Competitive Advantage Of Organizations Essence Business Essay

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The word competitiveness originates from the Latin word competer and means involvement in a business rivalry for markets. Today, it has become common to describe economic strength of an entity with respect to its competitors in the global market economy in which goods, services, people, skills, and ideas move freely across geographical borders. (Murths, 1998).

Numerous authors and researchers have studied and analyzed the characteristics of competitive advantage therefore there are many definitions available. Before discussing them, we will make an important remark - the concept of competitiveness and competitive advantage can be viewed from three different levels: country, industry and company (Di Mauro, Forster).

At the firm and industry level, which is the focus of our research, competitiveness can be defined as the ability of firm to design, produce and/or market products superior to those offered by competitors, considering the price and non-price qualities (D'Cruz, 1992). Roberts claims that competitive advantage is a set of factors or capabilities that allows firms to consistently outperform their rivals. It is even considered as the heart of a firm's performance (Porter, 1998).

The essence of these definitions is the same - competitive advantage allows producing more quality products and services than those produced by the relevant competitors. This ensures sustainable development in international markets without protection or subsidies. In our opinion, the dimensioning of the term 'competitiveness at firm level' includes comparable firm profitability, comparable cost and quality, export revenues and market share. Maintaining and increasing the competitive advantage of the firm is performed at different levels:

Competitiveness of a product or a service;

Competitive position of the firm;

Assessing the international competitiveness of a country.

Since each company that managed to reach the market is subject to verification of user satisfaction, each consumer buys what most closely corresponds to his personal needs. Therefore, the competitiveness of a product or a service can be determined only by comparison with the products of competitors. Competitiveness is relative and associated with a specific market and time period to sell. Since every buyer has their own criteria for assessing the degree of satisfaction of a certain need, then competitiveness is also individual. Porter tells us that the definitive value that a company creates can be measured by the price which the buyers are willing to pay for the product or service. He also puts an emphasis on the value chain, a tool that will be thoroughly discussed later on.

A good market position of the firm in the contemporary business world is a result of its strong competitive advantage. Its significant reduction and decrease of competitors' labor productivity, leads to staff redundancy, worse and more expensive products than those of competitors, it decreases revenues and drives it into bankruptcy.

The term 'international competitiveness' is widely used to define the ranking of countries and companies in terms of having relatively better results in foreign economic activity compared to their competitors on the world market for a certain period of time. The competitive advantage of a country is not only measured by GDP, business income or profits but also socio-economic criteria. The latter refers to the ability of citizens to achieve a high and constantly rising standard of living. In most countries the standard of living is determined by productivity, which reveals the use of state resources and created products per unit labor and / or capital invested. Therefore, as defined by the Organization for Economic Cooperation and Development (OECD), whose members are the richest and most developed countries, international competitiveness is the extent to which a country under free and fair market conditions is able to produce goods and services that meet the approval of the international markets, while at the same time for a long term to maintain and increase the real income of the people.

It is necessary to distinguish quality from competitiveness of goods. The presence of high quality in a product does not necessarily make it competitive. While quality is the feature of the product, which makes it able to perform certain functions and satisfy a certain need, the competitiveness is determined only by those properties that are of essential interest to buyers and ensure the satisfaction of a need. All parameters of the product that go beyond those borders are not essential in evaluating the competitiveness in the specific conditions.

Main models for competitive advantage analysis

Among the methodological tools for analyzing and evaluating the competitiveness of a company there is a number of theoretical models. They provide an opportunity to systematically study the impact of competition and on this basis to develop strategies, policies and programs to gain competitive advantage. Based on specialized management literature, we will make an attempt to present various theoretical models, focusing on those which are most popular and practically significant.

