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Competitive Advantage: Sources of Competitive Advantage

Introduction

According to Porter (1998, p.2), Competitive advantage is the ability of the firm to maintain its strong position against its competitors and continue making profits. Competitive advantage is gained by a firm that can beat its rivals in profitability. According to Porter (1998, p.2), cost advantage and product differentiation advantage are the main types of competitive advantage of the firm. Cost advantage exists when the firm can offer the same quality as competitors but at a relatively lower cost. Differentiation advantage on the other hand is possessed when the firm is able to deliver quality services to the customers that exceed that of the competitors. Competitive advantage therefore enables the firm to deliver superior value to its customers and make superior profit for itself in a market where there is fair competition (Porter 1998, p. 3). The two terms can be referred to as positional advantage describing the position of the firm in its industry in delivering value at lower cost. A firm uses its resources and capabilities to build up competitive advantage in its industry.

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In this assignment, competitive advantage is discussed in the context of aero engine and global retailing markets. The assignment seeks to compare and contrast the competitive advantage in aero engine and global retailing markets. The aero-engine market deals with aero engines that provide impetus for aircraft or enables the aircraft to propel. Global retailing market refers to the market dealing in the sale of products on retail basis. This is currently dominated by supermarkets with Wal-Mart supermarkets in US taking the lead.

Global retailing markets – according to the Office of Fair Trading (2006, chap.2), the global retailing markets are basically dominated by supermarkets. Wal-Mart supermarket in the United States is the market leader in the retail market worldwide. There has been stiff competition that has compelled the retail market participants to look for means of increasing their competitive advantage. According to Open2.net. (2005, p.1), retail markets strategy for competitive advantage aims at building sustainable competitive advantage. These strategies may build more or less sustainable competitive advantage.

Sources of more sustainable competitive advantage

Location of the retail companies – according to Competition Commission (2000, p12), this is one of the most important sources of competitive advantages in retail markets. Where the firm has a high density of stores, it is able to create awareness to the people about their products. It dominates a place by installing many stores thus making it impossible for competitors to enter the market because they cannot find a good place to locate themselves. People around will only know the company that has many stores in their area. The other rivals will find it hard to venture into the market because there is no space left for them.

The other source is customer loyalty – according to Frontier Economics (2000, p. 9), customer loyalty goes beyond liking one retailer to another to include customers being reluctant to support and shop from the competitors. Customer loyalty in the retail market is built through creating a strong store brand that will win the confidence of the people. It can also be built by coming up with a clear and concise positioning strategy that will help cover the market fully. Customer loyalty programs are also used to build customer loyalty. These programs create emotional attachments with the customers and make them have more confidence in the company. The main approaches to achieving customer loyalty are location, unique positioning, excellent customer service, unique merchandise and having a database with information about customers like what they buy, when they buy, how much they spend and how much they spend and so on.

The other source of competitive advantage is the ability of the company to offer excellent service to the customers. As stated by Chandler & Paalzow 2006, p.5), delivering high-quality customer service helps build competitive advantage. The customer service executives need to be qualified and highly trained in order to deliver quality service to the customers. They should not be overworked. Giving them high wages and training them does not guarantee the customers quality service. The working environment is made conducive in order to motivate them. They should not be expected to work like machines because they are not them. A company that treats its retail sales associates well gains competitive advantage because it will deliver quality service to the customers (Porter 1998, p.9). For retail businesses like supermarkets, their employees are also their customers. They should therefore be treated well as customers and employees.

Exclusive merchandise is the other source of competitive advantage for retail markets. The products of the company should de of good quality and apt to the customers. When the customers are satisfied with the commodities of one retailer, they always buy from that retailer and not from the competitors. Customers will believe that the retailer’s commodities are the best. This is a competitive advantage that the retailer will enjoy continually if they maintain excellent merchandise.

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The other more sustainable source of competitive advantage is the low-cost supply chain management of the retailer. If the supply chain management is consistent with low cost, the retailer will be able to charge a relatively low price. This will create a sustainable competitive advantage over the retailer’s competitors. Customers will always buy where they are charged a low price for quality products.

A company that has a strong information system will have a more sustainable competitive advantage. A good information system ensures efficient flow of information from the vendors to the retailer stores. It enhances distribution of commodities from the vendors to the stores where customers can fetch them. A good information system is also cost-effective, ensures better services to the customers and will result in reduced cost of the product. Customers are also assured of getting commodities from the retailer any time they want them. A firm whose formation and distribution system outdoes that of the competitors will have a competitive edge over them. Customers will enjoy reduced prices and the retailer will make more profits because of the reduced cost of commodity distribution.

