The Environmental View Of Competitive Advantage Business Essay

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Michael Porter's Five Forces is a model that looks at creating such an impregnable position for a firm that it can withstand any external market competitive forces (Porter, 1980). It stresses the importance of market positioning and competitive advantage through industry analysis. As the name suggests the Five Forces Model illustrates the five predominant forces at play in any given industry: buyer power, supplier power, barriers to entry, threat of substitutes and rivalry. If a manager can accurately assess and manipulate these, then they are on their way to achieving competitive advantage.

Fig. 1 Porter's Five Forces (diagram obtained from http://www.ifm.eng.cam.ac.uk/dstools/paradigm/5force.html)

Once a firm understands the industry in which it operates it can implement an appropriate generic strategy to position itself favourably within it. This can be gained through cost advantage or differentiation (Porter, 1980). These are known as Porter's Generic Strategies and they illustrate how a firm can gain competitive advantage by offering a service or a product at a lower price that rivals simply cannot match, or by offering a service or product that differentiates it from its competitors and thus allows it to maximise prices. Whether or not they adopt this policy in a broad or narrow scope will determine whether or not, on top of that, it is employing a focus strategy.

2.2.1 PORTER'S VALUE CHAIN

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Whereas the Five Forces Model centres on exploiting market imperfections that could affect the market equilibrium, Porter's Value Chain places more stress on internal activities (1985). It works on the premise that competitive advantage can be obtained by isolating the value created by each activity in a given business unit.

Fig.2 Porter's Value Chain (diagram obtained from http://www.12manage.com).

Since a product has to go through various activities before it hits the market, such as internal logistics or marketing and sales, the Value Chain illustrates how at each stage an activity adds value to the end product. These are not activities that are carried out in vacuums but that rather, occur industry-wide or in broader geographical regions, in value systems, hence this too inevitably takes into account the industry and environment in which a firm operates (Porter, 1985). Managers will have to be aware of other firms operating in the same environment. Competitors can be pinpointed since they will be those companies that are within the same value chain and therefore obtain similar profits thanks to a favourable difference between what customers are willing to pay and supplier opportunity costs. Inevitably in order to gain competitive advantage an organisation will have to continually seek ways of adding value to their firm and identify those activities that will increase the overall value of a business- value drivers (Amit and Zott, 2001). This is a way of redressing the value chain in one's favour. The onus is on the manager to devise a value creating strategy - one where the value of these activities can be maximised (Porter, 2004).

The industrial view of competitive advantage believes that the only way in which this can be achieved is by looking at the external environment; by valuing suppliers, firms and buyers and juggling their relative strengths and needs. Much like the Five Forces model, the Value Chain puts equal emphasis on the role of buyers and suppliers, and treats them as two sides of the same coin (Brandenburger and Stuart, 1996). That is why it falls within the umbrella term of environmental view of competitive advantage.

2.2.2. CRITICISM OF THE ENVIRONMENTAL VIEW

There are nevertheless shortcomings with a purely industrial view of competitive advantage. It works under the assumption of relatively stable environmental conditions, which is not always the case. In order to counter, that a Sixth Force - Government Regulation, has been proposed, since after all firms have to work within the constraints imposed by government regulations (Brandenburger and Nalebuff, 1996). In fact the traditional 5 Forces Model only seems to take into account environmental factors and none of the other PESTLE factors (namely political, economic, social, technological and legal factors) that would inevitably affect industry attractiveness. Nor does it make any concessions for psychological factors that may well govern market dynamics. Even though business analysts are forever encouraged to urged to try and explain market dynamics in purely rational terms, perhaps industry forces can be expressed in emotional terms (Grundy, 2001). Analysing the agendas of stakeholders would allow the consultant to gain an even fuller picture of the industry forces in play, and these might well be governed by psychological and emotional factors. Grundy (2006) goes so far as to suggest that Porter's 5 Forces are all interlinked on an emotional basis. One of the forces acts and another force reacts on impulse or on an emotive level so they are not completely independent of each other, but often respond emotionally to each other. For many the idea of the public is another Sixth Force that could be added to the traditional Five Forces Model. While formulating business strategy from an emotive point of view may be controversial, it certainly illustrates that perhaps the traditional industrial view is too one-dimensional in its approach.