2.1 Michael Porter's Five Forces Competition Theory Model

    This model for analyzing the structure and intensity of the competition in a particular sector or sub-sector was developed by Michael Porter in 1979. At its base lies the understanding that competitiveness of a company and its ability to maintain or expand market positions are determined by the strength of the influence and interaction of five major groups of factors:

Bargaining power of buyers - R1;

Bargaining power of suppliers - R2;

Threat of new entrants - R3;

Threat of substitute products or services - R4;

Rivalry among existing competitors - R5.

In general, the relationship between these forces of impact can be illustrated as follows:


New entrants



Rivalry among existing competitors

Threat of new entrants

Threat of substitute products or services

Bargaining power of buyers

Bargaining power of suppliers






Figure 1: The five forces that shape industry competition

Source: (Porter, 1998, p.5, Figure 1-1)

In the model illustrated above, the influence of the various factors for changing the competitive status of the firm can be characterized as follows:

First. The bargaining power of buyers is one of the main factors affecting the competition in the industry and it is indicated by the change in the coefficient R1. Here buyers influence the market with their behavior, forcing companies to cut prices, increasing the requirements for quality and service and in this way opposing to competitors against each other. This factor can be considered determinative when:

The buyers on the market are more concentrated and organized by the supplier, thereby increasing their purchasing power;

The customers are of key importance - they buy wholesale on a regular basis;

The product has a large relative share for the buyer and requires a significant part of his costs - in this way the buyer is price sensitive and cannot comply;

There is little product differentiation - the product is standardized, there are few varieties and it does not distinguish much from other similar products, which forms possibilities of replacing the product;

Switching to other products does not cost much to the buyers;

Management costs are small and the group of buyers has low profits;

The threat of entry into an industry is large;

The product purchased does not match the product quality from the perspective of the buyer;

The buyer has full information about the cost structure in the industry.

In these cases, customers are trying to bring down the prices and look for higher quality, better service and additional services.

Second. The increase in the bargaining power of suppliers is estimated by changing the coefficient R2. The power of suppliers increases when they are concentrated or organized, when the delivered products are very important for the company and when the costs of switching to other suppliers are very large. Strong suppliers can demonstrate their power before the industry by dictating higher prices, lower quality and quantity of the services and products delivered or inadequate frequency of deliveries. In other words, if a group of suppliers wants to succeed in the market, it should have enough bargaining power. A group of suppliers is strong when:

There is a large concentration on the market;

It is headed by a few companies and it is more concentrated than the industry that the suppliers sell to;

The industry is not a very important client for the group of suppliers;

The product provided by the group of suppliers is an important resource for production in the sector or there is a lack of substitutes;

The production of the group of suppliers is diverse or there are big management costs for switching to another supplier;

The group of suppliers has real opportunities to establish integrative links with its clients who compete against each other

Third. Intensity of competition increases when new companies enter the industry or the segment. This impact is visualized by R3. These new companies enter the market with new power, with greater resources and desire to gain market share. This inevitably affects existing firms and their market shares. Therefore, when analyzing the threat of new entrants it must be clarified whether the barriers to entry in the segment and industry are low or high and they should be compared to the potential barriers to exit, but also considering the reactions of competitors. The worst scenario is when the barriers to entry for new firms are low, and barriers to exit - high. Attracted by good conditions, new firms enter the industry (segment) easily leading to an increase in the available resources and capacity which increases the intensity of competition. In 'bad times', however, it is difficult to leave the industry forcing all competitors to struggle for survival. Best scenario for a company is when barriers to entry are high and barriers to exit - low. Barriers to entering a new market can be a result of:

Economies of scale in production. They compel emerging companies to enter the market either with large-scale production or manufacture in very small scale. The criterion here is the effect of optimal scale of production;

Diversification of production and product positioning on the market - existing firms in the industry have secured customer commitment to the purchase of their well-known products;

Access to distribution channels. The more limited the distribution networks, the more they are controlled by existing firms, the higher the barriers for market penetration;

Additional costs that do not depend on economies of scale - these costs can be for patents, licenses, advertising, etc.;

State regulatory policy - it may limit or exclude new entry to certain sectors by providing exclusive rights, licenses, concessions and more.

