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MBA - III Semester (2009-10)























A competitive advantage is an advantage over competitors gained by offering
consumers greater value, either by means of lower prices or by providing greater
benefits and service that justifies higher prices.

Competitive advantage is, in very basic words, how a firm manages to keep
making money and sustain its position against its competitors.

According to Michael Porter in his theory of generic strategies, the three methods for
creating a sustainable competitive advantage are through: 1. Cost leadership - Cost
advantage occurs when a firm delivers the same services as its competitors but at a
lower cost; 2. Differentiation - Differentiation advantage occurs when a firm delivers
greater services for the same price of its competitors. They are collectively known as
positional advantages because they denote the firm's position in its industry as a
leader in either superior services or cost; 3. Focus (economics) - A focused
approach requires the firm to concentrate on a narrow, exclusive competitive
segment (market niche), hoping to achieve a local rather than industry wide
competitive advantage. There are cost focus seekers, who aim to obtain a local cost
advantage over competition and differentiation focuser, who are looking for a local

Many forms of competitive advantage cannot be sustained indefinitely

because the promise of economic rents invites competitors to duplicate the
competitive advantage held by any one firm.

A firm possesses a sustainable competitive advantage when its value-creating

processes and position have not been able to be duplicated or imitated by other
firms. Sustainable competitive advantage results, according to the resource-based
view theory in the creation of above-normal (or supernormal) rents in the long run.
Analysis of competitive advantage is the subject of numerous theories of strategy,
including the five forces model pioneered by Michael Porter of the Harvard Business
According to the Competitive Advantage model of Porter, a competitive
strategy takes offensive or defensive action to create a defendable position in an
industry, in order to cope successfully with competitive forces and generate a
superior Return on Investment. According to Michael Porter, the basis of above-
average performance within an industry is sustainable competitive advantage.

Competitive advantage, also known as strategic advantage, is essentially a

position of superiority on the part of an organisation in relation to its competitors.
This superiority exists because the organisation has developed some
competencies which meet the environmental requirements in a better way as
compared to its competitors. A more formal definition of competitive advantage is
as follows:
"Competitive advantage exists when there is a match between the distinctive
competencies of a firm and the factors critical for success within its industry that
permits the firm to outperform competitors."
It concludes, then, that competitive advantage is externally focused while
organisational competence is internally focused. Therefore, an organisation's
competence does not automatically lead to competitive advantage. This
phenomenon can be explained by two situations:
1. The core competence of the organisation may not be of any importance
to the industry in which the organisation is operating. There are numerous
examples of this phenomenon; organisations diversifying into non-core competence
areas, failing therein and divesting such business. For example, L&T having core
competence in engineering and cement, diversified in shipping (non-core
competence area) sustained losses and divested it. Metal Box, having core
competence in packaging materials, diversified into bearing and had to divest it,
and so on.
2. Even if core competence has relevance in the industry segment, other
competitors may have the same strength and the particular organization may not
have any competitive advantage. What becomes, then, important for the
organization is to have relatively greater strength in that important factor than its
competitor, For example, two competitors may enjoy low manufacturing costs; but
one with the lower manufacturing costs has a competitive advantage.
In the present-day globalised economy, an organization’s competitive
advantage should not be looked at merely in the context 'of internal competition but
at the global level - because if an organisation has competitive advantage against
domestic competitors, it cannot be put in safe territory as it has to generate that
advantage against global players in the industry concerned. However, at the global
level, the competitive advantage of an organisation is largely determined by the
national competitive advantage. Therefore, before focusing on individual
organisations' competitive advantage, let us have a brief look at the dynamics of
national competitive advantage.
Like each organization, each country is known in terms of its competitive
advantage, for example, USA for computers, credit cards, and movies: .Japan for
consumer electronics and automobiles; Germany for printing presses, chemicals,
and luxury cars; Switzerland for pharmaceutical s and confectionaries; and India for
software professionals. The question is ; what factors have contributed to generate
advantage to these countries in specific areas? The answer of this question is
important for the purpose of generating competitive advantage at the global level.
Porter has categorized various national attributes in four groups that contribute to,
or detract from, the creation of competitive advantage for the firms of that nation.
These attributes form what is known as the national diamond.
Factor Conditions
The first basic attribute of national competitive advantage is in the form of
various factors that provide base for undertaking various business activities. These
resources can be grouped into five broad categories: human resources, knowledge
resources, physical resources, capital resources, and infrastructure: Of special
importance are resources that are created within a country, as distinguished from
those that are inherited. If the resources are created, that shows the - creative
power of the country. Competitive advantage accrues to country's industry if the
mix of the factors available to the industry is such that it facilitates pursuit of .a.
generic, strategy: low-cost production or the production of highly differentiated
product or service.
Demand Conditions
The nature of demand conditions for an organisation's or industry's products
and services in the country is important because it determines the rate bf and
nature of improvement and innovation by the organisations. These factors either
train organisations for world-class competition, or fail to adequately prepare them to
compete in the global market place. Three characteristics of home demand are
particularly important to competitive advantage: the composition of home demand,
the size and pattern of growth of home demand, and the means by which a nation's
home demand pulls the nation's products and services into foreign markets. The
interplay of these demand conditions determines the competitive advantage. Of
special importance are those demand conditions that lead to initial and continuing
incentives to invest and innovate, and to continuing competition in increasingly
sophisticated markets.
Related and Supporting Industries
Apart from the main industry in which context, competitive advantage is
talked about, the conditions of related and supporting industries also determine
industry's competitive advantage. However, in the long run, the relationship
between main industry and related and supporting industries becomes reciprocal.
For example, if the main industry is developed, the related industries will also
develop with a time lag. In the same way, the related industries will provide support
to the further development of the main industry. For example, when computer
industry developed in the USA, it led to the development of computer software
industry. However, development of software industry provided further impetus to
computer industry in the form of increased sales of computers associated with
software due to synergistic advantage, a phenomenon which will be discussed later
in this chapter.
Firm Strategy, Structure and Rivalry
Differences in strategy, structure, and rivalry create advantages or
disadvantages to firms competing in different types of industries in a nation. The
aggregate of these determines national competitive advantage. The way different
firms shape their strategies— ranging from a broad outlook and long-term
profitability to narrow range and short-term profitability—determines how the nation
will be competitive. For example, US companies rank return on investment, share
price increase, and market share in that order. As against this, Japanese
companies rank market share, return on investment, and new product introduction
in that order. This is the reason that Japanese companies have significant global
market share as compared to their US counterparts. Further, Japanese companies
introduce new products or their innovation more frequently. Besides strategy,
organisation Structure of competing firms determines the process through which
competitive advantage is generated. Structure dealing with such issues as who will
make decisions, how decisions will be arrived at, how hierarchic will be arranged
and so on determines firms' focus internally as well as externally. The last aspect in
this group is nature of rivalry among competing firms. The degree of intensity of
competition and the quality of competitors determine the" competitive advantage. If
the degree of intensity of competitor is high, each competitor will try to put its best
in the market place. This will also affect the quality of competitors.
Apart from the above four groups of factors, the government is also
considered as determinant of national competitive advantage. However, the role of
government in determining national competitive advantage is indirect one. It is not a
determinant but it has an important influence on various determinants, various
governments’ policies affect the way the different determinants of competitive
advantage will take shape. Various determinants of national competitive advantage
act as interactive system in which each activity has impact on other activities and
vice versa.


