Competitive Advantage

Competitive Advantage

 

Introduction

In this sternly aggressive business world, the goal of most firms is to establish distinctive or unique capabilities to gain a competitive advantage in the marketplace through utilising the most of their core competencies. Competencies refer to the fundamental knowledge owned by the firm (knowledge, know-how, experience, innovation and unique information), and to be distinctive they are not confined to functional domains but cut across the firm and its organisational boundaries (Lowson, 2002). Having a competitive advantage is having a difference, the choice of certain activities to deliver a unique value-mix to a selected market, thus the ability to perform particular activities and manage the linkages between activities is the key source of competitive advantage. The strategic task, then, is to create a distinctive way ahead, using whatever core competencies and resources at its disposal, against the background and influence of the environment. Through these distinctive capabilities the organisation seeks sustainable competitive advantage. Competition in many domestic and international markets appears to be entering a new phase, in which product quality and performance are becoming more important to customers than price. In such markets, the effective management of the new product development process is the essence of competitive advantage.

            In the paper of Brown & Wurth (2005), Joseph Schumpeter stated that business firms constantly face highly competitive global markets, diverse customer expectations, and rigid market demands. To gain competitive advantage, business firms must be able to produce better outputs and distribution channels. This means that companies must innovate in a more scaleable and efficient manner than their competitors (Brown & Wurth 2005, p. 9). Schumpeter points out that the major function of the entrepreneurs is to innovate, not just by crafting new inventions, but also by discovering better means of production, new products and forms of organisations; opening up of new markets, acquiring new sources for raw materials, reorganising the industry, and encouraging the manpower to suggest changes while delivering new and better outputs (The Concise Encyclopedia of Economics 2002; McKee 1991, p. 2). To cite some examples of business innovations, General American Life Insurance Company in Cupertino, California, has selected Chordiant’s Software Incorporated’s e-Business infrastructure software as part of the customer service e-commerce program to improve customer satisfaction. The program will substantially reduce operating costs, enhance customer tracking while streamlining transactions, and act as a foundation for future e-commerce efforts (M2 Presswire 2000). Also, Regal Wares as reported by Porter (2000) plans to use faster bread machines as a way to step up electric sales. Regal Ware is the first company to introduce a bread machine that bakes a loaf of bread in under an hour, an innovation that has helped the company garner a strong position in bread machine sales (p. 1).

            Schumpeter’s model has been praised for its study of innovation and how it helps business firms to deal with economic, organisational, technological, and institutional changes. His model recognises the capacity of change in altering market systems. He also conceived the innovative role of the entrepreneur in a broad context by tackling innovation in processes, products, sources of raw materials, markets, and organisational culture. Schumpeter’s model has been very influential in making innovation a central process for economic growth as it drives rise of technologies, enhancement of skills, improvement in economic processes, and consistent accumulation of important market knowledge (Advances and Challenges 2005). However, Witt (2002) argues that Schumpeter failed to achieve a satisfactory and conclusive theory explaining economic change. His theory is largely focused on the role of the entrepreneur and the business cycle which is characterised by change, crisis and success. His arguments failed to depart from the entrepreneur as a potent force of economic evolution to encompass the larger scale of the evolutionary economic process (pp. 1, 13).

               In regards to the above discussions, this paper attempts to evaluate the competitive advantage of two companies (i.e. PCCW Limited and Nextel).  Basically, the said company plays an exceptional role in their respective industries. Actually, PCCW Limited is the largest telecommunication enterprise in Hong Kong, and have been listed on Hong Kong Stock Exchange since October 18, 1994 (‘PCCW’ 2006). The company is also one of Asia’s leading competitors in Information and Communication Technologies or ICT (‘Company Profile of PCCW-HKT Limited’ 2007). On the other hand, Nextel is the main provider of the fully integrated wireless communications services has made some strategies in order to achieve its goals. Nextel’s varied products and services offer unrivaled drivers for success (‘Nextel Company’ 2004). However, the demands of its competitors enable them to create certain moves and strategies to counteract its competitors.