The threat of entry of new competitors is high when:

Economies of scale are small;

Product differentiation is low and it cannot be expected that customers will remain loyal to the same product;

The need for start-up capital is low;

The switching costs to another product are low;

There is not a company which controls the distribution channels and deters new entry;

Knowledge and skills are not an essential barrier to entry of a new organization;

Access to raw materials is easy;

There are government subsidies;

Access to technology and know-how is easy;

No significant effect of the experience curve;

Lack of government regulation and other administrative barriers to entry.

Fourth. A serious threat for changing the competitive strength of a company lies in the possibility of appearance of substitute products or services. All this is determined by a change in R4. The state of competition in an industry is subject to pressure from producers of these substitute products. Interchangeable products limit the level of prices, and thus profits or lead to reduction or even discontinuation in their search. Market penetration of one or several types of replacement products may attract the attention of customers and increase the threat of substitute products in the following cases:

When the effectiveness of the companies that produce substitutes is high - products have better performance in terms of price and quality compared to the characteristics of the industry's output - a possibility of products comparison appears and it is in favor of the substitute;

The costs of switching to substitute products are low;

New production from industries that have large profits enters the market. When there is a decline in production, most companies in these industries will seek new areas for their products.

Fifth. The degree of rivalry among existing competitors in an industry (indicated through R5) depends on the strength of these competitors. It leads to frequent price wars, advertising battles, and frequent introduction of new products. That costs the companies a lot of efforts and expenses, and leads to lower profits. Competitive struggle is increasing under the following conditions:

When the market has many competitors;

When in the relevant industry the rates of economic growth are low;

Fixed or storage costs are high;

The level of product differentiation is low;

There is a strong growth in production capacities;

There is a presence of price dumping;

In the manufacture of various products from competitors.

We will make an attempt to summarize the popular model of M.Porter by presenting it with the following formula:

, where

KStn - competitive advantage of the firm/industry

R1…R5 - factors that influence the competitive advantage of the firm - the comparative price, the comparative quality, production capacity, distribution power and the advertising power

q1…q5 - coefficients that reflect the strength of influence of the different factors and generally take values ​​to 1.

2.2 Toyohiro Kono's model

Another model that can be used to evaluate and design competitiveness is the so called 'model of competition and key factors for success of the company' developed by Toyohiro Kono [1] 

This model is based on a hierarchy of the key factors for achieving competitive advantage. It is meant that the strategy of each company in the competitive struggle is aimed at improving or maintaining its market position (share of products sold by the company, no matter if traditional or new). The market share (F) of the product of an enterprise can be presented as a function of several factors, or F = f (Q, P, S, C), where:

    Q - comparable quality of goods;

    P - relative price of goods;

    S - factor taking into account the speed of movement of the product to the market;

    C - factor taking into account the power of the distribution network of the company.

Quality of the products in this function reflects the design, size and level of the firm's own quality. It includes product differentiation and segmentation of the market. Cost reduction, individualization (positioning) and market segmentation have a leading role in the competitive strategy of firms. These are different points of view of competition, and all three are included in the above mentioned function.

Results from the previous period

Top management potential

'Product-market' strategy

Ability for development

Production power

Distribution network power

Market share = F (Q, P, S, C)

I level

II level

III level

IV level

Figure 2: T. Kono's model for competitive advantage assessment of the firm, Source:…………….

As it can be seen in the evaluation of the various factors of the model we would note:

    On the first level in the hierarchy of factors lies the competitiveness, which must be supported by the three most important factors - the ability to develop, production power and trade power.

    On the second level competitiveness is derived from corporate strategy, diversification of production and use of latest technology.

    On the third level, competitiveness is dependent on the ability of the top management of the company to adopt such solutions which in practice can implement the three factors of the first level of competitiveness of the company.

