The increasing competition in the marketplace is making it difficult for firms to keep up with their growth momentum. Newer entrants to the market try to poach the customers with their new to the market products or superior customer service. The cost of acquiring a new customer is also very high when compared with the cost of retaining its existing customer base. As a result, companies are now realising that it is not enough to make some profit with a single sale transaction. Instead, they try to create distinctive capabilities and differential benefits of their own which will in turn help in creating a competitive advantage of their own. Basing on the model propounded by Porter (1985), companies can create a competitive advantage by either following either cost advantage or differentiation advantage strategies. These differentiation strategies would help the firm in creating better value to customers. A better differentiation with their competitors would also help in creating good customer value, defined as what the customer pays and what he gets back from the product, to its consumers. Creation of competitive advantage would also depend on identifying the competencies that a firm has when compared with its competitors. A firm should be able to identify its core competencies and leverage up on them well in order to build a sustainable competitive advantage in the long-term.
COMPETENCIES AND CUSTOMER VALUE
The increasing competition in the global business environment has made companies compete aggressively to gain the attention and loyalty of consumers. Competition made businesses to resort to different kinds of practices to win over the consumers. Some of the most commonly followed strategies to differentiate from the competitors is to offer highly differentiated products and provide quality after sales service to consumers. The increased flow of information has made consumers aware regarding the other alternatives available in the market. Businesses too have realized that it is not sufficient to make money from a single transaction. Businesses signal the customers regarding the quality of goods sold by them through multiple signals like price, advertising, warranties, and brand names (Erdem and Swait 1998). False promises made by companies regarding the quality of products sold by them make consumers to turn against the company and significantly affect their revenues in the long-term. Social media like Facebook and Twitter have made consumers more activist. Any false promise made by firms is also quickly spread across the Internet.
Having a loyal customer base is also important due to the increasing cost of customer acquisition. Acquiring a new customer is much more expensive than retaining the existing customer base of the company. An unsatisfied customer who switches to another company is a big loss to the company in the form of lost revenues and costs involved in acquiring new customers. Hence, businesses stand to gain a lot by making its existing customer base loyal to them.
Retaining a customer with the business involves providing differential benefits when compared with the competition. A firm should position itself by leveraging on its core strengths. According to Porter (1985), a firm can create competitive advantage by following two different but equally powerful strategies, viz. cost advantage and differentiation advantage. Both these cost and differentiation advantages are referred as positional advantages as they symbolise the firm’s position in the market as a provider of highly differentiated products or cheaper alternatives than the competition. Cost advantage exists when a company can deliver the same products and services as the competitors for a cheaper price. Differentiation advantage exists when the company can offer highly differentiated products than its competitors in the market. Being able to successfully position itself with either of these advantages enables a firm to offer better value to customers and better profits for itself. For creation of either of these values, a firm uses all the resources at its disposal. All the resources and capabilities of the firm give it distinctive competencies when compared with the competition. These distinctive competencies would in turn make the company to position itself on either cost or differentiation advantages that would in turn lead to superior value creation. This model for the creation of competitive advantage proposed by Porter (1985) is depicted in the below figure.
Resources are the assets like brand equity, patents, trademarks, that are specific to the firm and useful for creating a specific advantage to the firm. Capabilities refer to the ability of the firm to utilize the resources available at its disposal effectively. A good example of such capability is the ability of Dell to assemble products from across the world and assemble a product for a cheaper price than the competitors. These capabilities are systematically built over a period of time and difficult for competitors to emulate. Resources and capabilities together form the distinctive competencies of the firm that will help in creating a cost and differentiation advantage and ultimately create some value to the customers. The kind of strategies selected by a company in creating a competitive advantage depends on a number of factors like the firm’s mission, prevailing conditions in the market, intensity of competition between players, etc. Companies like Wal-Mart differentiate themselves over others on the price front as consumers give importance to low priced products while buying groceries while companies like Apple differentiate itself by offering high quality products offering unique and advanced features not available with its competitors.
COMPETITIVE ADVANTAGE AND CUSTOMER VALUE
A unique competitive advantage valued by a company’s customer base helps in creating better customer value. The concept of value has been used in many areas of management literatures like strategy, finance, and marketing. Value refers to the perceived worth of a good or service basing upon the preferences and trade-offs made by the customers. Customer value is defined as the difference between what the customer pays for buying a product and what he gets back in return. Till the late 20th century, companies used to look at internal areas like downsizing, re-engineering, and process improvements for creating competitive advantage. But the emphasis has now shifted to areas involving outward orientation like superior customer value delivery (Woodruff 1997). A good perceived customer value makes consumers to remain with an organization for a long period. Being difficult to measure, customer value has been treated by marketing professionals as an off balance sheet item (Huber et al 2001).
Rather than making a selling a product/service for a single time, it is the ability of the organizations to create and deliver value to the consumers on a continuous basis that makes them survive in the long term. Creating customer value depends upon the resources controlled and the capabilities build by the organization over a long period of time. Capabilities and resources enable organizations to develop their core capabilities into competitive strengths and deliver the strategic advantage valued by the customers.
Core Competencies and Competitive Advantage
Identifying the core competencies of the organization is the first step in developing competitive advantage that is sustainable in the long-term. Once the core competencies of the organization are identified, the firm creates a series of activities known as the value chain to create strategic value. In addition to activities conducted by the firm to create value, it should also take care of the vertical activities of suppliers and channel members. The key in all this is that firm should manage to do one or more of the value chain activities (that create value) in a better way than its competitors. Even though a lot of companies manage to build competitive advantage, many of them could not manage to sustain it in the long-term. A key threat to the long-term sustainability of competitive advantage comes from the external environment. If other firms can easily copy the strategies followed by an organization, the long-term competitive advantage will be lost. Ability to withstand external impacts to the firm’s competitive advantage coupled with a detailed understanding of the organizations’ internal environment like its strengths, weaknesses, and the value delivery network will enable a firm to deliver good customer value on a sustainable basis.
Gone are the days when firms could make profits could make profits by selling a product and get away with low quality items. Activist consumers and the spread of social media is making it difficult to cheat the consumers. The only way that firms can survive in the long-term is to build a sustainable competitive advantage and providing superior customer value. Providing a sustainable competitive advantage would in turn depend on identifying the core competencies of the firm and building up on them.
- Erdem, T &Swait, J 1998, “Brand equity as a signalling phenomenon,” Journal of Consumer Psychology, vol. 7, no. 2, pp. 131-157.
- Huber, F, Herrmann, A, & Morgan, RE 2001, “Gaining competitive advantage through customer value oriented management,” Journal of Consumer Marketing, vol. 18, no. 1, pp. 41-51.
- Porter, ME. 1979,”How competitive forces shape strategy,” Harvard Business Review. Vol. 16, no. 8, pp. 1-10.
- Porter, ME 1985, The competitive advantage: Creating and sustaining superior performance, Free Press: New York.
- Woodruff, RB 1997, “Customer value: The next source of competitive advantage,” Journal of the Academy of Marketing Science, vol. 25, no. 2, pp. 139-153.