Comparative Advantage and Competitive Advantage
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Difference between Comparative advantage and Competitive advantage Comparative advantage:
In economics, the law of comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party. It is the ability to produce a product most efficiently given all the other products that could be produced. It can be contrasted with absolute advantage which refers to the ability of a party to produce a particular good at a lower absolute cost than another Comparative advantage explains how trade can create value for both parties even when one can produce all goods with fewer resources than the other. The net benefits of such an outcome are called gains from trade. It is the main concept of the pure theory of international trade. Comparative advantage was first described by Robert Torrens in 1815 in an essay on the Corn Laws. He concluded it was to England's advantage to trade with Portugal in return for grain, even though it might be possible to produce that grain more cheaply in England than Portugal. However the term is usually attributed to David Ricardo who explained it in his 1817 book On the Principles of Political Economy and Taxation in an example involving England and Portugal. In Portugal it is possible to produce both wine and cloth with less labor than it would take to produce the same quantities in England. However the relative costs of producing those two goods are different in the two countries. In England it is very hard to produce wine, and only moderately difficult to produce cloth. In Portugal both are easy to produce. Therefore while it is cheaper to produce cloth in Portugal than England, it is cheaper still for Portugal to produce excess wine, and trade that for English cloth. Conversely England benefits from this trade because its cost for producing cloth has not changed but it can now get wine at a lower price, closer to the cost of cloth. The conclusion drawn is that each country can gain by specializing in the good where it has comparative advantage, and trading that good for the other.
Competitive advantage:
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. When a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. The goal of much of business strategy is to achieve a sustainable competitive advantage. Michael Porter identified two basic types of competitive advantage cost advantage. A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, a competitive advantage enables the firm to create superior value for its customers and superior profits for itself.
National University of Modern Languages Islamabad
1
2 Cost and differentiation advantages are known as positional advantages since they describe the firm's position in the industry as a leader in either cost or differentiation. A resource-based view emphasizes that a firm utilizes its resources and capabilities to create a competitive advantage that ultimately results in superior value creation. The following diagram combines the resource-based and positioning views to illustrate the concept of competitive advantage. A Model of Competitive Advantage
Resources
Distinctive Competencies Capabilities
Cost Advantage or Differentiation Advantage
Value Creation
How Companies through which get Competitive advantages:
Any business with a competitive advantage is able to attract more customers than its competitors by having some special factor that no one else possesses. The key to capturing competitive advantage is knowing what your customers want and finding a way to give it to them. Very few sources of competitive advantage last very long however, so businesses are engaged in a never ending search to find new angles to beat their competitors. It’s all about finding some way of differentiating products and services from other offerings. The whole purpose of business strategy is to find new sources of competitive advantage I will present you the four main competitive advantages. Remember that even so you can probably be the best only at one of them, you still need to be good enough in all the others. The one that you are the best in is the winning factor and all the others are the qualifying factors. Why qualifying and why winning because the winning factor makes you win on the market and the qualifying factors keep you in the game.
Cost:
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3 First competitive advantage is of course the costs. Many companies compete with their competition by lowering the costs and consequently lowering the price. Price is very important competitive advantage in today’s capitalism because people are always looking to buy something cheaper. But you really have to think about it. Is low price really something you want to be known for? Usually a low price is connected with low-quality and even so this might not be the case in your company people will associate low price with low quality in your company as well.
Quality:
The second and also very important competitive advantage is quality. On most economy schools, in course “management of production process” they separate the quality advantage into two different areas. First one are “normal” qualities such as quality materials, long life of a product and similar stuff. While the other is compatibility. This side is becoming more and more important in today’s global connected world. Why you will ask? Because people are traveling a lot and it is very important that they can use their cell phone for example and charge it in every country they go to. Compatibility is a very important competitive advantage also because of the global market. Not so many years ago companies were selling their products in special areas or with other words in their own country. But today there is no such thing as a local market anymore as I wrote in one of the previous articles already. We have one global market and almost every company that produce anything interesting cell their products all around the world. So it’s very important that their product is compatible on all the markets around our beautiful planet Earth.