    On the fourth level, competitiveness is dependent on the functioning of the company over the past period. The realized profit is of particular concern as a source of financial resources in the struggle for markets. The higher the profit the higher the competitive advantage and vice versa, higher competitive advantage is a source of higher profits.

2.3 The Value Chain

The value chain analysis for evaluation and design of competitive advantage of enterprises, developed by Porter, aims to provide an opportunity to formulate rational solutions in the most important areas of their business.

  At the core of the model lays the assumption that companies perform many activities that are valued by customers' payments in the implementation of the goods and services. These payments determine certain value (price) of all activities. The various activities of the firm are divided into nine different groups - five primary and four support activities.

    According to the model, the five primary activities include:

1) material-technical supply (inbound logistics);

2) manufacturing operations;

3) distribution and movement in the channels of realization (outbound logistics);

4) marketing and sales;

5) customer service.

These primary activities constitute the ongoing operations of the firm. Support (providing) activities include:

1) firm infrastructure;

2) human resource management;

3) technology development (including innovation);

4) procurement (material-technical supply).

They form the basis for the ongoing operations of the firm and operating costs and investments may be allocated to different activities.

Figure 3: The Value chain, Source:……………..

As it can be seen, the model can be a starting point for identifying and assessing alternative strategies for economic growth and competitiveness design. In this case we have the following situations in mind:

When rapid changes in the competitive environment appear it may be necessary to change both the value chain and market strategy of the firm, given that the answer how this should be done might not be known in advance. This model allows formulating important decisions and wider alternatives for action that are appropriate for improving competitiveness.

When changing the market position of the company or the competitive environment this should be followed by a change in many activities involved in the value chain. Such changes may be directed towards extending or shortening of the activities performed by the company - reallocation of labor regarding customers or suppliers. Changes in the so-called vertical division of labor are related to the type of customer and supplier. The firm may need to serve specialized groups of customers from different segments of the domestic and international markets. In such a situation there are prerequisites for greater changes in the vertical division of labor.

There might be changes in the division of labor between enterprises of the same industry. This is associated with the so-called horizontal division of labor. Shift in the market and the mutual interdependence can lead to changes in the distribution of activities between enterprises. Some activities may be carried out more effectively together with other enterprises. For other activities it could be more effective to be executed by a firm specializing in them acting like a subcontractor (outsourcing). Another type of activities may be more suitable for implementation in each company in the sector.

   What costs are necessary for the change in the division of labor would be a determinative factor in different situations. The more this change leads to lower operating costs and investments in fixed assets per unit, the more the benefits of streamlined operations will lead to an increased competitiveness. This should be decided after discussion whether the product offered will match the market quality requirements.

   Another approach to the same problem is to consider each activity separately and decide whether the firm will perform this activity by itself or it will purchase it from another company. This assessment can be a starting point for a shift towards more appropriate alternative economic solutions.

The decision whether an entity should continue to perform a certain business activity or to give way to other firms is related to the manner in which this work can be best performed in the future. Any activity that is part of the value chain model will be subjected to a set of effects that are specific to a given activity. Depending on the strength and extent of the impact of the competitive environment, changes may occur in different activities without changing the principles of division of labor in the enterprise.

2.4 ABC Analysis

ABC-analysis is a method that allows classifying, managing and controlling the resources of the business organization by degree of importance. It is based on the Pareto principle, which can be expressed as follows: reliable control of 20% positions allows controlling 80% of the resources. These resources (elements) can be:

Supplies of materials;

Product nomenclature;

Various activities;



Corporate network.

    They are grouped into three categories (A, B and C) in terms of their expected value. Elements of group 'A' are very important, 'B' are important, 'C' are of minor importance. For example, the best customers (usually 20% of total customers) who bring the highest income (usually 80% of total revenues) are in group 'A'. They are served by the sales manager and receive the most attention. Clients classified in groups 'B' and 'C' require less attention and are served accordingly.

