price hence adding more value for the customers. On the flip side, a firm’s provision of the most benefits in the sector aids in justifying the value and even the price of a product when compared to a competitor’s product. Indeed, firms can combine innovation and business strategy to cater for untapped markets or explore innovative industry platforms based on customer insights hence adding to their success in value creation for customers. Ultimately, innovation is used in combination with a strategy to create a positive association that leads to firms attaining their ultimate goal that is profitability.

Question 4 (b)

The ‘barriers to entry’ concept reference the factors that introduce difficulties or prevent new firms the entry to an existing market. The existence of these barriers results in the reduced contestability in a particular market and hence less competitiveness. In essence, the greater the entry barrier, the less competition that a market features. This barrier concept then gives rise to the concepts of ‘external obstacles to the entry of industry’ and the ‘internal barriers to entry of a firm’ that influence the sustainability of competitive advantage.

The external barriers concept consists obstacles that stand in the way of a business entering a particular market that, in essence, offer the already established firms in the market particular advantage over new entrants[ CITATION JBl03 l 1033 ]. These external barriers include, for instance, the economies of scale where an entry might demand large scale operations to be competitive. Product differentiation is also an external barrier where the unknown or untested products of a new entrant might be incapable of winning a viable market share due to existing customer loyalty to established brands. Vertical restrictions also pose an external barrier where critical component sources, raw materials, and channels of distribution are controlled by existing firms hence restricting input access and market outlets for new entrants. All these external factors play a role in limiting new entrants to industry the chance for establishing or even maintaining a competitive advantage.

The internal barriers concept, on the other hand, are economic factors that restrict the degree to which the competitive benefit of a particular firm in a particular market can be replicated or counterbalanced through the activities of other industry players. These barriers, for instance, include isolating mechanisms that are strategies, either legal, physical, or intelligence that allows a particular firm the value appropriation of a particular resource, service, or product[ CITATION Lep07 l 1033 ]. These mechanisms enable the firm to protect the particular resource from being copied and, in the long term, protects this product from value capture by the competition. As such, these mechanisms are strategic in that they afford a firm the chance to sustain its competitive advantage by generating abnormal profits. For instance, the Coca Cola Company has kept its cola recipe secret from its competitors with none being able to produce the distinct taste that Coca Cola offers. Indeed, even if the method can be recognized, this would be after an extended period of intensive research. Accordingly, competitors have refrained from attempting to discover the combination of ingredients used to come up with the distinct taste. Through this isolating mechanism, the Coca Cola Company has been able to sustain its competitive advantage for a long time.

Question Five: Critique of Porter’s Five Forces concept

Porter’s ‘Five Forces’ model of industry analysis is a framework usually employed in the examination and analysis of an industry’s competitive structure by considering five competitive forces that impact on and model the potential for profits in the industry. In essence, this model defines whether a particular industry is appealing or unattractive from a firm’s perspective as it competes in a particular industry[ CITATION JWi13 l 1033 ]. An appealing industry, according to this model, is one that offers the latency for profitability. Porter’s framework, therefore, considers the multiple aspects of the economic environment and competitive structure of an industry. These elements include the threats posed by new entrants; the industry suppliers’ bargaining power as well as that of the buyers; the threats posed by substitute services or products; and the rivalry intensity among the competing firms in the industry.

Porter’s five forces model describes an attractive industry as one that features a low level of threats posed by new entrants. It also features weak bargaining power on the suppliers’ side as well as on the buyers’ side. Continuously, the model posits that an attractive industry should feature a small threat with regards substitute services and products as well as a low intensity of competitive rivalry amongst the participating firms. Ultimately, Porter’s framework asserts that if the five competitive forces are maintained as per its descriptions, then the industry is attractive and features a potential for industry and firm profitability. On the flip side, if the characteristics of the five competitive forces are opposite where the threats and rivalries are high, and the bargaining powers are strong, the particular industry is considered unattractive and featuring limited potential for industry and firm profitability[ CITATION JWi13 l 1033 ].

Porter’s conceptual framework has some critical limitations with regards explaining profitability. For one, this ‘Five Forces’ model is not mathematics-based and cannot, therefore, be employed in the making of predictions. The model is also ambiguous and cannot explain the differences that are inherent to individual firms. It underestimates the impact that the individuality of a company has on its capacity for profitability with the assumption that the competition structure of the industry is the sole influencer of profitability. The framework also introduces difficulties in real world application in the context of the major multinational firms that feature interdependence and synergy that arise from the companies owning an assortment of businesses[ CITATION JWi13 l 1033 ]. The five forces models also misguidedly assume that different industry players cannot collude or cooperate in various industrial activities. The model also ignores the real world possibilities for the creation of new markets.

Recent theories such as the ‘Coopetition’ and ‘Blue Ocean Strategy’ offer more validity in explaining the actualities of the establishment and sustenance of competitive advantage in the real world as for offer more specificity and include more economic aspects that Porter’s model. For instance, where Porter’s model asserts the interaction of firms as a threat, the Coopetition model highlights the positives of some interactions that still maintain competitiveness in a particular market. For instance, businesses can come together to establish compatible standards that allow for market advancements but do not interfere with competition.

The ‘Blue Ocean Strategy,’ on the other hand, posits that new economies can act as platforms on which the creation of new market spaces can be achieved in response to existing economies that mainly feature fierce competition between incumbents. In essence, these recent theories take care to consider both the positives and potential threats that result from a particular economic force in the determination of industry and firm profitability. Accordingly, these recent theories work to fill in the gaps left unexplained by Porter’s framework as they complement the five forces model in considering other possible complexities of business and profitability in the real world. They expand the industry analysis offered by the five forces model to include a comprehensive consideration of the external environment.

Despite these obvious limitations to Porter’s conceptual model, its applicability endures to today as the framework still has strategic value for the business managers today. Indeed, the model remains a strong and relevant tool for undertaking a detailed analysis of an industry’s competitive structure. In essence, the five competition forces still prove useful in the formation of entry strategies and planning. The consideration of these factors can, in particular, help a firm in determining whether or not a particular market or industry is attractive or unattractive. As such, business managers of these firms can utilize the model to determine the viability of their entry into the said industry through their evaluation of the profitability potential. Porter’s framework can also be employed as a complement to the SWOT analysis of a particular firm in the context of a particular industry in which it competes with other firms[ CITATION JWi13 l 1033 ]. In this case, the analysis of threats posed by new entrants as well as substitutes though Porter’s model can be matched and compared to the threats brought out by the SWOT analysis. This comparison can help business managers evaluate how best to avoid or counter these threats to sustaining their firms’ competitiveness. An analysis of the bargaining powers of the suppliers and buyers can be undertaken with the consideration of the company’s strengths and weaknesses to determine how to improve and sustain a firm’s bargaining power and hence competitiveness.


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