There is also strong buying power with vendors or strong relationships with the vendors. According to Paglucia (2006, p.2), a good relation with vendors improves efficiency through proper coordination and low costs associated with it. It can be enhanced through Electronic Data Interchange and collaborative planning and forecasting to mitigate inventory and distribution costs by ensuring on-time delivery. This will translate in to company charging low prices thus defeating the competitors in market share. Proper coordination with the vendors will also ensure sale of desirable brands. It would offer the retailer special treatments like early delivery of new styles in order to satisfy customers.

The other source of competitive advantage possession of committed employees who are committed to serving the customers the best way they can. Employees play a major role in building up a sustainable competitive advantage. The human resources management should aim at recruiting and retaining talented employees who are capable of serving the customers better and handle their complaints professionally. Organizations develop organizational culture that ensures the best employees are inducted (Davis 2006, p.12). Firms with the best employees have a competitive edge over their competitors.

Less sustainable competitive advantage-main sources

These may include better computes, more merchandise, lower prices, more advertising, cleaner stores, more employees and more promotions among others (Paglucia 2006, p.1). Most of these sources are a result of sources of more sustainable competitive advantage. Price is the key in all these sources. Other factors may not build up competitive advantage if high prices are still charged. They complement low prices.

Sources of competitive advantage for aero-engine markets

According to Buxton and colleagues (2006, p.12), this market is quite different from the retail market in some respects. Retail markets mostly deal with manufactured products but the aero-engine markets have manufactured as the key players. The products in this market can be substituted for the other. So if one company raises the price of its products, consumers will buy from the competitors an alternative product that will serve the same purpose. Most of this industry is publicly owned as opposed to retail markets that are basically owned by private sectors. There is therefore government intervention in aero engine market. Managers in this industry form competitive strategies based on some factors. These factors guide the managers on the strategy to take in order to maintain the firm’s competitive position in the market (Bramham et al 2004, p. 2). These factors include close substitution of products, customers’ bargaining power, the vendors’ influence, and the threat of new companies joining the industry among others. These forces are the ones that assist in developing competitive strategies. The competitive strategies adopted by a company are the sources of competitive advantage (Open2.net 2005, p.1).

When a company in this industry possesses a strong base of loyal customers, it will have a competitive advantage over others. Customer loyalty is built by satisfying the customer’s needs and desires that make them comfortable in buying from that company. The company also has to strategize on how to deal with high bargaining customers so as to satisfy them without hurting the company’s profitability. This is because these customers can cause the prices to go down because of their bargaining power. The company needs to have salespersons with high negotiation skills to deal with these customers.

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The suppliers of some products in the industry can affect the company’s competitive position in the market. This is because they can raise the price of materials and can also reduce the quality of products. The firm creates competitive advantage in this case by choosing suppliers that will charge a fair price and supply quality products.

Another source of competitive advantage where a company pursues exclusivity links to the distribution networks in order to shut out competitors’ products. Buxton and colleagues (2006, p.9) stated that this takes the form of the firm buying off the main distributor in the industry thus shutting out rival products in the industry. The rival companies will lack materials to manufacture some products.

The other source of competitive advantage is restricting new entrants from joining the industry. This is where a firm defends its competitive advantage by restricting proliferation of business entities in the industry. This is done by imposing large financial requirements, economies of scale and product differentiation all aimed at locking new firms out of the industry. The firm maintains its competitive advantage if no new companies join the market. New companies if allowed into the industry will increase competition and make old firms lose their strong position in the market.

According to Doganis (2005, p.11), Accumulation of experience by a firm is another source of competitive advantage. This is where a firm has vast experience in making a certain product. The firm is therefore able produce quality products faster than others in the industry. Customers will therefore prefer such an industry because they will be able to get what they want faster than in other companies. The firm is also able to produce at a low price than others because of efficiency. With this low cost of production, the firm will charge a relatively low price than others. This gives the firm a competitive advantage over others in that industry. Experience is therefore a source of competitive advantage.

Economies of scale are another source of competitive advantage. A firm that is able to produce in large quantities than others has a competitive edge over others in the industry. Producing in large quantities means that a firm is able to serve more customers than others depending on the size of the market. There is also the low cost associated with large volume production. Low cost of production will enable the firm to charge low prices in the market than other firms for the same product. This means the firm will fetch a bigger market than others. Economies of scale can make the firm become both market and price leader (Doganis 2005, p.10).

