Competitive Advantage PDF - Management & Strategy

De JAEGHER Argancy November 5th 2024 JADINON Zoé MISSA Aurore POPOVICI Anisa SCAILTEUX Emma WOODS Zita Competitive advantage Management and Strategy - BECGE1321 Professor: Frank Janssen  Table of Contents Introduction...

De JAEGHER Argancy November 5th 2024 JADINON Zoé MISSA Aurore POPOVICI Anisa SCAILTEUX Emma WOODS Zita Competitive advantage Management and Strategy - BECGE1321 Professor: Frank Janssen  Table of Contents Introduction 3 Part 1 : Theory 3 The three strategies 3 1. Cost Leadership 3 2. Di erentiation strategy 4 3. Focus strategy 4 Sustainable competitive advantage 4 Part 2 : Case studies 5 Proximus 5 ABInBev 6 Part 3 : Critical part 7 Conclusion 7 Bibliography 8 2 ff  Introduction In this paper, we rst de ne the concept of competitive advantage and analyze the various strategies that companies can adopt based on the theory model proposed by Porter. To examine this on a more practical level, we explore two case studies and discuss how each of these companies have successfully implemented unique strategies in order to gain leadership in their respective market. Finally, we bring a more critical view on the subject of competitive advantage and consider the signi cant implications it can have for the overall economy. While a company’s competitive advantage can drive innovation and evolution, it may also lead to negative consequences for the market dynamic. Part 1 : Theory The term competitive advantage describes “a condition or circumstance that puts a company in a favorable or superior business position”. An organization has a competitive advantage when it is able to develop some characteristics that allow it to outperform its competitors. The company could do that by producing better goods and services or producing them more cheaply. In 1985, Michael Porter published his book ‘Competitive advantage: creating and sustaining superior performance’ which introduced that concept. Even though Michael Porter was the rst one to formally introduce the concept of competitive advantage, it already existed from the moment people began trading or selling goods to one another. In his book, Porter discusses the three di erent possible strategies for establishing a competitive advantage. The three strategies According to Porter, a rm is able to acquire a competitive advantage through three di erent strategies: cost leadership, di erentiation and focus. He then subdivided the focus strategy in two di erent parts: cost focus and di erentiation focus. 1. Cost Leadership The cost leadership strategy means that a company is the leader in terms of cost in its industry or market. In this strategy, organizations try to cut o as much expenses as possible which then allows them to o er goods and services at lower prices than their competitors. To be able to reduce their expenses they can use economies of scale. Those are the advantages that occur as a result of increasing the size of a business. Cost leaders set lower prices than their competitors so they can attract a bigger part of the market. This strategy creates barriers for new rms wanting to enter the market, as replicating the cost e ciency of a cost leader can be hard. This strategy also provides a good resilience during downturns because in periods of nancial instability, people will prefer a ordable options. However, cost leadership can be considered risky because, even though barriers are created, it can still be imitated, causing the organization to lose its competitive advantage. Moreover, a ‘price war’ could emerge between competitors which could lead to a point where the price o ered on the market isn’t sustainable anymore. Another downside of this strategy is the quality perception of customers. They may associate low price with low quality which could negatively a ect the brand image. 3 ff fi ffi ff ff fi fi fi ff ff fi fi ff ff ff ff ff fi  An example for this cost leadership strategy would be Ryanair. The low-cost airline is only providing basic services and focuses on the operational costs only. That way, the prices of plane tickets can remain low, attracting price-conscious travelers such as young people or large families. This shows a clear example of creating a competitive advantage through cost leadership. 2. Differentiation strategy The di erentiation strategy involves making di erent and more unique products than your competitors. To be able to nd a ‘successful’ di erentiation, an organization will need a good R&D sector. Di erentiation can be achieved by o ering a product or service that is completely new (an innovation) or by focusing on added value (such as great customer service). This strategy allows companies to increase their prices through di erentiation and consequently obtain higher pro ts. Indeed, consumers are willing to pay higher prices for those products because they consider them ‘unique’ or even ‘superior’. However it is not always guaranteed that people will be interested in those new innovative products or that they will put quality above price. Therefore, companies must be careful when introducing their new o erings regarding their target audience and their expectations. They must also be aware of society's evolution if they want to maintain their di erentiation advantage. GoPro is an example of di erentiation, as they were the rst to produce a camera who could resist water and all types of weather. As a result, the quickly outperformed their competitors. 