There are different types of competitive advantage based on the nature of
industry and position of an organisation in that industry. Boston Consulting Group
(BCG) has identified different types of competitive advantage based on the number
of available competitive advantage and their size as shown

Volume of competitive advantage exists when an organisation has very few
advantages but these are quite large in volume. The nature of industry is such that
various organisations can adopt a particular approach for developing competitive
advantage. The profitability is linked to the size of market share. An organisation
can generate competitive advantage either on cost basis or differentiation basis
and not on both. For example, in luxury car segnientrprociuct differentiation "in
terms of style, comfort, design, etc. is used for generating competitive advantage
and cost becomes secondaryn Rolls-Royce and Mercedes-Benz compete on this
Specialized competitive advantage exists when an organisation has the opportunity
to adopt many approaches together to generate competitive advantage. Each of
these approaches may have high payoff. For example, organisations manufacturing
specialised machinery for selected market segment can combine both
approaches-"low cost and product differentiation—to be competitive.
Stalemated competitive advantage exists when an organisation operates in an
industry in which meaningful product differentiation is not possible and industry’s
cost structure is quite rigld. For example, in the case of sugar industry, product
differentiation does not exist. On the cost front, cost of sugarcane, the most
significant part of total production cost, cannot be manoeuvred because price of
sugarcane is fixed by government. Therefore, some insignificant competitive
advantage can be generated by better management of finished-product inventory.
In such an industry, profitability is not related to market share.
Fragmented competitive advantage exists when an organisation has many
opportunities but each opportunity has limited payoff. For example, in restaurant
business, each of the restaurants can differentiatejtself^in jnany ways but cannot
have high market share. Both lar£e ancFsmall restaurants can be profitable or
Milind Lele has observed that companies differ in -their potential
manoeuvrability along five dimensions: traget market, product, place, promotion,
and price. A company's freedom of manoeuvres is affected by the industry structure
and the company's position in the industry. Those manoeuvres that promise the
highest return define the company's strategic leverage.4


There are many approaches which an organisation can adopt to generate
competitive advantage against its competitors. These approaches are as follows:
1. Generic competitive strategy,
2. Strategic intent,
3. Benchmarking,
4. Synergistic approach, and
5. Critical success factors approach.
These approaches are not mutually exclusive or exist on either or basis but
may be adopted in combination of two or more. For example, benchmarking can be
combined with any of these approaches.


A generic competitive strategy is a basic one which can be combined with
other strategies. For example, overall cost leadership strategy may be followed for
a single business, vertically integrated business, or diversified business. A generic
competitive strategy is based on the principle that the achievement of competitive
advantage is at the core of a superior marketing strategy. It considers two
dimensions: competitive base and competitive scope. By combining both these
dimensions, Porter has identified four competitive strategies
Thus, there are following four generic competitive strategies:
1. Overall cost leadership,
2. Cost focus,
3. Differentiation, and
4. Focused differentiation.