The other source is investing in intellectual property by a firm. This is done through use of patents and other legislative protection to protect the brand. Companies can tend to duplicate other company’s products. Patents will serve at protecting the company’s investment in a certain product. Companies will not duplicate a patented product. This gives a company a competitive advantage in that it is the only one that produces certain product or brand. Others can only produce a similar product but with a different name and some specifications that are covered under the patent.

Another source is where a firm dominates a niche market leaving no room for others. In this case, the firm captures the whole market in a certain region and makes it hard for others to venture. This strategy alone may not give the firm q competitive advantage over others. This is because other firms can come in, charge relatively low prices for the same product and win the market Liehr et al 2001, p.16). A firm applying this strategy to win the market must also be prepared to lead in other respects like price.

The other source of competitive advantage in aero engine markets is pursuing strong branding and brand maintenance. This calls for heavy investment in advertising in order to maintain brand strength. This strategy must be complemented with other factors because other firms can also advertise their products. The company must be more strategic to beat others in advertising; in terms of where to advertise and how to advertise.

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According to Ibisworld.com (2010, p.1), superior technology can also cause the firm to have a competitive advantage over others. Technology enables the form to be more efficient in its operations both production and management. The firm’s level of technology employment stands it in good stead in a competitive environment. Efficient application of technology gives the firm a competitive edge over some other firms in the industry. Technology can also be used to lower to produce products at a lower cost than otherwise. Low cost of production will mean relatively lower price of the product in the market.

There is also customer focus as a source of competitive advantage. This entails recognizing customers with specific needs and serves them as appropriate (Kotelnikov 2001, p.18). Customers are the main target in every market because they are the core reason for the company’s existence. They are the consumer of the company’s products. According to David and colleagues (1991, p.13), companies have therefore to direct their focus to the customers who will buy their products and help them recover their cost of production. For instance, Aero-engine companies like UK’s Rolls Royce spend large amounts of money in research and development and they have to look for means to recover them. This company and others like US’s General Electric have to look for a big market for their engines. This is the only way for them to recoup the costs incurred. The purchasers of expensive aircraft and companies have to look for market internationally. A customer focussed firm will have a competitive advantage over others.

Conclusion

The two markets, the global retailing market and aero-engine market have most of sources of competitive advantage similar. The only big difference is that price reduction as a source of competitive advantage differs because the pricing strategy of aero-engine markets is influenced by macro factors like government intervention. In retail markets, there is no government intervention. Customer focus sources will also differ in that retail markets mostly have customers with similar needs and desires but aero-engine markets have some customers with specialized needs.

Reference

Buxton D., Farr R. & McCarthy B. 2006. The aero-engine value chain under future Business environments: using agent-based simulation to understand dynamic behavior. Nottingham, Nottingham university business school.

Bramham J, Er W, Farr R, McCarthy B. (2004). Preliminary description of the future aerospace business environment. Nottingham, Nottingham university business school.

Chandler M. & Paalzow A. 2006. Competition in Baltic grocery retail markets. Baltic, Baltic International center for economic policy studies.

Competition Commission. 2000. Supermarkets: A report on the supply of groceries from Multiple stores in the United Kingdom. London, competition commission.

David W., Cravens W. & Shannon H. 1991. Find articles.com. Market driven strategies for competitive advantage. Web.

Davis, P. 2006. Spatial competition in retail markets: movie theatres. Santa Monica: The RAND Corporation.

Doganis, R. 2005. The airline business, 2nd edition. New York, Routledge

Frontier Economics.2000. The price of beans: the Competition Commission inquiry Into supermarkets. Frontier Economics Bulletin 2000. Sydney, Melbourne: frontier economics ltd. Ibisworld.com. 2010. Aircraft, Engine & Parts Manufacturing U.S. industry report. Web.

Kotelnikov V.2001. 1000ventures. Com: sustainable competitive advantage. Web.

Liehr M, Grobler A, Klein M & Milling PM (2001), Cycles in the Sky: understanding and Managing business cycles in the airline market, Systems Dynamics Review, Vol 17, No 4, pp 311 – 332

Office of Fair Trading (2006). The grocery market: OFT’s reasons for making a Reference to the Competition commission, 2006. London: OTF.

Open2.net. 2005. Management and organisations: competitive advantage. Web.

Paglucia M. 2006. Global retail market: Driving Successful Shopping Occasions Through Deeper Insights. London. IBM Corporation

Porter, M. 1998. Competitive Advantage: Creating and Sustaining Superior Performance. Burlington: Free press

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