Competitive Strategy vs Value Innovation free essay sample

From the last few decades, the emphasis of strategy has been on the competitive advantage (as laid down by Michel Porter in 1980). This is evident from the cut throat competition amongst the various industrial sectors, be it at domestic or global level. Every company or firm in their respective industries strives hard to grab a bigger market share than its peers. The motive is to surpass the profits/revenues of the latter. But in the recent times, the scenario has been a strayed. Instead of following the cliche notion of competitive advantage, the present day firms have gathered a new perspective of profit making i. e. Value innovation’. I am going to take a look at both of them and eventually try to compare and contrast the two perspectives. STRUCTURE Before going into the details of two scenarios, there is a need to understand that what strategy actually implies. Different businessmen have their own way of explaining strategy. According to (Hitt, Ireland Hoskisson, 2009 p. ) ,A strategy is an integrated and coordinated set of commitments and actions designed to exploit the core competencies and gain a competitive advantage. Michael Porter (1996) defines strategy in terms of competitive strategy. He asserts that the notion of strategy lies in being at a competitive position and adding value through a combination of activities that are different from that of competitors. Strategy is a pattern of the fundamental goals of the walk and planned the distribution of resources and the organization of interaction with the market, competitors and factor-environmental factors. -John A. Byrne So the selected strategy lays down the dos and don’t’s of an organization. From quite a long time, competitiveness has been in vogue. The firms in a particular industry try to imitate each other. Any firm enjoys the competitive advantage when its rivals are not able to emulate the profits that it makes. So competition comes out to be the most essential factor here. But this happens for a transient period of time. In order to sustain themselves in the value creating strategy, the firms imitate each other. It is where the competitive advantage fails. According to (Porter 1980, p. 12) the basic unit of analysis and business are industry and product respectively. Thus analysis of industrial structure holds utmost significance in forming a competitive strategy. A set of five forces define an industry structure and hence shape the competitive in an industry. These forces are a means of understanding an industrys current profitability as well as effective positioning. In other words they depict whether an industry is attractive or unattractive in the market place. Thus these vary from industry to industry. The five forces according to ( J. H. M. de Jonge 2011) are as follows. The entry is guided by the some of these barriers like when the company in question enjoys economies of scale, product differentiation and the entrants need capital requirements and switching cost and strict government policies thus making it difficult for the newcomers to enter the industry. COMPETITORS: There are a number of factors that guide the rivalry between the competitors. These include numerous equally balanced competitors, insufficient industry growth, high storage costs to name a few. The substitutes are the products that have quite the same function as companys own products. e. g. Plastic for aluminum. If there is high threat from the substitutes, then the industrys profitability and growth potential suffer. For e. g. With the advent of Skype, telephone services have experienced a major setback.The bargaining power of suppliers is more when they are more concentrated, not dependent upon revenues and pose a threat of forward integration. The bargaining power of buyers is high when buyers buy in bulk, have little consideration for quality and may threaten to integrate backwards. After having discussed the five factors that form an essential tool in laying down the industrial structure, now I am going to discuss the three main generic strategies that are required to position a company in the market place. It is said that the five forces measure the companys attractiveness which is indeed the primary factor and the secondary factor is its position in the market, this is guided by the generic strategies. Porters 1980 generic strategies model (Antony Michail, 2011) Â  According to (Antony Michail, 2011) in order to be following the strategy of cost leadership, a firm needs to be the low cost producer (Porter, 1980). It can gain the cost advantage by means of economies of scale, innovative technology, cheap raw materials, etc. They can do so by grabbing bigger market share through lowering their own prices or by maintaining average prices, thus increasing profitability (Porter, 1980). For e. g. Wal-Mart has been utilizing this strategy. It is successful because of its large scale and efficient supply chain, thus allowing their items at low prices and to profit off thin margins at a high volume (Antony Michail, 2011) This incorporates development in product or services such that it offers unique quality and is valued by the customers (Porter 1980). The added value enables the firms to charge premium price for it. They have the resources and core competencies. They have skilled production team and efficient sales network. The drawback is that they can be a t loss if their competitors imitate the product design or there is decline in demanded consequent to changing