Competitive
advantage and value for shareholders
Our columnist discusses the importance of companies striving to
be different to get an edge over the competition without which they
would find it difficult to survive.
A
challenge which all businesses face today is increasing competition.
Competition not only from local firms but also from international
contenders.
SriLankan
Airlines, our national carrier is facing stiff competition on various
routes from Qatar Airways and Etihad Airlines which appear to be
offering lower air fares than SriLankan. Sri Lanka's apparel sector
is also facing threats from many global competitors, including China,
who are capable of offering quality as well as cheap products to
the buyers.
Sustainable
profits
How can a firm build sustainable profits in such a situation?
There is a need to adopt a clear competitive strategy. In other
words the business will have to be clear about how it is going to
compete in the market place.
Competitive
strategies
Competitive strategies can be broadly categorised into
three, which are
1. Cost leadership
2. Differentiation
3. Focus
Cost
leadership
This is an approach whereby a firm attempts to become
the lowest cost producer in the industry. Scale has to be built
to reach this position. Toyota is the lowest cost car manufacturer
in the world whereas Exxon Mobil is the lowest cost oil company.
Wal-Mart has become the lowest cost retailer in the world. When
cost leadership is reached the firm will have the deepest pockets
and will be able to fight other competitors if necessary on price.
Cost leadership will also make it easy to earn higher profits.
Differentiation
The problem is all firms cannot be cost leaders. The only
way they can survive in the market is through what is known as differentiation.
They attempt to appear different from the rest of the companies
in the market according to certain measures. Laugfs supermarkets
does not have the scale which Sathosa or Food City offers.
They
differentiate in terms of convenience, variety and being open 24
hours. Most airlines differentiate by attracting their nationalities
through cultural differentiation.
Focus
This is where a firm tries to provide goods or services
to a segment of the market and does not cater to every one. HSBC
in Sri Lanka focuses its services towards the upper middle class
clientele. EasyJet, a European low budget airline, focuses on budget
conscious travellers. The focused approach can also be very profitable
if the firm settles in a segment with limited competition and specialises
in serving that segment. Porsche is a successful car manufacturer
building sports cars and SUVs to the high net worth luxury segments.
Conglomerates
There are many conglomerates in Sri Lanka such as JKH,
Hayleys and Ceylinco which pursue diversification as an approach
to gain competitive advantage.
While
this can guarantee profits the risk with this approach is the development
of large companies, which do not have a competence in any particular
form of business.
Message
to the investor
If a business is to generate high profits for its shareholders
in the long run it must have a competitive advantage. Firms without
competitive advantage will find it difficult to survive in the long
run. In an era of increasing competition it is essential for boards
to focus on developing a particular competitive advantage for their
firm. |
