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Requirement
Answer the following three questions using examples to support and illustrate your discussion.
1. Define critical success factors, resources and competences. Using examples to illustrate your answer, discuss how understanding and managing these
different elements can create sustainable competitive advantage.
2. Why might organic (or internal) development be recommended as an appropriate method for strategic development? With examples highlight the
risks and benefits associated with this strategic method.
3. Discuss the contrasting characteristics and objectives of a cost leadership strategy and a differentiation strategy. Base your analysis on Porter (1985)
Solutions
1. Define critical success factors, resources, and competencies. Using examples to illustrate your answer, discuss how understanding and managing these different elements can create sustainable competitive advantage.
Critical success factors:
For the success of an organization, there are some fundamental performance requirements. These are known as the critical success factors for that company. In other words, the features of the product that the customers value are CSFs. These help the company in outperforming the competition (Rothaermel, 2015).
The example for this is: in the automobile industry, the CSFs are the style of automobile, the efficiency in the dealer network. In the life insurance industry, it is the reputation of the company and the innovation of the new policies introduced by them. In the food processing industry, it is the development of new product, the distribution channels, health aspects, etc. These are CSFs because they give some value to the customers.
There are four sources of the critical success factors:
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1. Industry: every business has the industry in which it works so that industry has its own relevant CSFs. Like the car industry’s CSF is the compliance with the requirements of pollution.
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2. Company: the company and the situation of that company in the industry are also a source for CSF. For example, some companies are located in such places where it gets unique resources, so the geographical location of the company in itself becomes CSF for it. Also, the competitive strategy of the company becomes the CSF (Rothaermel, 2015) .
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3. Environment: the wider environment like the economy of the country, its political factors, the trends of consumers in the market, etc. becomes the CSFs. Suppose at some point in time there is a shortage of the oil in the country, so the companies have availability of supply of energy. This is the CSF for the company.
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4. The temporal factors of the organization: there are some areas of the company that causes concern unusually because these activities are unacceptable, and they require attention.
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Resources:
Resource simply means the source that produces some benefit for the company. The resource can be physical, human, and financial or they can simply be an intangible resource. These are used by the companies for creating strategic initiatives for them. When the company plans or implements any strategy, it needs resources. There are some resources that are basic like they are available with the competitor also, but there are some resources that are unique and are different from the competitors. The unique resources are difficult for the competitors to copy (Ram, 2013).
For example the company has some very creative person in the company who develops new ways to make a product. His ideas are benefitting the company very much. So he is a unique human resource that the company has. Other examples of unique resources include: brand, the sunk costs as the competitors have to cover the costs of depreciation, right to use a process that is patented, etc.
Competencies
Competence is the activity or the process that is used by the company for deploying its resources in an effective manner. The companies have resources, but when they know how to use the resources, it is their competence. There are two types of competencies: the threshold and the core competencies. Threshold just qualifies the orders i.e. they just determine that whether a company has potential to do a thing or not. The core competencies determine that a company has the potential to do those things that the competitors cannot do easily. The core competencies are the source of competitive advantage for a company (Boguslauskas, 2015).
For example core competencies include a sophisticated IT system that is able to forecast a very complex demand accurately, the corporate culture of the company that is able to foster innovation and the ability to share and lever knowledge throughout the company.
Understanding and managing these different elements can create sustainable competitive advantage as:
Sustainable competitive advantage means any asset, ability or characteristic of the company that others cannot replicate, or it is difficult for the competitors to provide something superior. The company with sustainable competitive advantage has a favorable long-term position over their competitors.
If the critical success factors, resources and competencies of the company are managed properly, it can create sustainable competitive advantage. The companies when to develop CSF from the needs of the customer, they tend to create sustainable competitive advantage for themselves. For example: when the customers buy a new car. They look for reliability, price, running costs, safety and performance. So if the company is making their products on these factors and the product is able to fulfill these needs of the customers then they will buy the car and hence the company will create a sustainable competitive advantage for themselves. Identification and attention on the CSF by companies help them earn a sustainable profit for the long term (David, 2016).
Every company has resources but by creating and developing unique resources, the company can develop sustainable competitive advantage. Unique resources give the company an edge over their competitors. The competitors cannot determine that how the company created the unique resource or how they are using the existing resources in a unique manner. For example, every company has human resources like labor, but a company has identified a source of cheap labor (Boguslauskas, 2015). So by using it, it has reduced its costs to a great extent. Hence the overall cost of production is decreased. So the company is able to earn higher profits than others. This reduced the costs of the firm hence giving it a sustainable competitive advantage over others.
The core competencies of a company help them to do things that are very difficult for others to do or copy. The competitors cannot emulate them (David, 2016). So they form the basis for sustainable competitive advantage. These are also known as ‘the order winners’ as they help the companies to get more orders, bulk orders of the product. When the companies get more orders than competitors, their market value increase, they get more share of the market, and they grow rapidly. Hence their sustainable competitive advantage is gained.
2. Why might organic (or internal) development be recommended as an appropriate method for strategic development? With examples highlight the risks and benefits associated with this strategic method.