3. Focus strategy Companies use a focus strategy when they concentrate on a particular niche market and develop uniquely low-cost or well-speci ed products. To achieve that, they need to understand the dynamics of that market and the needs of their customers. Because they provide good quality customer service, companies that adopt this focus strategy tend to build strong brand loyalty. However, having a focus strategy is generally not enough on its own; unlike the two strategies discussed previously. As mentioned earlier, there are two types of focus strategies. Firms can choose to focus on costs by emphasizing cost minimisation within a focused market. They can also choose a di erentiation focus which consists of pursuing strategic di erentiation within a focused market. This gives companies the opportunity to understand their audience better and build value and loyalty. Whether rms choose cost or di erentiation focus, they still have to ensure that they are adding ‘something extra’ by only serving that niche market. Otherwise, more resourceful companies will put them o the market. Sustainable competitive advantage Acquiring a competitive advantage through one of those strategies is one thing, but being able to maintain it makes another. A sustainable competitive advantage lasts over time. Companies can acquire such advantages through multiple ways. The rst one is by having resources that are limited, di cult to copy and non-substitutable. However, if other organizations are able to catch up with them, that advantage will be gone. Another way for companies to gain a sustainable competitive advantage is through corporate strategic assets. When a company has assets, it has an edge over competitors in the same industry. Assets such as patents and copyrights give their owner a control over their invention. We can nd these kinds of assets in drug companies and it allows them to sell their products that are protected by patents at high prices. 4 fi ff fi ff ffi ff ff fi fi ff ff fi ff ff ff ff fi fi ff ff ff  Part 2 : Case studies Proximus The rst case study that we are going to analyze as a way to illustrate the concept of competitive advantage is that of Belgium's leading digital telecoms operator: Proximus SA. This rm is very complex as it has many a liates and brands that tackle multiple segments of the market, both at a national and international level. To simplify this case study, we decided to center our study on the Proximus brand which is the one we, as customers, are most accustomed to. To understand the unique competitive advantage of Proximus, we rst need to focus on its history. Formerly called RTT and founded in 1930, it was the rst operator in Belgium. The company used to be public and had the monopoly on the Belgian telecoms market. Eventually, that market was fully liberalized in 1998 which means that competitors could start entering the market and Proximus, which was still called Belgacom at the time, lost its monopoly. The rst competitive advantage that we can discuss is the one Proximus acquired due to that special background. Indeed, as the sole operator for many decades, the company had already covered substantial infrastructure costs related to the telecoms sector, whereas new competitors had not yet done so. That historical competitive advantage also contributed to consolidating Proximus’ brand image. Since the operator had already been established for a long time, it created a feeling of trust and stability in the minds of consumers. Like we have said, before 1998, Proximus used to have all the consumers but with new entrants on the market, they had to start sharing the pie. Even though it was the historical leader, it could have lost its position to its new competitors. However, data show that Proximus’ market shares have remained relatively stable at around 40-50% over the past few decades. The brand has therefore succeeded in remaining the preferred partner and in maintaining a sustainable competitive advantage. In order to gain more insight on Proximus’ competitive advantage, we contacted Laurent Lemay, Head of Customer & Market Intelligence at Proximus. Most of our information is based on our interview with him. We start by examining Proximus’ brand strategy which consists of targeting the premium segment of the telecoms market by providing quality and trust servicing. This strategy enables the company to apply a price premium on their products which are superior to the others on the market. This is known in the theory by Porter as a di erentiation strategy. To protect their price premium, the brand has to justify it and that includes maintaining their premium image and competitive advantage. A rst way for Proximus to keep their advantage is through