2.3. Resource-based view of the firm

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Exponents of the resource-based view of the firm (RBV) state that it is the best of both worlds, since they claim it analyses how external market forces are suitable for maximising a firm's internal capabilities (Collis and Montgomery, 1998). This, to a certain extent is false advertising. The whole premise of the resource-based perspective is looking internally at a firm's resources and how to best exploit these. It hinges on analysing and exploiting a firm's idiosyncratic assets and capabilities (Teece, et al. 1997; Wernerfelt, 1984). It is in sharp contrast to the environmental view of the firm for it emphasises competing for resources (Barney, 1986) and sharing them across business divisions (Collis and Montgomery, 1998; Wernerfelt, 1984; Prahalad and Hamel, 1990). Thus the insular strategic business unit, where resources and skills are jealously guarded, no longer has applicability. Capabilities need to be distributed and divvied up throughout the organisation since, even though their branches might be in far-flung settings, they should all share the same vision and goals. This view has serious repercussions for management. They must have an overarching vision that goes beyond individual business units and encourages collective learning (Prahalad and Hamel, 1990). Managers also need to have the conviction to commit to this vision early, for their goals are not merely about being competitive today, but rather, in the long run (Teece et al, 1997).

2.3.1. CORE COMPETENCES

Prahalad and Hamel (1990) paved the way for viewing the source of competitive advantage as residing in core competences. At first it had merely been seen as a "kind of technological coherence" (Ansoff, 1957, p.120) due to the espousing of vision, goals and capabilities with long-term objectives. What Prahalad and Hamel did was illustrate just how these coherences were actually part of the firm's fundamental business activities and could therefore be found throughout the array of a firm's products and services. Since firms operate in a non-market-like fashion where price systems and markets do not govern their internal operations, the balance sheet does not necessarily mirror a company's distinctive competences (Teece, et al. 1997). Core competences must instead denote a few key skills or capabilities that can be applied across business units to produce a variety of end products (Prahalad and Hamel, 1990). In a way managers have to analyse past performances to identify those capabilities that led to this superior performance which might initially have been unexpected or unintentional and apply these to future activities (Peteraf, 1993).

In order to work out what distinctive competences are, scholars tend to follow Barney's definition; namely that resources ought to be valuable, rare, imperfectly imitable and there should not be any strategic substitute for them (1991).

2.3.2. VALUABLE RESOURCES

One of the ways that core competences can be identified is that they add value to the end products. This is completely in line with the industrial school of thought and their stance on competitive advantage. These resources will, however, lead to competitive superiority only if they are durable. In RBV competitive advantage is tantamount to a certain degree of sustainability (Collis and Montgomery, 1998). The fast depreciation of resources, be they tangible or intangible, would run contrary to this philosophy of competitive advantage, since it would mean a loss of value.

2.3.3. RARE RESOURCES

Part of the reason RBV analysts look internally at their company resources, is that this is information to which not all are privy. The assets are not controlled by many and these could include special expertise unique to a firm (Barney, 1986). Tailoring a capability to user needs, is another way of making a strategic capability unique and rare (Teece, et al. 1997).

From an economic stance, competitive advantage can be said to be gained from Ricardian rents, the result of a scarcity of the supply of a given resource. Alternatively they could result from monopoly rents, where there is a conscientious restriction in the output of a product (Peteraf, 1993). Both economic strategies would make a resource rare; a necessary criterion for it to be considered a core competence.

2.3.4. IMPERFECTLY IMITABLE RESOURCES

In order for core competences to be assets unique to the firm they have to be almost impossible to imitate. If attempts are made to imitate then it can only be done imperfectly, once again highlighting how a core competence is firm-specific. (Teece, et al. 1997; Wernerfelt, 1984; Barney, 1986). Yet this is not a situation that will remain unchanged forever, for if indeed it is a source of sustainable profit, others will seek and in all likelihood eventually learn how to copy it. If the attempts at imitation are immediately successful then that resource cannot be deemed to be a core competence, or certainly not a source of sustainable competitive advantage.

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2.3.5. NON-SUBSTITUTABLE RESOURCES

It seems logical enough to propose that if other resource substitutes were readily available on the market, then the returns from the original resource would be lowered and thus would not be a source of competitive advantage. Core competences must therefore entail a degree of uniqueness making it difficult for them to traded or substituted. This can often be because the evolution of these capabilities is actually path dependent and therefore inextricably linked to a particular firm. In this viewpoint, these sources of competitive advantage are of such importance that no monetary value can be ever attached to them (Teece, et al. 1997).

2.3.6. CRITICISM OF CORE COMPETENCES

Barney's definition of core competences does however present some challenges to the analyst. Firstly, even though managers across different branches may go about developing a firm capability in their own unique way, they still all end up with the same capability. This suggests that there must be more than one way to develop those supposedly unique skills, so they cannot be particularly path dependent. Rather, there must be a high degree of substitutability (Eisenhardt and Martin, 2000). Further, if a resource is valuable, inimitable and cannot be substituted, it stands to reason that it inevitably is rare too. In short, Barney's definition of resources, though a more than valid starting point, is just that - a somewhat tautological starting point (Williamson, 1999).