Overall Cost Leadership

Overall cost leadership strategy is based on a company's position as the
industry's least cost producer in broadly defined markets or a wide mix of products.
There are two essential features of overall cost leadership:
1. The company pursuing overall cost leadership must aggressively pursue
a position of cost leadership by constructing the rnost efficient Sc~ate" tacilities and
must be godoTin engineering, manufacturing, and physical distribution.
2. The company has a large market share so that its per unit cost is the
lowest. Overall cost leadership generates competitive advantage in the form of
offering products to customers at lower prices which helps in achieving large
market share. For example, Reliance Industries has created huge capacity in
polyster, polymers, and fibre intermediaries and in all these segments, it is the
lowest cost producer thereby capturing the largest market share. In fact, in the
present competitive environment, most companies adopt cost as the basis of
competition. Though many of them may be low cost producing companies, but
everyone may not enjoy cost leadership. Those with the least cost enjoy cost
leadership. For example, in detergent and toilet soap, Hindustan Lever and Nirma,
both emphasize on low cost but Nirma enjoys the cost leadership position. While
Nirma competes on price basis due to low cost, Hindustan Lever competes on
product differentiation basis coupled with cost.
A basic question in adopting overall cost leadership strategy without some
kind of differentiation is: is it a sustainable source of competitive advantage? It can
be sustained only if barriers exist that prevents competitors from achieving the
same low cost. However, in an era of technological development, manufacturers
constantly leapfrog over one other in pursuit of lower cost. With decreasing national
and international barriers to entry, sustaining overall cost leadership strategy
requires continuous efforts for being cost effective.
Cost focus
In the cost focus strategy, an organisation focuses on a narrow segment of
the market and offers product at lower price than its competitors on the basis of its
low cost. According to Porter, those companies pursuing the same strategy
directed to the same target market constitute a strategic group. The company which
has clear strategy on cost dimension performs better than others. For example,
Hero Cycles concentrates on functionally useful bicycles and offers these at the
lowest price because of being least-cost producer and is more successful than
other competitors
Apart from cost, generic strategies may be developed on the basis of
differentiation. Kotler has defined differentiation as "the act of designing a set of
meaningful differences to distinguish the company's offerings from competitors'
offerings."7 Thus, the product offered by a company is perceived by customers as
being different from other companies offering the similar product. The product,
being perceived as distinct, may attract higher price which results into higher
profitability. For example, shaving blades offered by Gillette India Limited command
much higher prices as compared to its competitors' blades. In differentiation,
perception of customers about a product being unique is important and not the
officer’s perception. A product can be differentiated on several bases: product
characteristics— form, features, performance quality, conformance quality,
durability, reliability, reparability, style, design; services—ordering ease, delivery,
installation, customer training, customer consulting, maintenance and repair, etc.;
personnel—competence, courtesy, credibility, reliability, responsiveness and
communication; channel—coverage, expertise, and performance; image—symbols,
media, atmosphere, and events.8 Since there are serveral bases of differentiation,
the question arises; which differences should be pronounced? The answer lies in
the competitors' analysis which will reveal their competitive differentiation. A
company can differentiate those areas which are weak points of the competitors,
particularly the nearest one or the areas which have been left by them.
Differentiation strategy is comparatively more sustainable as compared to overall
cost leadership. However, it requires constant analysis of competitors and their
likely moves for differentiation.
Focused Differentiation
While differentiation of general nature has width, focused differentiation is
undertaken to achieve advantage in a narrowly defined market/customer segment.
This strategy generates advantage based on the ability to create more customer
value for a narrowly tareeted segment and results from a better understanding of
customer neea^. For example, various types of hotels adopt focused differentiation
strategies as each class of hotels has different customer segments. Further,
depending on the class of hotels, each of them emphasizes on some specific but
few bases of differentiation. Unlike toothpaste market or other personal products,
customer segmentation for hotel industry is narrowly focused.