innovation. According to Laurent Lemay, Telecoms is about investments. To make sure that the brand remains the best operator and that it continues to issue superior products, Proximus invests a lot in research and development, more than its competitors. We have already seen the results of such an innovative behavior in the past as Proximus was the rst operator in Belgium to o er 3G in 2005 and then 4G in 2012. Today, Proximus leads the market regarding 5G and ber connections. Proximus is also looking to make a di erence besides innovation. Like we have already mentioned, Proximus di erentiates through its quality service. However, the brand not only makes sure that they provide better products and speed of network, but they also serve customers better. Indeed, to maintain their competitive advantage and premium servicing, the experience consumers get by interacting with the brand has to be perceived as better than what they would get with competition. To ensure that they remain the best in that domain, Proximus pays a lot of attention to its customers and listens to their feedback. Part of Laurent Lemay’s team monitor the customer experience and track their response through customer research. As a matter of fact, the results of their research show that Proximus is better at customer service than competitors like Telenet for example. In conclusion, we looked at the rich history of Proximus, which enabled us to draw on its historical competitive advantage. But this advantage alone isn’t su cient to explain Proximus’ prosperity 5 fi fi fi ff ffi fi ff ff ffi fi fi ff fi fi  over the years. The company also owes its success to its ability to establish a sustainable competitive advantage on the telecoms market. The brand di erentiates by providing high quality products and customer service. They also stay ahead of new trends by investing a lot in R&D so they can provide innovations on the market. The brand is constantly diversifying and moving to new markets and segments so it remains perceived as unique and di erent. This is what allowed Proximus to prosper over the years. ABInBev The second case study that we are going to analyze is the world’s leading brewing group called ABInBev. The Belgian company has grown remarkably since its debut and is now a market leader. We are going to review 3 di erent strategies that ABInBev uses to keep its competitive advantage. The rst management strategy of ABInBev consists of acquiring brands that promise sustainable growth in order to reduce costs and o er a wide range of product choices. As a major player in the brewing sector, AbInBev enjoys considerable bargaining power with its suppliers. Indeed, its monopoly position in Africa and in Latin America gives it the power of setting its selling prices. Suppliers are often in favor of negotiating prices or accepting more favorable payment terms to secure a partnership with such a giant company. This advantage regarding prices strengthens the company’s competitiveness against its smaller rivals that do not have the same leverage. In addition, the company bene ts from considerable economies of scale. Due to its size, it buys raw materials in very large quantities, which allows it to bene t from lower prices in terms of production costs. From what we have seen in the theory of Porter, we can say that ABInBev clearly has a cost leadership advantage. Moreover, this strategy of acquiring promising brands has enabled ABInBev to have a very diversi ed portfolio of beer brands. The company owns internationally well-known brands such as Stella Artois, Jupiler as well as local and regional beer brands. By acquiring all the growing market segments, both locally and globally, the company can propose beers for every taste. ABInBev has also established a large distribution network over the years that ensures a high visibility and accessibility of its products. Indeed, its beers are available everywhere from restaurants, to supermarkets, or small grocery shops. The second strategy that ABInBev uses to remain competitive is constant innovation. This not only concerns the product in itself but also consumption trends. The company makes sure to o er innovative avors, limited edition beers and new models of eye-catching cans in the shape of a bow tie or V shape. They respond and even go beyond the ever-changing tastes and consumer preferences in order to better respond to their needs. The rm also adapts to new consumer trends such as sustainable and responsible consumption. As an example, the company is now opting for environmentally friendly packaging. In response to the growing trend of personal wellness, the company has planned a big project for 2025 that consists of o ering many popular drinks with a low or no alcohol option. They are also entering into new partnerships such as one with the famous transport company Uber to promote safe driving and responsible drinking. This constant innovation is one of the most important factors that allows ABInBev to remain at the forefront of the beer industry. Finally, the company is implementing a marketing strategy that focuses on consumer