2.3.7. DYNAMIC CAPABILITIES

There is the growing belief amongst analysts that core competences have to evolve in response to changing circumstances (Prahalad and Hamel, 1990). This is one of the main criticisms levied at the industrial view of competition. From this criticism sprung the notion of dynamic capabilities. These are idiosyncratic capabilities, be they internal or external, that grow from and respond to a rapidly changing environment; hence the idea of their dynamism (Teece, et al. 1997). This could perhaps be a way of identifying newer sources of competitive advantage. Competitive advantage is more than just a question of adopting a defensive position and defending one's competitive advantage, but is also about developing in times or rapid change (Teece, et al. 1997). The ability to withstand challenging environmental situations is the way in which competitive advantage can be sustained.

2.4. SUSTAINED COMPETITIVE ADVANTAGE

For many it is unclear what the difference is, if any, between competitive advantage and sustained competitive advantage. According to Porter (2004, p.11), sustained competitive advantage is simply "above-average performance in the long run". The point that remains ambiguous is just how long this run ought to be.

Some leading analysts such as Fiol (2001) question whether indeed organisations can depend on a single core competence, or a set of core competences for that matter, with which to gain sustainable competitive advantage. She argues that all an organisation can hope for is a series of temporary victories that reflect the ever-changing nature of skills and techniques needed to record these victories against their adversaries. So any competitive advantage that is gleaned is from the dynamic ability of an organisation to change and adapt over time. She therefore calls into question the very notion of sustainability.

Barney (1991, p.102) claims that as long as "other firms are unable to duplicate the benefits of this strategy" then a company can claim to enjoy sustainable competitive advantage. The time factor in this definition supposes therefore that 'sustained' means once other competitors have tried to imitate a given strategy and have failed in that attempt and no more imitation efforts are made. With this in mind, being imperfectly imitable, as was elucidated earlier, is for some theorists of primordial importance.

Peteraf (1993) observes that in order to enjoy sustained competitive advantage a company must possess resources that are imperfectly mobile. These are resources that can in theory be traded but for them to be of use and provide a competitive edge, need to be utilised alongside other firm-specific assets. Thus these resources are bound to a particular firm, not just for a single task, but in the long run and it is because they are bound to the firm that competitive advantage can be sustained.

2.5. IMPACT OF THE INTERNET

Finally it is worth briefly discussing the impact of the Internet since few innovations, if any, can be said to have altered our lives as much as the Internet has. It is a relatively recent invention and is constantly changing the rules of engagement, in the manner in which it has modified how industries are organised or business is carried out.

In researching the impact of the Internet problems arise due to lack of appropriate research instruments and familiarity with the subject matter (Drew, 2002). It only seems logical that those who know how to run their e-business to optimal levels will enjoy any competitive advantage that there is to be gained from the Internet. The success also depends on the extent to which customers are ready to embrace the new technology (Barua, 2001). The Internet should be treated as any other innovation where the challenge for the analyst is ascertaining the extent to which customers are ready for new ideas (Kim and Mauborgne, 2000). It is also a matter gauging the extent to which businesses are able to incorporate the Internet as an enabling tool that buttresses traditional business models and therefore their competitive advantage. It does not have to be an either / or scenario where the Internet somehow throws traditional work practices into disarray. Rather, this notion can be taken a step further and the very need for e-strategies can be summarily dismissed (Porter, 2001). Though the Internet has altered numerous aspects of business, it has not changed business itself and age-old principles still hold true. In fact, it is only by applying orthodox frameworks that the impact of e-business can be thoroughly examined (Amit and Zott, 2001).

2.6. CONCEPTUAL FRAMEWORK

Performing a literature review has validity, for though the current situation of London translation and interpreting agencies is the focus, the aforementioned theories and models are applicable. Even though the study may investigate a new area, or talk about the Internet specifically, it is important that it be grounded in sound theoretical knowledge, which is backed by the current literature.

The literature review allows for a something of a SWOT analysis to be performed, with an industrial analysis of environmental opportunities and threats and RBV analysis of the organisation's strengths and weaknesses. This triangulation of the main schools of thought will offer the most balanced examination of the present state of affairs.

RESEARCH QUESTIONS

RELEVANT THEORY

What does competitive advantage mean in the world of London translation and interpreting agencies?

Porter's 5 Forces, for an analysis of the forces at play in the translation and interpreting industry

How then can this competitive advantage be sustained in the world of London translation and interpreting agencies?

Barney's notion of sustainable competitive advantage

How has the notion of competitive advantage been affected by the proliferation of the use of the Internet?

Porter's 5 Forces analysing the state of the translation and interpreting industry in London

How significant is the threat of online linguists?

Porter's 5 Forces particularly looking at the threat of substitution

RBV - looking at key elements of core competences, such as imperfect imitability, rarity and non- substitutability