 

Discussion

The most dominant strategic management paradigm in recent years is known as the strategies model (Fredrickson 1991). Porter (1998) claims that the intensity of competition in an industry is neither a matter of coincidence or bad luck. Rather, competition in any business industry is rooted in its underlying economic structure and goes well beyond the behaviour of current competitors. The state of competition in an industry depends on five basic competitive forces. The following discussion illustrates the five basic competitive forces in the two companies.

Figure 1 – The Five Factors or Forces Affecting Competition in an Industry[1]

Analysis using Porter’s 5 Forces Model of Competition

            The model of pure competition suggests that risk-adjusted rates of return should be stable across firms and industries. Nevertheless, a number of economic studies have asserted that different industries can sustain varied levels of profitability, through knowledge of the structure of the industry. With this, Porter’s 5-Forces Model is useful for understanding the context of the industry, in which the firm operates (‘Porter’s Five Forces’ 2006). 

 

      Rivalry

In PCCW, this is caused by several factors, such as the presence of a larger number of firms that compete for the same consumers and resources; low switching costs for a consumer can switch from one product to another; strategic stakes are high when a company is losing market position; a diversity of rivals with different histories, cultures, and philosophies; and industry shakeout (‘Porter’s Five Forces’ 2006).

Similarly, Nextel also faces this factor since they have a lot of competitors like Verizon Wireless, Sprint PCS, Alltel Corp. and others.  In order to gain an advantage the company has to do some competitive moves. Basically, Nextel caters to 95 percent of America’s Fortune 500 companies, that helps corporations and government enterprises add value, through Nextel Wireless Business Solutions and Customer Network Solutions.  As competition seems to be very high in the wireless-telecom industry, so does the fight for high-value, the customers in particular.  Nextel is determined to gain more of these valued customers. According to Hamilton, global wireless group director of Strategies Group, Nextel posses’ very high average rates per user (ARPUs), and an estimate of a month. It can be compared to an industry average of approximately .24 a month (Young). Its strategic elements are a very effective way to compete with their rival companies.

 

      Threat of Substitutes

Substitute products refer to products in other industries (‘Porter’s Five Forces’ 2006). The threat to PCCW is the price of the materials being used in order to render service to consumers, which include cables, telephone lines, and many others.

In accordance to the threat of substitutes in Nextel, Nextel completely manage this factor to attain business success. Nextel, in its commitment to customers in the wireless world, demonstrates value and return on investment. In fact, its business users comprise 90 percent of Nextel customers. When they produced the Nextel 2.5G nationwide network, it presents an unequalled benefit over other wireless competitors, that most likely run “custom data applications” for specific industry segments. The focus on key industries permits Nextel to locate customer needs. Collaboration with market-leading partners—such as IBM, EDS and Microsoft—also allows Nextel to offer distinctive solutions and improve the way business gets done.  Nextel, in its pursuit to become unique has to be flexible in their product innovations and consider the substitutability of different types.

      Buyer Power

This refers to the impact that customers have on a producing industry (‘Porter’s Five Forces’ 2006). In Hong Kong, buyer power is strong, such that this could provide PCCW’s rivals with a strong and efficient business.

In Nextel environment, the buyer power is the impact that customers have on a producing industry.  According to Paul Saleh, Nextel’s chief financial officer, Nextel’s in the No. 1 rank on customer satisfaction surveys that proves its growth in customers (Pearlstein). Its buyer power is also strong (‘Nextel Company’ 2004).

 

      Supplier Power

The power of suppliers over PCCW is also strong, as it also contributes to the decline of the business of the company. Due to the increase of prices in the market, prices of raw materials also increases, thus, give additional costs for the company.

In the case of Nextel, when it built its wireless network, Motorola has been its exclusive partner.  A producing industry requires raw materials and other supplies.

 

      Barriers or Threat to Entry

Threat to the entry of PCCW to the Chinese market is due to China’s preference of being not involved with any company related to the Singapore government. Another barrier to the company’s entry to the Chinese market is also brought about by the lack of development in the entire East Asia, which failed to accommodate the needs of company.

In Nextel’s situation, when they’ve set themselves at a profitable market, many of its competitors try to enter the market to take advantage of the high profit levels. A lot of barriers to Nextel’s future growth would be from its external environment, the government; patent’s and proprietary knowledge serve to restrict entry into an industry. When Nextel’s competitors imitate their ideas and knowledge in their product creation, it creates a barrier to an entry.