Figure 4: Graphical visualization of the ABC method, Source………..

The need for such an approach in the analysis and evaluation arises because if a company wants to be successful, it must be familiar with the market on which it operates as well as its participants. The results of the market analysis help to reduce the level of uncertainty in which the company exists and managers are able to make more reasoned decisions for the development of their businesses. By analyzing, managers receive valuable information according to which they decide what action to take in emergency situations caused by changes in the external environment.

   It is impossible to monitor all your customers, suppliers and competitors. Much more reasonable is to define our key customers, suppliers and competitors and observe changes in their behavior towards the market. It is therefore appropriate to apply ABC analysis, which is realized in the following stages:

I stage - we separate the focus group (customers, suppliers or competitors) into three groups.

II stage - for each group we define criteria based on which the subject would fall in Group 'A', 'B' or 'C'.

III stage - we observe Group 'A' of the three types - these are our key customers, suppliers and competitors.

   The application of this methodology for the analysis and evaluation allows more focused observation of the changes in the external environment of the company. The results of the monitoring carried out in order to build early warning system could be very beneficial to improve the efficiency of marketing and sales of the company.

   In our opinion, to have a complete picture of what is happening in the external environment it is necessary to monitor the changes in government policy and changes in technology that could improve the competitiveness of the company. Therefore it is very important to constantly monitor the market and think in advance how we can protect our interests and positions on time, not afterwards when the failure is a fact.

2.5 Balanced Scorecard

Balanced Scorecard is the most popular modern methodology for performance management. (Norton, 2008)

    The basis of the balanced scorecard concept is the idea of creating a new system for measuring the activity of the companies. According to Norton companies currently operate a new type of economy based on knowledge, where practically unpredictable activities must be measured such as innovation management and human capital. He argues that organizations understand how the new type of economy brings new things carrying value - people's knowledge, software and new technologies, organizational culture that supports innovation. Simultaneously, Norton reported that companies do not have the right tools and the biggest challenge is the implementation of their business strategy and therefore they often fail. In his words, 9 out of 10 companies fail in the attempt to implement their strategy, which gives an incredible competitive advantage to those which manage to do so.

As a result of a study of best practices among companies that implemented and use balanced cards Norton presents a model of five principles that organizations could follow in translating strategy into action.

   The first principle states that change must start at the highest level. The idea is that senior management initiates the implementation of the strategy by first stating clearly the vision and objectives of the company, showing personal interest, making sure to win the hearts and minds of people about change.

   The second principle says that the strategy should be translated into operational plans and deadlines. At this stage is the creation of the strategic maps describing the relationships between the elements of the strategy, goals and indicators are defined to identify strategic initiatives. According to David Norton it is not possible to manage something that you can't describe.

   The third principle is to put the organization into a position that would allow it to implement corporate strategy. Balanced Scorecard with indicators for each business unit (department) should be developed to identify opportunities for synergy in order to achieve maximum value.

   The fourth principle is realization of the strategy to become a part of the job of every employee in the company. This is a difficult process as it is connected to the development of individual balanced cards that contain individual goals and explain the relationship between the individual contributions of each employee to implement the strategy of the company. At this stage, personal development plans are created. It is important to find the intersection between individual and corporate interests. The success of this stage is critical because although the strategy is formulated by the management, its implementation depends on the people working in the company.

   The last principle is to turn strategy into an ongoing and continuous process. Here are modeled various practices related to resource management, continuous learning and control.

   As noted, the Balanced Scorecard of performance indicators is a practical tool that helps companies implement their business strategy. In its original form the map covers a system of performance indicators, measures and predicts the performance of the organization on the basis of selection of quantitative indicators that are grouped into four main areas (perspectives), describing the most important aspects of its operations:

1) Financial results - this includes parameters such as growth, profitability, shareholder value;

2) Customer relations - in this segment are introduced measures that provide information on customer satisfaction with the products and services offered by the company;

3) Internal processes - identifies those internal processes that achieve maximum value for shareholders and customers;

4) Training and Development - associated with continuous learning and development of the company.