An alternative framework for generating and sustaining competitive
advantage is to focus on competitiveness as a function of the pace at which., a
company implants a new advantage deep within itself. This framework is based on
strategic intenTwhich implies ambition and bsession for winning. This approach of
winning is used as a tool for generating competitive advantage. Hamel and
Prahalad who have emphasised on strategic intent as a means of competitive
advantage view that competitive battles are shaped by more than pursuit of generic
strategies. They have given the examples of various companies showing how these
companies have gained advantage by disadvantaging their competitors through
competitive innovation which is "the art of containing competitive risks within
manageble proportions."9 They assert that "few competitive advantages are long
lasting. Keeping score of existing advantages is not the same as building new
advantages. The essence of strategy lies in creating tomorrow's competitive
advantages faster than competitors mimic the ones you possess today. An
organisation's capacity to improve existing skills and learn new ones is the most
defensible competitive advantage of all."10 Hamel and Prahalad have identified four
approaches for generating competitive advantage based on strategic intent. These
are as follows:
1. Building layers of advantage, .
2. Searching for loose bricks,
3. Changing the rules of engagement, and
4. Collaborating.
Layers of Advantage
Building layers of advantage involves generating layers of advantage on top
of another advantage. Through this process, a company has" a wide portfolio of
advantages. This is essentially based on moving up in value chain (concept
discussed in the previous chapter). This can be done through moving to upward
value chain or downward value chain. In upward value chain, either additional
features are added to the existing product or additional product having some
complementarily with existing product is added. For example, a TV tube
manufacturer, presently competing on price basis for a given quality, can add the
features of reliability and further quality improvement. Further, if the company is
engaged in the business of black and white pictun ibe, it can add colour picture
tube in its portfolio. In downward value chain, a company adds the advantage by
taking some activities which are directly related to and support the existing product.
For example, in the case of TV picture tube, moving to downward value chain may
involve manufacturing of glass shells which are critical components for a TV picture
tube. In both these cases, layers of advantage have been added. Thus, the
company becomes more competitive as compared to its competitors who do not
have the advantage of building layers. For example, Nirma Limited which operates
in low-cost synthetic detergents saw the danger from numerous small-scale
producers (Nirma also graduated from small scale) who were having the same
strategy, went for backward integration by undertaking manufacturing of linear alkyl
benzen (LAB) and soda ash, two principal raw materials for detergents, to offset the
likely cost advantages to these producers.
Loose Bricks
Loose bricks concept is based on the maxim that 'if a wall has loose bricks, it
can be broken easily.' In the context of strategic intent, it refers to creating
advantage in those areas which have been let loose by the existing competitors,
that is, the areas uncovered by them. Generally, this happens when the industry is
in evolutionary phase. For example, when the concept of synthetic detergent was
introduced in India, most of the players in the industry led by Hindustan Lever
concentrated on top-end of the market leaving large majority of the population.
These conpetitors developed market for detergent. Nirma introduced the concept of
low-cost detergent. In order to reduce its cost and, consequently price, it used low-
cost polyethylene packaging materials instead of aesthetic but costly paper
packaging materials. At the initial stage, Nirma's product was not bracketed in
detergent category and the existing competitors did not pay any attention to this.
Gradually, it started eating the market share of major competitors including
Hindustan Lever. By the time Hindustan Lever became offensive, it was too late
and Nirma even established itself in top-end market enjoying number two position
with very low gap to the market leader—Hindustan Lever.
Changing the Rules of Engagement
Every industry has certain critical success factors (CSFs), discussed later in
this chapter, which are observed by almost all existing competitors in the industry.
For a brief, a critical success factor is a condition in an industry which must be
adequately satisfied for success. These CSFs, however, are dynamic and change
over the time. Thus, a new CSF may be created which may generate advantage to
the company which has introduced it. For example, when Reliance entered
premium textile fabrics, there was lot of resistance from the then existing channel
intermediaries which was in the form of producer-wholesalers-retailers-customers.
Instead of going through this long channel, Reliance shortened the channel in the
form of producer-retailers-customers. Further, branding and advertising were not
popular concepts in textile business. Reliance initiated both by branding its textile
product of all categories—suiting, shirting, saree, and dress material—in highly
positioned Vimal brand. In order to promote Vimal, the company took massive
advertising. All these created advantage to Reliance which other competitors could
not do.
Collaborating, as a source of competitive advantage, is based on the maxim
that ‘if you can’t compete on your own, collaborates with others.' In the context of
strategic intent, it refers to entering into collaboration with another which nas
competence in areas that can be used as a source of competitive advantage.
Hamel and Prahalad have extended their study on strategic intent further to include
more approaches through which competitive advantage can be developed. They
have identified four broad categories of resource leverage that managers can use
to achieve their aspirations. These are:
1. Concentrating resources on strategic goals via convergence and focus;
2. Accumulating resources via extracting and borrowing:
3. Contemplating one resource with another by blending and balancing: and
4. Conserving resources by recycling, coopting, and shielding.11
Benchmarking is another tool which can be used to generate competitive
advantage. It is a process of identifying in a systematic way superior products,
services, processes, and practices that can be adopted in an organisation to
reduce costs, decrease operations cycle time, and provide greater customer
satisfaction. The concept of benchmarking has been derived from land surveying in
which it indicates a reference point called benchmark which is established as a
base for surveys. Webster Dictionary defines benchmark as "a survey's mark;
previously determined position used as a reference point; standard by which
something can be measured and judged." Sarah Cook has defined benchmarking
as follows:
"Benchmarking is a process of identifying, understanding, and adapting
outstanding practices from within the same organisation or from other businesses
to help improve performance."12
Based on the above description, various features of benchmarking can be
identified which are as follows:
1. Benchmarking is based on the theme "see what others do and try to
improve upon that." Therefore, this implies some kind of measurement which can
be accomplished in two forms: internal and external. Both internal and external
practices are compared and a statement of significant differences is prepared to
identify the gap which should be filled.
2. Benchmarking can be applied to all facets of a business; it includes
products, services, processes, and methods. It goes beyond the traditional
competitor analysis in the form of identifying strengths and weaknesses and
includes clear understanding of how the best practices are used.
3. Benchmarking is not aimed solely at direct product competitors but those
organisations and businesses that are recognized as best or industry leaders.
4. Benchmarking is a continuous process and not just one-shot action. It is
continuous because industry practices constantly change and a continuous
monitoring of these practices is required to bring suitable change in the

Types of Benchmarking
There are different types of benchmarking. Since benchmarking is an
evolutionary process in an organisation, its application varies over the period of
time resulting into different types of benchmarking
At each subsequent stage, the complexity and sophistication increase
because emulation of practices becomes gradually more difficult. For example,
emulation of product features of a company is much easier as compared to its
competitive practices. The first generation of benchmarking is related to product
analysis which reveals what product features are valued by the customers most. At
the second level comes competitive benchmarking in which the performance of a
company is compared with either close competitor or industry leader depending on
the competitive position of the company in industry. At the third level, process
benchmarking is undertaken to make a comparative analysis of various processes
in relation to the companies chosen for benchmarking. Strategic benchmarking
involves a number of factors beyond processes which are taken for analysis.

