Sources of Competitive Advantages
Competitive advantage refers to “the ability gained through attributes and resources to perform at a higher level than others in the same industry or market” (Neganova 304-317). A firm is considered to have achieved a competitive advantage if it is implementing a strategy that creates value, and such a strategy is not being implemented by its competitors. The value-creating strategy enables the firm to realize superior performance.
Consequently, the firm outperforms its competitors in the industry. Competitive advantage is realized when a firm develops attributes that enable it to overcome competition (Neganova 304-317). Such attributes include skilled labor, advanced technology and access to raw materials. Additionally, the firm should develop a business strategy that enables it to utilize its resources to create a competitive advantage. This paper focuses on core competencies as a source of competitive advantage.
The Core Competencies Needed for Sustainable Competitive Advantage
According to Prahalad and Hamel, core competencies refer to “the collective learning in the organization, especially, how to coordinate diverse production skills and integrate multiple streams of technology” (1-13). These skills determine the quality of the firm’s products and the ease with which its competitors can join new businesses. Core competencies are considered a source of competitive advantage due to the dynamic nature of the contemporary business environment.
Firms find it difficult or even less valuable to control a give market segment as product life-cycles accelerate and market fragment. To survive in a dynamic business environment, the strategy of the firm should focus on adapting its behavior to the needs of the market rather than transforming the structure of the firm’s products (Prahalad and Hamel 1-13). This can only be achieved if the firm develops core competencies that can not be easily imitated and differentiate the firm from its competitors.
According to McKinsey and Co., a firm should concentrate on three to four core competencies to achieve a competitive advantage (Dess and Lumpkin 27). The choice of three to four competencies is informed by the following reasons. First, developing core competencies that translate into competitive advantages requires a lot of resources. Due to the scarcity of resources, firms should concentrate only on capabilities that distinguish them from the rest in the industry (Dess and Lumpkin 28).
Second, a firm with more than four core competencies may find it difficult to fully exploit such competencies in its industry or market. If the competencies are so many, the management might fail to fully understand and develop them. Hence, there will be wastage of resources and failure to create the desired competitive advantage. Finally, not all capabilities of the firm can qualify to be core competencies (Prahalad and Hamel 1-13). For a capability to be considered a core competence, it must meet the following criteria. First, the firm’s competitors should find it difficult to imitate the capability. This means that a “core competence should be competitively unique” (Dess and Lumpkin 34).
Thus, any resource or capability that does not provide significant competitor differentiation can not be considered a core competence. Second, core competence must enhance the end customer’s perceived or experienced benefits. The core competencies should create fundamental customer benefits. In this context, core competencies include the skills used to produce and deliver a product that meets the customers’ expectations. Such production capabilities determine the product quality which eventually determines the competitiveness of the product in the market. Finally, a core competence should enable the firm to “access a wide variety of markets” (Prahalad and Hamel 1-13).
By concentrating on three to four competencies, the firm will be able to focus its scarce resources on developing capabilities that meet the above criteria. Consequently, it will achieve a competitive advantage by distinguishing itself in the industry.
The Core Competencies that a Firm should pursue
A sustainable competitive advantage is one that provides long-term competitive uniqueness to the firm. Additionally, it should be difficult to duplicate. As discussed above, sustainable competitive advantage can be achieved if the firm concentrates on three to four core competencies. However, the number of core competencies pursued by a firm might be less or more than the recommended three to four. Core competencies can be conceptualized as “the resources and capabilities that create competitive advantages” (Neganova 304-317). The number of core competencies to be pursued by the firm, thus, depends on the ability of its capabilities to enhance sustainable competitive advantage.
Therefore, the choice of the core competencies to be pursued is guided by the following criteria. First, core competence or capability should be valuable. It should enable the firm to overcome threats in the industry (Prahalad and Hamel 1-13). For example, it should enable the firm to overcome the threat posed by substitute products and competitive rivalry. Besides, the capability should enable the firm to take advantage of the opportunities that arise in the industry. Second, the capabilities possessed by the firm should be rare in the industry. These should be capabilities that are not at the disposal of many firms.
Third, a capability is considered a core competence if it is costly to imitate. The capability should have a historical association with the firm. For example, it can be a unique organizational culture that creates value or a unique brand name. Effective work relationships and trust among employees and other stakeholders of the firm can be costly to imitate due to the social complexity associated with them. The causes or purposes of the competence should be ambiguous to competitors.