customers taste. e. g Apple computers have been profiting by implementing the differentiation strategy. By differentiating their product because they get desired value. Owing to lesser number of substitutes they are the market leaders and it launches its product only when they have enough resources to sustain themselves in the market for long. This is what confers them a competitive advantage. Unlike the other two, it focuses on narrow market segment and thus practices both differentiation and low cost. Here the firms set out to serve the niche markets. Ferrari and Rolls Royce are perfect examples of niche players in the automobile industry. These two companies have a niche of premium products available at a premium price and they occupy a small percentage of worldwide market (Drypen, 2010) These are the primary and secondary factors that help company achieve competitive advantage and sustain itself in the market place. According to Porter(1980. 985) the competitive strategy is related to economics concept where long term competition and imitation are the main factors. This creates the path to yield superior growth and profitability in the future. Blue ocean focuses on venturing into the untapped market place by means of Value Innovation which forms the corner stone of this strategy. According to (Kim Mauborgne 2005) although the term seems to be newer, yet the blue oceans have always existed in the past as well. If we look back like 100 years from now, we’d realize that the industries which are quite common in the present times were totally nonexistent for e. g. Internet industry, the automobiles industry, the telecommunications, the biotechnology industry, pharmaceuticals, fast food chains etc. So this means that every industry is borne with an idea of introducing something new for the people and thus demand is created with the advent of such industries. At the same time we dont know how things are going to be in another 50 years. According to (Kim Mauborgne 2005) we might get to see certain new industries which are not even thought of at present times. It is likely that blue oceans are going to serve as the growth engines. The red oceans are decreasing because the technological innovations are progressing in leaps and bounds. No industry wishes to be a bystander instead it works on its products and thus seeks to accomplish value innovation. (Kim Mauborgne 2005) lay down that the incumbents can create blue oceans within their core businesses for e. g. In the movie theatre industry, AMC theatre have a reputed name. They began as multiplexes in 1960s and later evolved into megaplexes in 1995. Thus they strived into a new venture because they had core competencies to do so. In stark contrast to what Porter emphasized, the proponents of this strategy lay down that the industry is not the unit of analysis, but it is the strategic move which holds more significance. The following are some of the features that differentiate Red Ocean and blue ocean (Kim Mauborgne 2005) Thus Blue Ocean strives to create untapped market place. The competition is not a defining characteristic and most importantly the focus is to provide the low cost and differentiation simultaneously unlike those in competitive strategy which stresses upon either low cost or differentiation. For e. g. Cirque de soleil successfully entered a totally unattractive industry because it restructured the industry through value innovation, created a new market place and eventually turned out to be a winner. This is what the core essence of Value innovation is. The intent is to create a leap in value for both customers as well as the company (Kim Mauborgne 2005) The companies that create blue oceans set up huge barriers for about 10-15 years which are very difficult to be broken down by other companies and generate economies of scale very rapidly thus jeopardizing the success of their rivals in the industry. A significant example of this is seven eleven convenience stores in Japan mainly which enjoy huge economies of scale, making it impossible for imitators to track down their path. Ikea used value innovation as it co-opted the customer into value chain in the final assembly and delivery stages which enabled it to emerge as a major international brand. Then although a late entrant into the highly competitive computer market, Dell tapped into an enormous reservoir of trapped value with its innovative direct model and left other established players way behind it. Leavy Carry, 2002). Nintendo Wii games were brand new products that didn’t care about the already existent market players like PlayStation by Sony and emerged as the most successful one. In Pakistan very few companies have been able to create new markets. The most important of all of them is Trakkar private limited which introduced a simple device that allowed the customers to track their own vehicle in their bid to prevent against auto theft. No such product ever existed in the market before so it achieved unhampered growth. (Aleem Bawany, 2011). In the termination, I would like to say that the Blue Ocean and Red Ocean have always co-existed together. In the present times the companies cant escape the so called notion of competition. But they need to broaden their horizons by thinking beyond their defined market boundaries i. e. there is a dire need to incorporate the blue ocean strategy. In other words the current time calls for maintaining a balance between the two scales with competitive strategy on one side and value innovation on the other side of the scale.