Process of Benchmarking
Benchmarking is a process which involves a series of steps with each step
consisting of several activities. Figure 9.5 presents benchmarking process as
developed by Robert Camp.
The first step in benchmarking is its planning which involves the determination
of three elements: what is to be benchmarked? to whom will be compared? and
how will data be collected? Determination of content of benchmarking comes first
and a careful analysis of what is to be compared should be made. It may be noted
that everything can be benchmarked but that requires comparable cost. In terms of
production and marketing functions, generally, the factors included are:
manufacturing process, inventory control, warehousing and delivery services,
quality systems, product development process, marketing techniques,
understanding of customer needs, and so on.
The second issue in planning for benchmarking is the determination of whom
to compare. There may be several companies both within an industry and outside it
which can be selected depending on the jsize and capability of the organisation
undertaking benchmarking. The third issue in planning for benchmarking is the
determination of who will collect data and how these will be collected; is it through
company's own team or consultants? Data can be collected through various
sources—primary data through opinion .surveys, examination and dismantling, trial
purchasing, customers and suppliers of benchmarked company, or even through
direct contact with the company concerned; secondary data through various
After collection of data, an analysis is made to determine current performance
gap and projected future performance level. Present performance gap indicates the
difference between disired state of affairs and actual state of affairs. This gap
provides the present status. However, since processes go on changing, future
projected performance level should also be measured. In order to the take the
latter, benchmarking has to be taken on continuous basis, so that performance is
constantly recalibrated to ensure superiority.
Integration is the process of using benchmarking findings to set operational
targets for change involves careful planning to incorporate new practices and
implementing those practices. However, incorporating required changes is not easy
task to implement because there are chances that new moves will be resisted
specially when there is a departure between current and new practices and the
organisation is not innovative one.
Therefore, whole change programme must be communicated, rationality for
change explained, and commitment of people for change obtained. After this
process is over, the benchmarked practices should be introduced within the time
frame scheduled for the purpose.
Action step of benchmarking involves implementation of a specific action
and monitoring its results followed by recalibration of benchmarks. Implementation
of an action required under benchmarking may not produce the intended result
immediately because of learning period required for a new method. Therefore,
result evaluation should be performed on continuous basis. When an action is
completed and produces intended result, recalibration of benchmarks is required
which involves the updating of performance in the light of new data.
Maturity would be reached when desired best practices are incorporated in all
business processes and, thus, superiority is ensured. Impact of benchmarking
should be evaluated in terms of final objective achievement such as cost reduction,
customer satisfaction, etc. However, these are relative measurements and there is
a need for continuous improvement in the light of relevant environmental changes.

