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Competitive Advantage and International Business
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Competitive advantage and international business
Hello and welcome to today's seminar. Today is a two part seminar that covers two of the hottest and most sort after business topics. These are competitive advantage and international business. Many of you may have heard about these two terms but may not know what they mean so I will start by defining these two terminologies.
Competitive advantage can be defined as the advantage which one company or organization has over and above what its competitors have. It is the advantage that one company gains above another by offering consumers greater value.
How does value creation lead to competitive advantage?
When talking about competitive advantage, we have mentioned value. So how exactly does value come in? The company or organization needs to create a certain value in the market. Value refers to the perceived benefits of the product or service by the end user or customer. To increase the value, the company increases the benefits of the product or service to its customers. Value can also be increased by lowering the cost of the product Arend, 2009.
To reduce the cost, the company must find a way to use its available resource effectively and efficiently in order to achieve the lowest cost of production Chen & Edgington, 2005()
The creation of value is affected by the ability of the firm to create and capture value which depends on how strong the competition is. Therefore there is a direct relationship between value and competitive advantage. By increasing the value of the company's product or services, the company increases its competitive advantage. To increase its competitive advantage, a company must be involved in product innovation, process innovation or innovation of the transaction itself. All of these innovations increase the value of the company's products and services which in turn improves the company's competitive advantage Saeed, Grover, & Hwang, 2005()
How does a company gain competitive advantage?
Competitive advantage is gained by the company by offering consumers products or services that have greater value than the competition by applying one of the Porter's generic strategies. The Porter's generic strategies are a set of three distinct strategies which a business entity can choose to follow. The first is that of cost leadership whereby the company prices their products as low as possible. This strategy is used by companies producing standard products which try to meet the needs of a larger market share. The company thus prices its products or services on the lower side in order to gain small profits from a large amount of sales rather than large profits from a small number of sales. This is the strategy that has been used by companies such as Virgin Air, Aer Lingus and Ryan Air which are known to be low cost airlines. The second is that of differentiation where the company offers a product or service that has greater value to the consumer. This allows the company to apply a premium pricing policy since the price is used to reflect on the added value of the product or service and the higher production costs that are incurred in providing these differentiated products. This is the strategy that has been used by companies such as Mercedes and Bang & Olufsen. The last is that of niche marketing whereby the company chooses a particular market niche to which it tailors its products and services. This strategy has been used by various companies such as specialist holiday tours and travel companies, gift shops, perfume shops, etc. These companies focus their strategy on a particular product or market niche M. Porter, 1980()
How does the price elasticity of demand affect a firm's strategic positioning for competitive advantage?
The profitability of a firm depends greatly on the economies of the market in which the firm operates. The success of the business in creating more value than the competition also greatly influences the profitability of the company. The price elasticity of demand is extremely important in the strategic positioning for competitive advantage. Horizontal differentiation is likely to be strong when there are many product attributes which the consumer can weigh and assess the overall benefit. This means that lowering the price or increasing the value of the product will attract more customers Grant, 1996.
However, others will not switch unless the differential created by the change in price or quality is large enough.
The company can decide to use the margin strategy where it profits from its cost advantage majorly through a high-price cost margin rather than through having a higher market share. When the horizontal differentiation is weak, the company will use a share strategy whereby it underprices its products in order to gain market share at the company's expense. However, many companies use a combination of the strategies. This mixed strategy involves cutting price in order to gain market share while at the same time making profits from cost advantage through having higher profit margins Yeung, 1996()
What factors and strategies allow a firm to sustain competitive advantage?
Sustained competitive advantage is what a business needs in order to survive against the ever-growing competition over a long period of time. There are various factors and strategies through which a company can sustain its competitive advantage. One is by building a strong brand Wiggins & Ruefli, 2002.
A good example of this is the Virgin brand which is synonymous with low cost items and is well-known all around the world. A second strategy is that of having a strong organizational culture that is focused on the organization's core strategy. For example Apple which has an innovation culture which is focused on the company's core strategy of differentiation. Strategic HRM which focuses on utilizing the company human resources effectively and efficiently is also another strategy that can lead to sustained competitive advantage Collins & Clark, 2003(; Ferligoj, Prasnikar, & Jordan, 1997)
. A good example of failure can be seen in the Miller IT company which failed to manage its human resources effectively and thus failed to gain sustained competitive advantage. The company ended up paying the price for this by going bankrupt.
Multinational corporations are those companies or organization which are operating in more than one country and are duly registered. Usually, they have their headquarters in one country but the structure of the company allows a somewhat decentralized management. These companies usually include both horizontal and vertical economies of scale.
Additional risks and opportunities faced by multinational corporations
The multinational corporations face an additional risk that is brought about by fluctuations of currency exchange rates. As a result of the company decentralizing its manufacturing facilities and operations to the other countries, it is affected by changes in currency rates whereby the company can experience problems in optimizing various aspects such as price and marketing strategies. The company must therefore heavily invest in human capital and innovative solutions to help it survive amidst these currency fluctuations.
A second risk is that of political interference. As a result of the multinational companies expanding to different political structures, there can be interference by the politicians. This is where the company is forced to comply with certain measures in the new market. For example, the local companies may try to use political interference to prevent the multinational corporation from gaining significant market share. Multinational companies have been greatly criticized for undermining the local culture through providing cheaper alternatives and this is one of the major sources of political interference. Doukas & Lang, 2003()
Despite these risks, multinational corporations also experience certain opportunities for growth. The first opportunity comes from the ability of the company to reduce its cost of production. The company can analyze the production costs of certain products and optimize its operations to achieve the lowest cost of productions Doukas & Lang, 2003.
A good example is a computer manufacturer who may find it to be cheaper to produce microchips in one country then import them into others. Therefore, the multinational can be able to apply a cost leadership strategy as a result of optimization of cost of production. A multinational corporation is also able to benefit from other factors such as low cost of labor which can significantly lower the cost of production.
Strategies that can be used by a multinational corporation to take advantage of the opportunities described
In order to take advantage of the opportunities described above, the multinational can decide to apply the gambler's earnings hypothesis. This is an attempt to explain the phenomenon of investing profits received from the foreign investments into other foreign subsidiaries. The investor keeps reinvesting in the current opportunities rather than scanning around the world for more opportunities. This ensures that the company builds its current opportunities till they are large enough to be self-sustaining before they invest further.
Secondly, the organization can use Porter's idea of clusters. This means that the company should promote cooperation and competition by…[continue]
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