Strategic development means ‘change.' It is the way by which the management handles the new realities of technology, the flow of information, the global competition and political accountability so that the company moves towards success. The dynamics of strategic development is understood by the effective leaders, and they work for controlling the change in an organization.
Organic development happens when the company makes efforts to develop the base of their customers, they reinvest the profits in new assets so that they can earn more income and they also improve their productivity so that the bottom line of the company is increased. Inorganic development happens when the companies merge with other companies, or they acquire them. This helps them gain more customer base, and they get new channels of distribution. Thus the growth gets accelerated (Acharya, 2013).
Organic (or internal) development is recommended as an appropriate method for strategic development because (benefits):
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1. With the organic development strengthens the company by using its own energy and resources. Though the rate of development internally is slow, but the front up costs that the company incurs using organic development is very less, so it is an attractive option available with the companies. This development makes the company a strong competitor in the industry as it causes the internal processes become stronger. So in future when the company faces any challenge, it can deal with it effectively and continue to develop. Otherwise, the company will fall if the internal processes of the company are weak. For example, a company is devoting its profits for the improvement in quality control; department, so it is giving more value to the customers. Thus the company is becoming a more formidable competitor. This is causing the strategic development of the company using the internal development.
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2. The organic development helps in increasing the market share of the company, and it also retains the customers for the company. For example: when the company reinvests its profits in the sales and the customer service departments then they perform better, and the customers are attracted. The relations with the customers also get strengthened. This again helps in the strategic development of the company.
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3. The internal or organic development is s a long-term strategy for the company. The risk in this is lower than the inorganic development. This is built on the strengths of the company, and it helps in increasing the sales. So it should be used as a method for strategic development. For example: when the internal development happens due to innovation or new product development, it creates an opportunity for the company for longer term (Franco, 2015). Hence the company can make use of the competitive advantages.
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4. There are options of external development also like the company can use the strategy of merger or acquisition for developing itself or gain strategic development, but there are risks in it. There is no guarantee that the merger will be successful. Also, a huge amount of costs is involved with the external development. The risk is higher, and the human resources feel dissatisfied with these options. Therefore, internal development is better for strategic development of the company.
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5. The internal developments are controlled by the company itself so it can manage the internal processes in a much better way than others. The strategic control over the internal developments is much stronger than the external control. Thus the companies are able to achieve the synergies. This helps them to drive the competitive advantage.
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6. The internal conditions of every company are different. So the companies can identify their potential attributes, and they can generalize them (Franco, 2015). Every company is aware of their strengths and weaknesses. So they can make use of their strengths to grab the opportunities and counter the threats. Thus they develop more strategically when they are able to monitor their internal developments. The control on the external factors is very less.
Organic (or internal) development has some risks associated with it:
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1. Sometimes the company decides to grow internally or organically, but the biggest competitor of the company use the external growth strategies for developing itself like the merger. So it becomes difficult to compete in the market. There is higher risk because our internal development cannot match his external development. He will earn more profits if the merger becomes successful and he will grow larger than us in the short period of time. If the two companies were standing equally earlier, then the focus may be shifted to other company altogether, and the competition may go completely outmatched.
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2. If the competitor's growth is very rapid, the focus is shifted from the necessary elements of success in the industry like the offer of high-quality products in the market, giving personalized service to the customers, etc. (Joseph, 2015). All the focus is put on regaining the lost position in the market or making a counter strategy for the competitor. This causes loss to the business in the long run, and it does not develop strategically.
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3. The results that the companies get from the external development strategies are faster than the internal ones. For example, a home-security company could spend years developing a strong marketing team, or it could acquire a small marketing firm that already has the staff and necessary expertise. The latter approach requires substantially more money in the short term, which is why organic growth might be the best option for some small businesses.
3. Discuss the contrasting characteristics and objectives of a cost leadership strategy and a differentiation strategy. Base your analysis on Porter (1985).
There were generic strategies given by Porter. These were the cost leadership strategies, differentiation strategies, and focus. The focus was then divided into ‘cost focus' and ‘differentiation focus’.
Cost leadership strategy
This strategy is based on the strategy of marketing where price is considered as the main strategic tool, and the objective of business is gaining the market share leadership. This strategy becomes successful when the business becomes the lowest-cost producer in the industry this is done when the business manages the costs in marketing and the other functions like the function of production, supply, etc. This is an appropriate strategy when the relative market share of the company is high and with economies of scale; it is able to reduce the costs (Dess, 1984). The companies need to construct the efficient scale facilities in an aggressive manner, and then they also have to reduce the costs with experience. In some areas like a sales force, advertising, etc. the business have to tighten their costs and minimize the costs.
The objectives of this strategy are to make the company gain competitive advantage, attract the customers by lowering the prices of products, reduce wastages by minimizing costs and earn sustainable profits in the market.
The ways by which the companies can achieve cost leadership is:
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a. They can reduce the costs and increase their profits. They can charge the average prices in the industry.
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b. The market share of the companies can increase by charging lower prices but at the same time, the company can make a reasonable profit on every sale as it has reduced its costs.
