How to find your Competitive Strategy and What’s its Impact on Profitability?
Know Your Competitive Advantage
Competitive advantage can be defined as “a capability (or set of capabilities) or resource (or set of resources) that gives the firm an advantage over its rivals which ceteris paribus leads to higher relative profitability.” If a company wants to conduct a well-performed competitive strategy, it must know what its competitive advantage is. According to Robert Grant, competitive advantage refers to a firm’s ability to outperform its rivals (Grant, 2019). We can almost recognize competitive advantage when we see some brands: Walmart in discount retail; Google in online search; and IBM in B2B technology services. It could be a firm’s potential to earn a higher rate of profit than its direct competitors. So how is competitive advantage established? How can companies find their own competitive advantages and use them in competition? It relates to both internal and external factors.
Internal Factors
For internal sources of competitive advantage, the most important element is an innovation which means business model innovation. Since McKinsey said, innovation is increasingly important in driving corporate growth, especially in this technological revolution time (Jong et al., 2021). And business model innovations can be classified in different ways. In the IBM 2006 Global CEO study, they identified three generic types (Giesen et al., 2007):
New industry models: This strategy involves rethinking the "industrial value chain." This may be performed by horizontal expansion into new industries, as Virgin has done with its expansion from its music and retail roots into areas as diverse as airplanes, trains, drinks, financial services, and so on, utilizing its excellent customer management abilities. It may also be performed through reinventing existing industries, as Dell has done by removing intermediaries and going straight to customers, and as Apple has done by giving music to users directly via iTunes.
New revenue models: This approach requires reorganizing offerings (product/service/value mix) and/or adopting new pricing structures to change how businesses make income. This is a dimension that makes use of the customer's experience, choices, and preferences, as well as new technology. Gillette's tactic of underpricing razors to sell razor blades is a famous example of a pricing innovation.
New enterprise models: This strategy requires rethinking the enterprise's structure and the role it plays in new or current value chains. Redefining organizational boundaries is the emphasis of this dimension. Zara, for example, handles design from concept to completion, providing feedback loops from shop data back to designers to production. Specialization, in which firms focus on core capabilities or high-margin operations and outsource the rest, is another way to achieve enterprise model innovation. For example, Bharti Airtel, an Indian telecoms firm, concentrates on marketing, sales, and distribution while outsourcing the majority of its IT and networking services to third parties. Finally, enterprise model innovation can be accomplished via network plays, wherein companies rely on external collaboration. For example, to improve the whole coffee-drinking experience, illy coffee has collaborated with various other firms throughout its value chains, such as coffee-maker manufacturers and others.
Apart from that, there is an alternative internal approach called the Blue Ocean Strategy which can identify the potential for strategic innovation. Blue ocean's strategy includes a quest for “uncontested market space” (Grant, 2019). Creating untapped market space doesn’t necessarily require finding new market opportunities well beyond existing industry boundaries, blue oceans can also be created within existing value/cost trade-offs. One method is to mix performance characteristics that were previously thought to be incompatible. As a result, Virgin America provides low tickets typical of budget airlines, as well as superior in-flight facilities than most legacy carriers. Offering greater customer value by harmonizing low pricing with distinction is a recurring theme in many blue ocean strategies.
External Factors
For external sources, it creates competitive advantage when they have differential effects on companies because of their different resources and capabilities or strategic positioning (Grant, 2019). It could be change of customer demand, change of prices, or change of technology. Resources heterogeneity among firms creates winners and losers. Some firms are faster and more effective in exploiting change. The arise of COVID-19 could the perfect example. The pandemic let many traditional-based companies shut down their physical stores. The restaurant, travel, retail, and sports and arts industries have been strongly impacted by the pandemic. They are facing a huge decline. On the other hand, the COVID increase the growth of technology, healthcare, and makeup and skin care industries. People are using Zoom for remote work and study. Estee Lauder’s net sales has increased by 13.4% compared to 2020 (Estee Lauder Co., 2021). Thus, the greater the magnitude of the external change and the greater the difference in the strategic positioning of firms, the greater the propensity for external change to generate competitive advantage, as indicated by the dispersion of profitability among the firms within an industry. The competitive advantage that arises from external change also depends on firms’ ability to respond to change. And external change creates entrepreneurial opportunities that will accrue to the firms that exploit these opportunities most effectively. It involves two key capabilities:
Anticipation: The birth of the mainframe, the rise of personal computing, the advent of the internet, the migration of value from hardware to software and services, cloud computing, big data, and quantum computing are just a few of the major shifts in the IT sector that IBM has demonstrated a remarkable ability to anticipate and then take advantage of over its 100-year history. Hewlett-Packard, on the other hand, has been less good at identifying and responding to these shifts.
Agility: As markets grow more volatile and unpredictable, quick-response capability has become more valuable as a competitive advantage. Information is required for quick answers. Companies are increasingly relying on "early-warning systems" through communication with consumers, suppliers, and rivals, then compressing their cycle times so that information can be acted upon quickly since traditional economic and market forecasting has become less successful.