Competitive Advantage through Benchmarking

The above discussion shows that benchmarking is a good tool for generating
superior performance in an organisation. However, for generating competitive
advantage, the organisation has to define the factors on the basis of which it
competes in the market place because it is not possible for an organisation to excel
in all areas and all geographical locations because of resource constraints, both
physical and human. Therefore, it has to define its competitive postures in terms of
product features, customer segment, and technology used—the three elements of
a business definition These three elements taken together will specify where
benchmark is required.
However, benchmarking as a means for competitive advantage has its own
limitations. Some of the more common limitations are as follows:
1. Organisations differ in terms of their culture and values around which
all organisational processes revolve. Therefore, a particular process may work well
in an organisation but may not be suitable for another organisation. If a
benchmarked process is adopted in the latter organisation, it is likely to create more
chaos rather than efficiency. However, this limitation can be overcome, to some
extent, by making benchmarking as a gradual process in which the organisation
learns to adapt.
2. There are some operational problems in implementing benchmarked
practices in the form of lack of focus, lack of leadership, lack of perseverance, etc.,
though these operational problems can be taken care off.
3. A more serious and inherent limitation of benchmarking is that a
benchmarking organisation will always remain follower of benchmarked
organisation. With geographical * barriers operating, benchmarking organisation
may become leader in a limited area if it had adopted global benchmarking. But in
the present era of globalization of business, geographical barriers are losing their
relevance. Where fierce battle is on for capturing global market share, an
organisation looking for global competitive advantage cannot achieve its objectives
unless it improves upon benchmarked practices. This is the concept of present-day
strategy. Winners do the same thing differently or do different things.
Synergistic approach can be used as a means for generating competitive
advantage to an organisation if the managers are sufficiently aware about how
synergistic effect is developed. Concept of synergy and its effect has been derived
from systems appro^h which deals with the phenomenon of putting various
elements of a system in such a way that each element contributes positively to
other elements. The net result is that the sum total of combined contribution is
greater than what the individual elements could have contributed independently.
Ansoff has made invaluable contribution by demonstrating how a company can
generate competitive advantage by creating synergistic effect.14 Synergy ^an be
defined as follows:
Synergy is the process of putting two or more elements together to achieve
a sum total greater than the sum total of individual elements separately. This effect
is described as 2 + 2 = 5 effect.
Synergistic effect does not generate automatically by putting different
elements together but depends on the complementarity of these elements. Thus,
synergistic effect in the process of strategy formulation refers to the degree of
complementarity between present skills and resources and the future skills and
resources- which would be required for a strategy. The higher the degree of
complementarity that exists between the present strategic posture and the
contemplated posture, the greater is the opportunity for realising positive synergy.
A simple example of synergistic effect may be of opening of a restaurant by motel
owner in side-by area. In this case, the joint income of motel and restaurant may be
much more than what they can earn individually if located at different places.
Areas of Synergistic Effect
There may be many possible areas of synergistic effect of an organisation
depending on its strengths and weaknesses. Since the synergy depends on the
complementarily of present and future strategic postures, this can best be
understood by analyzing an organisation's strengths and taking suitable strategic
actions in order to effect the result of the strengths. For this purpose, different types
of synergistic effects in various functional areas of operations may be analyzed.
1. Production Synergy
Production synergy can be achieved if the present production facilities,
processes, and skills can be used to produce the contemplated products. In this
situation, some existing excess capacity can obviously result in decreased unit
production costs because factory overhead will be spread over a larger volume.
Moreover, the quality and efficiency will not be hampered as the existing work-force
is capable of handling new product because of transferability of skills from the
existing product to new one.
The production synergy may best be achieved by merging the firms
manufacturing same or substantially similar products. For example, many textile
units have merged other textile units in order to take advantages of production
synergy. The merger of Sidhpur Textiles with Reliance Textiles is a case in this
context. In the case of internal growth, production synergy will occur to the extent
the new products developed are compatible with existing skills and resources. For
example, production synergy can best be identified in the cere of Associated
Cement Company which operates many cement plants in the country using similar
technology which provides the company greater flexibility in using its present
capabilities. On the other hand, there is little chance for production synergy, if the
.organisation takes over dissimilar product because the present production strength
does not contribute in any way in the future product. For example, taking up of
production of bearings by Metal Box which was primarily known as metal packaging
manufacturer could not generate any synergistic effect. The result is that the
company has lost substantial amount in its bearing division. Thus, it can be
emphasised that production synergy can occur only when some 'common thread'
between two operations can be found regardless of the degree of market
congruence in so far as end uses of products are concerned. For example, this is
reflected in the product range of an electronic manufacturing unit which produces
electronic goods for entertainment as well as for commerical purpose. Though in
botli these cases the end users are quite different and incomplementary, the
company enjoys the common threads of production facilities.
2. Marketing Synergy
Marketing synergy refers to the situation when the organisation can take the
advantages of its present marketing facilities— sales force, distribution channel,
physical'facilities, promotional techniques —for the ensuing product though the
product may be substantially different from the present one. For example, a soap
manufacturer may take the marketing of hair oil. In this case, the company can take
the advantages of its present marketing facilities because, in both the cases, the
same type of marketing facilities will be required although there is no production
synergy if the production of hair oil is taken up because of the difference in
production process and consequently the requirement of different production
Thus, in this case, there is marketing synergy because of the overlap in
marketing efforts but the same overlap is not available so far as production is
concerned. In order to take the advantages of marketing synergy, Colgate Palmolive
India Limited decided to enter the new field of toilet soap though it is better known for
toothpaste, toothbrush, shaving cream, and shampoo. Since the company can utilise
its present marketing facilities for soaps, it can take the advantage of its marketing,
3. Research and Development Synergy
The research and\ development synergy will be achieved if the company's
technologies supporting the development of both the present and the contemplated
product lines are substantially similar. The potential in this area usually emanates
either from similar research skills or from similar functional characteristics of the
products. For example, the research and development at Hindustan Lever Limited
offers unique synergy because it contributes to the development of chemical
products of different types for different end users. It has discovered the raw materials
from minor seed oils for synthetic detergent which is claimed to be much cheaper
and effective than the present raw material linear alkyl benzene (LAB). In its
research and development efforts, the company has undertaken simultaneous
functions of developing hea\y chemicals also which has enabled the company to
enter in this field too. Since the basic research and development facilities are
common for bo minor seed oils and heavy chemicals, the company enjoys the
research and development synergy.
4. Financial Synergy
The financial synergy is virtually unrelated to the degree of similarity between the
present and the contemplated strategic postures because the skills and techniques
of financial management have a high degree of transferability across both industry
and organisational lines. The possible synergy which lies in this area is the extent
to which the organisation can raise the funds for investment througn larger capital
base, increased borrowing power, and greater earning through the spreading of
administration overheads over a larger volume of operations. In fact, this synergy
has been used by several companies to take over other companies or diversify in
those areas which were unknown to them. However, the success of such strategy
may be doubtful if other considerations are not taken into account.
5. General Management Synergy
General management synergy occurs when the skills, experience, and knowledge of
managers are transferable from the present strategy to the contemplated one. The
transferability of these elements of management depends on how these elements
are acquired. Basically knowledge requirements for managers are twofold: (i)
general knowledge of the processes and techniques of management which can be
learned through management education; and (ii) technical knowledge about the
specific industry or organisation which can be learned through experience in a
particular industry or organisation. The first category of knowledge is easily
transferable to all types of organisations and industries as these are methodological.
The second type of knowledge, however, is not as freely transferable because it
requires certain learning period on the part of the managers, Thus, while moving
from one organisation to another or from one industry to another, managers have to
devote time for learning the requirements of those which may be different from what
they must have learned previously. Thus, if the movement is from one organisation
to another which is similar, the knowledge can be transferred easily. However, if the
movement is from one industry to another, the transferability is limited in that it
requires more time in understanding the requirements of the new industry. Thus,
further away a manager moves in terms of organisation and industry characteristics,
the longer is the learning period and lower is the synergy. This aspect is very
important for achieving growth through