Lack of a clear understanding of the cause and purpose of the competence will prevent the competitors from imitating it. Finally, the firm’s capabilities should be non-substitutable (Dess and Lumpkin 45). This implies that there should be no alternative resource or strategy which can substitute the capability. All the sets of capabilities and resources that meet the above criteria qualify as core competencies. Thus, it will be in the interest of the firm to pursue all its capabilities that qualify as core competencies.
Business Strategy Dynamics: Tesco.com
Business strategy dynamics concerns the “initiatives, choices, policies and decisions adopted in an attempt to improve performance and the results that arise from these managerial behaviors” (Dess and Lumpkin 51). The concept of business strategy dynamics will be illustrated by analyzing the strategic actions that have contributed to Tesco’s success.
Tesco is a leading online grocer in the world’s grocery industry. The company serves about one million customers and fulfills more than two hundred and fifty thousand orders every week. Currently, Tesco is the third-largest retailer at the global level, with over 400,000 employees and 2440 stores in different countries (Zoeael and Simson 142-150). The UK-based supermarket chain was established in 1924. As a dominant firm, Tesco has over 30% market share of the UK’s grocery market. Apart from groceries, the firm also sells clothes, electronics, and gas. It also provides financial, internet and telecom services. The strategic actions that have contributed to the success of Tesco include the following.
Tesco’s main competitive advantage is its unique brand image that is associated with high-quality products. Consequently, the customers believe that they will always get value for their money by buying Tesco’s products. To develop a strong brand, the management re-engineered the process of product and service development (Zoeael and Simson 142-150). This enabled the management to effectively manage the product lifecycles and deliver a variety of products. Product activity at Tesco is aimed at improving existing products and introducing new ones. The company has also focused on improving customers’ shopping experience as well as introducing new products such as financial and insurance services. This effort has enabled the company to create a reputation that can not be matched by its competitors in various markets.
Tesco has gained the loyalty of its customers by introducing a loyalty card system through which it rewards its regular customers. The services are also customized to meet the specific needs of all customers. For instance, having realized that the majority of people prefer online shopping, Tesco introduced an online sales system and this has significantly contributed to its rapid growth (Zoeael and Simson 142-150).
To realize its objective of being a leading online retailer, Tesco’s management developed an only supply system. The system coordinates most of Tesco’s supply chain activities by connecting all stores to the firm’s central management unit (Zoeael and Simson 142-150). The supply system effectively controls stock, tracks deliveries and keeps business transaction information which is used to analyze performance. This system is a core competence since it enhances customer benefits by allowing customers to personalize their online purchases.
Tesco obtains its supplies within the UK and from abroad. To secure its supplies, Tesco aims at developing unique relationships and trust with its suppliers. The firm uses “advanced communication technology to coordinate the work of its suppliers and improve efficiency in its supply chain” (Zoeael and Simson 142-150). The best suppliers are selected from various countries through subcontractors who have close relationships with Tesco. Close relationships with suppliers is a core competence since it is difficult to imitate.
The Impact of the Internet
Tesco uses the internet to develop proprietary information which enables it to synchronize its activities with those of its partners. By connecting with partners through the online system, Tesco has been able to achieve flexibility, scalability as well as extensibility in its distribution channel (Zoeael and Simson 142-150). Key information from Tesco’s partners is easily shared through internet-based online communication systems. Consequently, the management has been able to develop and maintain mutual relationships with all stakeholders in the supply chain.
Finally, the internet has greatly improved the sales of Tesco across the globe. As a leading online retailer, Tesco heavily relies on the internet to reach its customers from different parts of the world. The customers place their orders on Tesco’s website and the orders are then delivered to the customers. The internet also serves as a marketing tool. Tesco uses email services to communicate with its customers. For instance, customers are usually informed about new products or promotional activities through their email addresses and Tesco’s website.
Dess, Gregory and George Lumpkin. Strategic Management: Creating Competitive Advantages. New York: McGraw-Hill, 2009. Print.
Neganova, Irina. “Managing Core Core competencies to create Value for Customers.” World Review of Entrepreneurship Management and Sustainable Development 6.4(2011): 304-316. Print.
Prahalad, Coimbatore and Gary Hamel. “The Core Competence of the Corporation.” Havard Business Review 68.3(1990): 1-13. Print.
Zoeael, Keivan, and David Simson. “Performance Improvements through Implementation of Lean Practices.” International Food and Agribusiness Management Review 9.2(2009): 142-150.Print.