 

Conclusions

As discussed, the knowledge of the underlying sources of competitive pressure highlights the critical strengths and weaknesses of the two companies, animates its positioning in its industry, clarifies the areas where strategic changes may yield the greatest payoff, and highlights the areas where industry trends promise to hold the greatest significance as either opportunities or threats. Understanding these sources will also prove to be useful in considering areas for diversification, though the primary focus is on strategy in the industry. Structural analysis is the fundamental underpinning for formulating competitive strategy and also applies to diagnosing industry competition in any country or in an international market, though some of the institutional circumstances may differ.

Experience shows that opportunities or threats can arise from many different sources (Jackson & Dutton 1988). Thus, obtaining information about several different sectors furnishes the CEO with more relevant information in aligning the firm’s competitive strategy with environmental conditions (Nutt 1984). Moreover, in investigating rivals’ operational processes, a firm may learn of new and improved methods and processes that allow it to remain competitive. Thus, securing information across several environmental sectors may enable a firm to gain competitive advantage or maintain its market position.

According to Davies & Lam (2001), although the five forces approach provides sound theoretical basis and allows systematic analysis, it has the disadvantage of not providing how to measure and weight the many different components which determine each of the forces. Also, it is only possible to make an unambiguous judgment on the strength of a force if all the indicators ‘point’ in the same direction. If indicators contradict each other, there is the problem of how to balance them.

The five competitive forces – suppliers, buyers, competitive rivalry among firms currently in the industry, substitutes and potential entrants to the industry – reflect the fact that the competition in the business industry goes well beyond the already existing chains. Customers, suppliers, substitutes, and potential entrants are all ‘competitors’ to firms in the industry and may be more or less prominent depending on the particular circumstances (Porter 1998). All five competitive forces mutually establish the amount of industry rivalry and profitability, and the strongest force or forces are prevailing and becoming decisive from the point of view of strategy formulation. In the case of these businesses, even them who have a very strong market competition in the industry where entrants have little or no threat will earn low returns on their profits if it has to face a superior quality and lower-cost alternative.

The strength of the competitive forces in an industry determines the degree to which the inflow of investment occurs and drives the return to the free market level, and thus the ability of firms to sustain above-average returns. ‘The underlying structure of an industry, reflected in the strength of the forces, should be distinguishable from the many short-run factors that can affect competition and profitability in a transient way’ (Porter 1998:3). For instance, variations in the economic environment over the business cycle manipulate the short-run productivity of the business industry, as can material deficiencies, strikes, and the like. Although such factors may have strategic implications, the focal point of the analysis of industry structure is on categorising the basic, fundamental features of the industry rooted in its economics and technology that shape the arena in which competitive strategy must be set (Porter 1998).

 

Recommendations

            The general, long-term development of these businesses is one characterised by a series of evolutionary periods that at times can best be described as revolutionary in nature (Neumann, E. & Sumser, R. 2002). In line with this observation, PCCW Limited and Nextel need to constantly be on the lookout for strategies which would help in maintaining their market leadership. Problems in the industry today appear from so many angles, at so many levels and in so many directions that their pursuit without a regular path will soon become lost in details. Porter’s five force model will help any organisation determine the direction in which they are going to take through an analysis of the five forces: suppliers, buyers, competitive rivalry among firms currently in the industry, service substitute and competitive entrants to the industry. Using this tool, PCCW Limited and Nextel, as well as other firms, is challenged to understand an industry’s profit potential and the strategy necessary to establish a defensible competitive position, given the industry’s structural characteristics. Overall, the communication and technology industry in which these two firms belong is a highly attractive industry which contributes a large share of the total profits. With the intensity of rivalry kept in check by the business giants, high threat of industry entry, low supplier and buyer power, prospects for business holds much promise.

All things considered, there is still no substitute for good management in the strategic positioning and implementation process of PCCW Limited and Nextel. That means:

Ø  targeting markets that are large and growing and increasingly concentrated, where the firms has a shot at being one of the dominant players;

Ø  knitting together those markets that extract the maximum value from scale and scope linkages that may exist.

Ø  setting up change management teams to handle the change management aspect of the potential alliances.

 

Total Word Count: 2, 499 words

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[1] Adapted from Porter (1998).

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