The strategic map of the balanced scorecard is a framework model that shows how the strategy as a competitive factor incorporates intangible assets and processes of value creation.

As can be seen, the evaluation of the financial perspective presents results from the implementation of the strategy with traditional financial concepts. Indicators such as ROI (rate of return on investment), shareholder value, profitability, revenue growth and cost reduction are indicators with deferred action, which testify to the success or failure of the company's strategy.

   Customer value perspective determines the value proposition for targeted users. Value proposition for consumers is one context in which intangible assets create value. If customers appreciate highly the quality and time of delivery, thereforе the competencies and skills of employees, systems and processes that create and provide quality products and services have a high value to the organization. If customers show a preference for innovations and greater effectiveness, greater value acquire those skills, systems and processes that create new products and services with distinctive functionality. Constant synchronization between actions and opportunities on the one hand, and the value proposition on the other hand, is crucial for the implementation of the strategy.

  Financial perspective and customer value perspective show the desired results from the strategy. They are both characterized by multiple indicators with deferred action.

In the internal perspective we identify those few critical processes that are crucial for the implementation of the strategy. For example, an organization can increase investments and development and introduction of new products and technologies for their production so that as a result its clients to receive a new high-tech product. Others, in an attempt to provide similar value offer to their customers can focus on developing new products through joint ventures and partnerships.

   In the 'learning and development' perspective those intangible assets that are most important for the strategy are reflected. The objectives of this direction is to identify which types of activities (human capital), which systems (information capital) and what organizational climate (organizational capital) are needed to support the process of value creation. All of them should be connected and synchronized with the main internal processes.

The processes and activities in the four areas are connected to each other in the objectives system through cause-and-effect relationships. Above all stands the hypothesis that financial performance can be achieved only if there is a customer satisfaction. Customer value proposition shows how to generate sales and build loyalty among target customers, and intangible assets that support internal processes are the base of strategy. Appropriate alignment of the objectives of these four areas gives the key to creating value and therefore to a focused and consistent strategy.

 Visual representation, analysis and verification of the organization's strategy are facilitated by the development of so-called 'strategic map' that represents the supposed cause-and-effect relationships between objectives on different perspectives of the system of indicators.

   The structure of the cause-and-effect relationships that connect the four directions determine the basis on which strategic maps are made. Strategy maps help the organization to focus on the clear logic: how and who will create value.

   Performance management is based on identifying and prioritizing the implementation of initiatives, projects and programs that aim to bring the values ​​of specific performance indicators to predefined target levels. Planning of this execution is a powerful tool for resource allocation and budgeting of the organization.

   By sharing responsibilities for achieving target levels of performance of the effectiveness of different organizational units and individual employees a high level of motivation and commitment of human resources is achieved, especially if their payment is linked to performance.

   According to Norton, it is absolutely impossible to successfully implement the balanced scorecards in a company, if it has no well-defined mission, values, vision and strategy. According to him, the lack of these elements significantly interferes the effective management of intangible capital as people and know-how. So he considers it normal that in developing economies often human resources manager initiates the processes of defining the mission, vision and values ​​of the company.

Analyzing  the balanced scorecard method should note that the authors offer specific models for organizations with more specific scope of business activity - models for Information-advertising business, for innovative and high-tech organizations, for intangible assets, etc.

Regardless which model for competitive advantage evaluation we will use, it is extremely important to have information on how macro environment will change, particularly the intention of the government and regulators to impact the relevant sector of the economy. We think that is what defines greater practical benefits from the application of any model in which this influence can find a quantitative measure. We mean an impact on:

the amount of tax revenues;

deductions from income;

social security environment;

expected sales;

expected profit and more.