Question

1. a) Explain the concept of sustainable competitive advantage (SCA). What are the higher-order and lower-order sources of SCA? What are the threats to SCA? And how do you counter them? b) Consider an analysis of return on investment (ROI) reported over a 10-year period for a sample of 100 firms in the same industry. When the sample was divided into two equally sized groups, based on initial ROI, the top group's ROI in year I was 33 percent and the bottom group's was 3 percent. Assume firms were kept in the same businesses in which they started out and tracked over a decade. What would you predict to the 30-point ROI difference between the two groups by year 10? And why? (Note: You dont need to downy calculations to answer this question)

Answer 1

Sustainable competitive advantage: Sustainable competitive advantages are company assets, attributes, or abilities that are difficult to duplicate or exceed; and provide a superior or favorable long term position over competitors. A Sustainable Competitive Advantage is the backbone of most businesses that are thriving today. Businesses that have understood this and followed a Sustainable Competitive Advantage strategy have remained to be the market leaders in their industry for an extremely long time. The question is What is this Sustainable Competitive Advantage? Even more than that, the question would be how to develop this competitive advantage. In the last Strategy article - Competitive Advantage - the Messi of your business, I talked about competitive advantage and the two types of it i.e. Cost Leadership and Differentiation. A quick recap of that: A firm enjoys a competitive advantage when it provides its customers benefits similar to its competitors but at a lower price. That's because it manufactures its products at a much lower cost as compared to the competitors. The lower cost of production gives it the cost advantage allowing it to price its products lower than competitors. The same firm also enjoys a competitive advantage when it provides its customer's benefits superior to what is being offered by its competitors, but at the same price. These excellent benefits give the firm a differentiation advantage. What do these advantages mean? These are two strategies for the same objective. Both these advantages translate into superior value creation for customers and higher profits for the firm. The cost and differentiation advantages give the firm a positional advantage - either in any one or both.

How do firms gain a sustainable competitive advantage? A firm uses its capabilities and resources to offer products and services that customers want. When a firm uses them optimally to produce a product at the lowest cost and with more features, then it creates a cost or differentiation advantage. The concept becomes clear through the following diagram Resources Distinctive C Competencies Cost advantages v alue creation Capabilities 12 Best Sources Advantage in Business of Sustainable Competitive: 1. Strong research and development capabilities: A business can gain a strong competitive advantage in its industry if it has strong research and development capabilities. Strong research and development reflects in the company's product development processes. Companies with strong research capabilities often lead the market with innovation. 2. Access to intellectual properties:

The next source of sustainable competitive advantage a business can exploit is the holding of an intellectual right; which can exist in the form of trademarks, trade names, copyrights and patents. 3. Exclusive re-selling or distribution rights: Holding exclusive distribution right is another source of sustainable competitive advantage. When a company holds exclusive rights to a product within a given territory; that product can only be sourced from the distributor or holder of such rights. 4. Ownership of capital equipment: This source of competitive advantage is mainly exploited by companies operating in industries where heavy machinery is needed. Example of such industries where ownership of capital equipment is a competitive advantage includes publishing, manufacturing, oil exploration, construction and mining. 5. Superior product or customer support: Any company that has the capacity to quickly respond to customers need and provide subsequent support will have a competitive advantage over competitors. 6. Low cost or high volume production: If your business has the capacity to produce in high volume; then it can gain a sustainable competitive advantage by reducing its profit margin and recoup it through high volume sales and turnover. 7. Economic factors: The seventh source of sustainable competitive advantage is the economic factor of a region within a speculated time frame. A manufacturing company operating from China or India will have competitive advantage over a company manufacturing in the United States because the economic system in China is more favorable with respect to start up overhead and labor cost. 8. Superior database management and data processing capabilities:

This source of competitive advantage is quite clear and understandable. A company that demonstrates the capacity to process data speedily will have a competitive advantage over other firms with lower processing capacity. This source of competitive advantage usually plays itself out in the banking industry, telecommunication industry and the service industry in general. 9. Strong marketing strategy: In the market place, the company with the best marketing strategy wins. No doubts about it. The competition to gain a stronger competitive advantage in the marketplace is the reason why giant corporations spend millions of dollars on marketing research and advertising annually. 10. Access to working capital: Access to working capital is one of the strongest sustainable competitive advantages a business can have over its competitors. Access to working capital is the difference between a billion dollar company and a million dollar company or a small business and a big business. 11. Excellent management team and operations: Show me a business that is a market leader in its industry and I will show you a business backed by a strong management team. Exploiting other sources of competitive advantage without a strong business team on ground will only be a futile attempt. A business management team is essential to harnessing opportunities that create the needed competitive advantage. 12. Barriers to entry or monopoly: Some businesses have gained competitive advantage because the entry in their industry has been limited by surrounding circumstances. A good example of industry where barriers to entry creates competitive advantage is the oil exploration and mining sector industries where licenses are needed to gain entry because there is government restriction on entry). Monopoly is also a sustainable competitive advantage and can be gained by having strong ties with the government. As a final note, these are the12 sources of sustainable competitive advantage a business can exploit. Remember that a company without a competitive advantage cannot compete and when you can't compete; you are as good as dead.

9 TYPES OF COMPETITIVE THREATS: • New competition: The potential for new firms to compete for your customer. • New products: Improvement to the products & services of the competitors • New business models: The new way of capturing that competes with your business models • Substitutes: The ability of competition in different markets to attract your customers. • Pricing: The potential for a price war. • Customer experience: Improvement to customers experience. • Promotion • Talent: The potential of the competition to recruit your most valuable employees. • Intellectual property: The potential for the competition to develop superior intellectual property such as trade sector & patents.