Characteristics of cost leadership strategy
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1. This strategy involves the company in becoming the leader in costs in a particular industry or market. But it does not advise the company to become one among the lowest cost producers because that may harm the company in long run. When the company is among the lowest cost producers, the other producers may undercut the prices and block the attempts of a company to gain more market share.
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2. The strategy requires the companies to have access to the needed capital so that they can invest in appropriate technology that aims to bring the costs down (Panwar, 2015). Then the companies also need to have very efficient logistics and a lower base of the costs like low-cost labor, materials, and facilities. It asks the companies to find a way by which the costs can be cut below the level of competitors.
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3. There is a risk associated with this strategy that is, the sources of reducing the costs are not very rare or unique. The competitors have the ability to copy the cost reduction strategies. So the companies have to find the ways of reducing costs continuously before the competitor identifies it and copy it.
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4. This strategy is based largely on the Japanese philosophy of Kaizen that talks about continuous development.
For example, the Wal-Mart stores give low prices to the customers’ every day. Thus the customers get attracted towards them. They don’t rely on their sales to give the products at lower prices to the customer; instead, they do it continuously so that the competitor does not have a chance to copy their strategy. They have developed large scale operations, and their supply chain is also very efficient. This makes the company achieve cost leadership strategy in the market.
Differentiation strategy
This strategy means that the product or the service is differentiated from the products of competitors. Differentiation can happen either in the product, its brand, the features, technology, customer service, channels of distribution, pricing, etc. basically, this strategy aims to develop a franchise of customer depending on the brand loyalty. The company that differentiates increases the margins and avoid the competition in the section of the market that is low-cost section (Dess, 1984). This means that the market share is lower, and this strategy is useful when the competitor is strongly reducing its costs and gaining cost leadership.
The objectives of this strategy are to make the company gain competitive advantage, create a unique product, attract the customers and become the market leader in a particular product (Brenes, 2014).
Characteristics of differentiation strategy
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1. This strategy has the ability to make the products of the companies very different and attractive than that of other producers in the market. This increases the competitive power of the companies.
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2. This strategy demands the companies to research the market so that they can develop new things and innovate in a good manner. Then the companies should also have the ability to deliver products and services that have a higher quality (Fung, 2014). The companies’ also need to have effective sales and marketing so that it is understood to the market that what are the benefits that the differentiated offerings in the company offer.
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3. This strategy demands the companies to invest in new product development.
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4. There is s a risk associated with this strategy that is, the competitors can pursue Focus Differentiation strategies in different market segments. This can harm the differentiation strategy of the company.
For example Apple has innovated its products to such level that they are unique and differentiated in the market. Though the competitors try to imitate them but they cannot produce the products that Apple makes. Every time the company comes up with something new and different. The product standard is so high that customers have developed a taste for it and they trust the company too. So they have differentiated its products on specific elements and gained the market share.
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Acharya, V.V., Gottschalg, O.F., Hahn, M. and Kehoe, C., 2013. Corporate governance and value creation: Evidence from private equity. Review of Financial Studies, 26(2), pp.368-402.
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Brenes, E.R., Montoya, D. and Ciravegna, L., 2014. Differentiation strategies in emerging markets: The case of Latin American agribusinesses. Journal of Business Research, 67(5), pp.847-855.
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Boguslauskas, V., and Kvedaraviciene, G., 2015. Difficulties in identifying Company‘s Core Competencies and Core Processes. Engineering Economics, 62(2).
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David, F. and David, F.R., 2016. Strategic Management: A Competitive Advantage Approach, Concepts and Cases.
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Dess, G.G. and Davis, P.S., 1984. Porter's (1980) generic strategies as determinants of strategic group membership and organizational performance.Academy of Management journal, 27(3), pp.467-488.
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Franco, A., 2015. Evaluation and Strategic Development within the Brand Management of an International MBA Program. Journal submission manual-ASEAN Journal of Management & Innovation [For testing], 2(1).
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Fung, H.P., 2014. The Relationships among Porter Five Forces, Generic Strategies, Ansoff Growth Strategies & Strategy Methods in an IT Industry–A Conceptual Paper. Generic Strategies, Ansoff Growth Strategies & Strategy Methods in an IT Industry–A Conceptual Paper (December 18, 2014).
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Joseph, M., Joseph, B., Poon, S. and Brooksbank, R., 2015. Diagnosing the Strategic Planning Process in Australian Companies. In Proceedings of the 1999 Academy of Marketing Science (AMS) Annual Conference (pp. 326-326). Springer International Publishing.
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Panwar, R., Nybakk, E., Pinkse, J. and Hansen, E., 2015, July. Competitive Strategies and Small Firms’ Social Responsibilities. In Proceedings of the International Association for Business and Society (Vol. 26, pp. 99-111).
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Ram, J., Corkindale, D. and Wu, M.L., 2013. Implementation critical success factors (CSFs) for ERP: Do they contribute to implementation success and post-implementation performance?. International Journal of Production Economics, 144(1), pp.157-174.
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Rothaermel, F.T., 2015. Strategic management. McGraw-Hill.
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