In order to understand how critical success factors (CSFs) approach is
applied to generate competitive advantage and the concept of CSFs, let us take
few examples. A good academician can be successful in teaching and research
and not necessarily, he succeeds as a business man. A player having high
competence in a particular game, say lawn tennis, and is successful is unlikely to
succeed in cricket. Even in the same game, a player cannot succeed in all
positions, for example, a good wicket keeper cannot be a good bowler too. The
question is: why does this happen? The answer is: each activity has unique
requirement, and a single person cannot meet the requirement of all activities. He
can be successful only in that for which he has competence to meet its
requirement. {Success is defined in terms of objective achievement.) This social
phenomenon can be replicated in business situation where the question may be
asked: why does a successful business organisation in one industry fails in another
Concept of Critical Success factors
Critical success factors, also referred to as strategic factors or key factors for
success, are those characteristics, conditions, or variables which when maintained
and sustained can have significant impact on the success of an organisation
competing in a particular industry. A CSF may be a characteristic such as product
features, a condition such as high capital investment, or any other variable. A basic
nature of CSFs is that they differ from industry to industry: consumer goods versus
industrial goods,
"Key success factors (CSFs) in an industry and business need to be
identified to inject a concentration of resources into a particular area where the
company sees an opportunity to gain significant strategic advantage (competitive
advantage) over its competitors."15
Identifying Industry CSFs
In order to generate competitive advantage along CSFs, it is necessary to
identify these. Based on a study related to identifying strategic factors which are
important to different businesses, Steiner views that "there are indeed strategic
factors needed for a business and they can be identified."16 However, the question
is : if CSFs differ from industry to industry, how can these be identified? In order to
find out the answer of this question, managers can put another question: what do
we need to do in order to be successful in a particular business? It is just like an
individual putting a question: what does he/she need to do to be successful in
studies, in career, etc. However, the answer of the question 'what needs to be done
for success in a business' is not as simple as it prima facies appears. Therefore,
managers need to generate as much information as possible by going through
following ways:
1. CSFs can be identified based on logic, heuristics, or even a rule of
thumb rather than through any theoretical model these are based on long year s of
managerial experience which leads to the development of intuition, judgment, and
2. CSFs can also be identified internally in the organisation by using
creative techniques like brainstorming.
3. CSFs can be deduced Trom other companies' statements, expert
opinions, organisational success stones etc.

Organizational Critical Success Factors

The above discussion of CSFs is externally focused in the sense that it
concentrates on what an organisation should do to be successful in a partioular
industry. Researchers, both academicians and consultants have made attempt to
find out the answer of the question: what are the characteristics of an organisation
which make it successful in different industries or meeting the requirements of
CSFs of these industries? Though the answer of this question is not precise
because of interplay of different variables in determining success of an
organisation, some clues can be derived from various prescriptions and research
Various components of McKinsey 7-S framework are as follows:
Strategy—a means to achieve objectives
Structure—basic framework to designate responsibilities and functions
Systems—management tools for planning, decision making,
communication, and control.
Staffs—human resources of the organisation.
Skills—organisational and individual capabilities.
Style—how managers lead and motivate!
Shared values—organisational values which govern behaviour of its members.
Based the McKinsey 7-S framework, Peter and Waterman have identified eight
characteristics of successful companies (called as excellent companies):
1. Bias for action,
2. Close to customers,
3. Autonomy and entrepreneurship,
4. Productivity through people,
5. Hands-on, value driven,
6. Stick to knitting,
7. Simple form, lean staff, and
8. Simultaneous loose-tight control.
However, these characteristics should not be taken on static basis for
generating competitive advantage. For example some of the companies such as
Delta Airlines, Digital Equipment, IBM, included in the list of excellent companies
started showing declining performance soon after the publication of the book.