engagement to strengthen brand loyalty. The company adapts to individual preferences and behaviors by o ering di erent beers according to the cultural region or to seasons and festivities. This approach allows the rm to interact with consumers on a more personal level and to create emotional connections. For example, AbInBev is strongly present in large popular events such as the World Cup of football or Tomorrowland where they organize creative experiences and immersive pop-up bars. These partnerships strengthen the presence and awareness of the company worldwide and allows it to interact with consumers by sharing common experiences. These marketing strategies positively a ect the customers who unconsciously associate those experiences to the brand, thus creating loyalty. 6 ff fi fi fi ff fl ff fi ff ff ff fi ff ff fi ff In conclusion, AbInBev has a cost leadership advantage thanks to their strategy of acquiring all the growing market segments and use of economies of scale. They also di erentiate through their constant quest of innovation and wide range of product choices. The company’s commitment in building relationships with their consumers also strengthens their dominant position worldwide. Part 3 : Critical part As we saw it in the other sections of this paper, having a competitive advantage can be seen as a key to business success. However, what are the impacts of such competitive advantages on customers and on the markets? This section addresses the limits of such competitive advantages. First of all, rms with signi cant competitive advantages can gain monopolistic power in a particular market. Such power allows businesses to set prices as they wish which is often way above the price that would have been set in a more competitive market. Indeed, rms that don’t face meaningful competition from other companies may charge prices that re ect their market power rather than their production costs. Such pricing strategy tends to lead to higher prices and reduced consumer welfare and satisfaction. To exemplify that, we can take the case of the company Gilead Sciences, a pharmaceutical company, which owns a patent for its Hepatitis C treatment. This patent allows the company to be the only one producing the medicine and therefore, we can say that it has the monopolistic power. Indeed, Gilead Sciences charges tremendous prices (about $1000 per pill) for their treatment, even though it could save the lives of many people. Another consequence of companies’ strong competitive advantages is that it creates barriers to entry for potential competitors. Indeed, when a company or multiple companies own a signi cant competitive advantage, it makes it even harder for new entrants to enter the market. These barriers can take the form of high capital requirements or even high advertising costs that would be required to compete with strongly established competitors. Therefore, such competitive advantages tend to distort market competition. We can take the case of the non-alcoholic beverage market as an example. Indeed, that market is strongly dominated by two companies: Coca-Cola and PepsiCo. These two brands created barriers to entry through many competitive advantages they have established throughout the years. Coca-Cola and Pepsi-Co both have a strong brand loyalty and recognition around the world, making it very di cult for small starting companies to build a similar level of brand recognition. Moreover, these companies spend billions of dollars every year on advertising to make their products even more visible. Small companies don’t have enormous budgets to compete with them. Last but not least, both of these companies o er a large variety of products (sodas, juices, energy drinks, tea,…) which allows them to reach a large spectrum of customers. Small companies usually don’t have the resources to develop that many products, therefore they’re not able to reach the same customer base. Conclusion In conclusion, maintaining a competitive advantage, regardless of its type, is essential for a company to be successful. Depending on the company’s focus, di erent strategies can be adopted, as we saw earlier. The case of Proximus shows that companies must remain creative and innovative to maintain their advantage, even as the environment changes. ABInBev teaches us that scaling and striving for market dominance can provide a signi cant advantage, though this approach can be criticized due to the challenges it poses for other companies trying to enter such a monopolized market. 7 fi ffi fi ff fi ff ff fl fi fi  Bibliography Twin, A. (2024, 12 June). Competitive Advantage De nition With Types and Examples. Investopedia. https://www.investopedia.com/terms/c/competitive_advantage.asp How to gain a sustainable competitive advantage - Qualtrics. (2023, November 17). Qualtrics. https://www.qualtrics.com/experience-management/customer/sustainable- competitive-advantage/ Porter’s Generic Strategies. (n.d.). Mindtools https://www.mindtools.com/azb8kpl/porters- generic-strategies Zanetti, N. (2024, February 19). 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