Achieving Competitive Advantage
Jasire Conner
ECO/415
August 13, 2012
Tarron Khemraj
Achieving Competitive Advantage
Companies, foreign and domestic, have aspirations to expand and become a global business with satellite offices and factories in various areas of the world. For this to transpire the firm must understand what it takes to become profitable and able to finance the global expansion. Creating value for the company and products or service offered by the firm is of great importance because of the profitability possibilities. Creating value for the company, sustaining the competitive advantage of the firm, and the factors involved in expanding businesses globally are discussed in the text below.
Creation of value
Competitive advantage is a firm’s ability to outperform its industry rivals to earn more profit than the industry average (Besanko, Dranove, Shanley, & Schaefer, 2007). This competitive advantage gives the firm a larger customer following which leads to customer loyalty. Customer loyalty is important but not easy to earn. Managers must find a way to create value for the company in order to earn the customer loyalty. The creation of value helps firms develop a competitive advantage over competing firms in the industry who offer identical or very comparable product (Besanko, Dranove, Shanley, & Schaefer, 2007). Creating value will aid the firm in distinguishing itself from others which will help increase the customer loyalty, profitability of the firm, and social standing (Besanko, Dranove, Shanley, & Schaefer, 2007).
Achieve competitive advantage
Performing a service or producing a product that is high in quality but offered at the same price as lower quality competitors will result in the firm having a competitive advantage over its industry rivals (Besanko, Dranove, Shanley, & Schaefer, 2007). With the ability to purchase higher quality inputs at a lower cost coupled with an exclusive contract with said supplier or suppliers gives the firm added value (Besanko, Dranove, Shanley, & Schaefer, 2007). Having a high quality resource not available to competitors provides the firm with the ability to sell the higher quality product at a lower or equal price as the competition (Besanko, Dranove, Shanley, & Schaefer, 2007).
Firms that create more value than industry competitors by offering products that have a higher B are using what is called the Benefit Leadership Strategy (Besanko, Dranove, Shanley, & Schaefer, 2007). This strategy provides parity between the firm and its rivals by making products with the same C but higher B (Besanko, Dranove, Shanley, & Schaefer, 2007). With the customer’s willingness to pay a higher price (B) and the same cost (C) for production, the firm creates more value for its product or service (Besanko, Dranove, Shanley, & Schaefer, 2007).
Another strategy firm’s use is called Cost Leadership. Cost leadership creates more value for its product by offering products or services that have a lower C but the same B (Besanko, Dranove, Shanley, & Schaefer, 2007). With these products and services costing the firm less to produce, the value of the product or service is higher as with the firm’s profitability (Besanko, Dranove, Shanley, & Schaefer, 2007).
Organizations can open its business to a large segment of the market or narrow its focus to certain smaller segments (Besanko, Dranove, Shanley, & Schaefer, 2007). When the focus of the firm is narrowed to a smaller segment, the firm gains more value for its products or services because of its exclusivity (Besanko, Dranove, Shanley, & Schaefer, 2007).
Price elasticity of demand
If the price elasticity of demand is high then the cost advantage would include a modest price cut gaining ample market share (Besanko, Dranove, Shanley, & Schaefer, 2007). The firm can exploit the advantage through the higher market share that other firms do not have and the firm can use the share strategy to underprice competitors to gain market share