An organisation should prepare its competitive advantage profile (CAP), also
known as strategic advantage profile (SAP) though the CAP is more commonly
used in strategic management. CAP describes the organisation's competitive
position in the market place. A comparison of CAP and OCP (organisational
capability profile) as discussed in Chapter 8 shows that OCP indicates what the
organisation can do based on its capabilities; CAP indicates what the organisation
has done or is doing in comparison to its competitors to generate competitive
advantage for itself. Thus, OCP is, basically, internal-oriented while CAP has
external orientation. In preparing CAP, three factors are important.
1. The organisation should identify the factors which are relevant for
determining success in the industry concerned.
2. At the next level, the organisation should measure its performance on
these factors in comparison to its competiticrs. Based on the comparison, the
organisation can firnd out whether it has advantage or disadvantage in terms of
various factors. An advantage is the situation which helps the organisation to do
better than its competitors. A disadvantage is the situation which affects the
competitive position of the organisation adversely. Further,
advantages/disadvantages should be measured in terms of degree because all
advantages/disadvantages may not be equal.
3. After identifying advantages, the next step is to measure their
sustainability because any advantage may turn into disadvantage due to change in
environmental factors. For example, many companies had competitive advantage
in pre-liberalised era which turned into disadvantage because of entry of new
competitors in post-liberalized era.
In preparing CAP, either descriptive form can be used or matrix form can be
adopted to focus more clearly the areas of advantage and their sustainability.


Competitive advantage profile of Maruti Udyog Limited is presented to show
how competitive advantage of a company can be identified. Though there are
several companies which have generated competitive advantage and maintained it,
the case of Maruti Udyog has been chosen because of two reasons. First, it
entered the passenger car market in an era when entry barriers w rere created by
the government in the form of licensing. Maruti created several ac ntages in pre-
liberalised era. Second, car industry has attracted the maximum number of foreign
players and as a result, almost every car manufacturer of the world level has
entered India but Maruti has continued to sustain many of its advantages.
Maruti Udyog is a 50:50 joint venture between Suzuki Motor Corporation
(SMC) of Japan and Government of India (GOI); GOI has decided to reduce its
stake to 25 per cent diluting the remaining 25 per cent in favour of Indian financial
institutions after capital restructuring. Maruti started its operation by rolling its
Maruti 800 cars in 1983. Afterwards, many more models in different segments have
been added. At the time of its entry, there were two other car manufacturers—
Premier Automobiles and Hindustan Motors. After liberalisation, a number of
foreign players entered Indian car industry covering entire range. Prominent among
them are General moters, Ford, Honda, Fiat, Daewoo, Hyundai, Peugeot, Fiat.
Mercedez-Benz, and BMW. Besides, TELCO has also entered car segment with its
Indica. In the light of this background, Maruti's competitive
advantages/disadvantages and their sustainability are presented below:
l. Maruti has the highest range of cars: Maruti 800—small-budget car, Omni
—van segment, Gypsy—all-terrain vehicle segment, Zen—compact, car, Maruti
1000—semi-luxury car, Esteem—semi-luxury car, Wagon R and Baleno—luxury
car. Thus, Maruti offers cars for all segments—those who are the first-time users as
well as those who are moving up in value chain. However, in upper value chain,
many competitors are offering cars perceived to be better than Maruti's.
2. Maruti has about 60 per cent market share in car industry with an annual
industry turnover of about 7 lacs cars per annum (2000-01). This level of market
share is unlikely to be sustained because Maruti faces aggressive competition from
new entrants—in lower segment from TELCO and Hyundai and in upper segment
from Ford and General Motors.
3. Maruti enjoys cost leadership because of two reasons. First, its plant
was commissioned much earlier resulting into lower fixed cost in terms of
investment outlay as well as depreciation cost per annum. Second, having set up
manufacturing facilities for 5 lacs cars, its operating cost per car is the lowest.
Unless competitors bring some more efficient systems, Maruti will continue to enjoy
cost leadership.
4. Being the largest manufacturer, Maruti has developed a wide network of
dealers numbering about 300 covering the entire country. Other competitors will
take lot of time to develop such a network.
5. Maruti provides efficient after sales service with about 1700 workshops
covering^ 700 cities. Out of these, 300 workshops are attached to dealer outlets
while the rest are Maruti-authorised service stations. The after sales service of this
type has put Maruti in much advantageous position.
6. For customer service, Maruti has provided financing service in two
forms. First, it is co-promoter of Citicorp Maruti Finance and Maruti
Countrywide Ventures with equity participation of 26 per cent. Both these
firms offer finance facilities to Maruti car buyers on attractive terms. Second, the
company has introduced the concept of integrated service with the help of financial
institutions which includes auto finance, car insurance, corporate lease, and fleet
management. Though both ideas are good, these can easily be emulated by
competitors and the advantage will not be significant.


A competitive advantage is an advantage over competitors gained by offering

consumers greater value, either by means of lower prices or by providing greater
benefits and service that justifies higher prices.
Competitive advantage, also known as strategic advantage, is essentially a
position of superiority on the part of an organization in relation to its competitors. We
have seen how organizational analysis leads to identify core and distinctive
competencies. However, these competencies are of no use unless these are related
to generate competitive advantage in the market place.
Competitive advantage exists when there is a match between the distinctive
competencies of a firm and the factors critical for success within its industry that
permits the firm to outperform competitors.

An organization should prepare its competitive advantage profile (CAP), also

known as strategic advantage profile (SAP) though the CAP is more commonly
used in strategic management. CAP describes the organization’s competitive
position in the market place. A comparison of CAP and OCP (organizational
capability profile) as discussed in Chapter 8 shows that OCP indicates what the
organization can do based on its capabilities; CAP indicates what the organization
has done or is doing in comparison to its competitors to generate competitive
advantage for itself.