Flexibility:
Another important competitive advantage is flexibility. And here I’m not talking about how flexible your TV is, how much it can bend, but how much your product can adjust the customers needs. For example if you are making boats do you have only three models in your offer or can you make boats specially by customer requests. IBM for example has this on a very high level. They make custom ordered computers on daily basis and that for sure gives them a very big competitive advantage against other computer producers on our planet
Delivery:
Last but not least of our competitive advantage examples is delivery. This one is also separated into different fields. First one is speed or in other words time of delivery and second one is reliability of the delivery. I don’t think I have to explain this in much more details. First one is of course how much time you need to deliver the product to the customer and the second one is how sure you are or how trustworthy you are to deliver the product on the date you have promised to.
What do you mean by? Strategy, Mission, Goal, Vision, Task for an organization?
National University of Modern Languages Islamabad 3
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Mission:
A mission statement is a formal short written statement of the purpose of a company or organization. The mission statement should guide the actions of the organization, spell out its overall goal, provide a sense of direction, and guide decisionmaking. It provides "the framework or context within which the company’s strategies are formulated. The mission of the company is the answer of the question: why does the organization exists? The mission statement communicates the firm's core ideology and visionary goals, generally consisting of the following three components: Core values to which the firm is committed Core purpose of the firm Visionary goals the firm will pursue to fulfill its mission
Vision:
Vision statement is sometimes called a picture of your company in the future but it’s so much more than that. Your vision statement is your inspiration, the framework for all your strategic planning.
Strategy:
A strategy is a plan of action designed to achieve a particular goal. The word strategy has military connotations, because it derives from the Greek word for general. Strategy is distinct from tactics. In military terms, tactics is concerned with the conduct of an engagement while strategy is concerned with how different engagements are linked. In other words, how a battle is fought is a matter of tactics: the terms that it is fought on and whether it should be fought at all is a matter of strategy. Military strategy is the overarching, long-term plan of operations that will achieve the political objectives of the nation. It is part of the four levels of warfare: political goals, strategy, operations, and tactics.
Goals and Objectives:
Goals and objectives are statements that describe what your Vision Document will accomplish, or the results that will be achieve. Goals are high level statements that provide overall context for what the Vision Document is trying to achieve, and should align to its components.
National University of Modern Languages Islamabad
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5 Objectives are lower level statements that describe the specific, tangible products, deliverables and fruits that will be delivered. The definition of goals and objectives is more of an art than a science, and it can be difficult to define them and align them correctly.
Task :
.In the Navy, an organization which assigns to responsible commanders the means with which to accomplish their assigned tasks in any planned action. 2. An organization table pertaining to a specific naval directive.
Global operations strategy options:
An international business is any firm that engages in international business or investment This is broad category and different from domestic or local firm. A multinational corporation (MNC) is a firm with extensive international business involvement..MNCs buy resources, create goods and services and sell goods and services in a variety of countries .The term International Corporation applies to most of the world’s large, well known business Certainly IBM is a good example of an MNC .It imports electronic components to the U.S from over 50 countries, export computers to 130 countries, has facilities to 45 countries and earns more than its half sale and profit and profit abroad. Operational mangers of international and multinational firms approach global opportunities with one four operations strategy. a) International strategy b) Multi domestic strategy c) Global strategy d) Translational strategy
International strategy:
An international strategy use exports and licensing to penetrate the global area. It is transfer of valuable skills and products developed in the home market. R&D and control of product and marketing strategy tends to be centralised “at home” Examples i. McDonalds ii. Wal-Mart iii. Mercedes Benz iv. Microsoft v. U.S.Steel National University of Modern Languages Islamabad 5
6
Multi domestic strategy:
Multi domestic strategy is a strategy by which companies try to achieve maximum local responsiveness by customizing both their product offering and marketing strategy to match different national conditions. Production, marketing and R&D activities tend to be established in each major national market where business is done. An alternate use of the term describes the organization of multi-national firms. International or multinational companies gain economies of scale through shared overhead and market similar products in multiple countries. Multi domestic companies have separate headquarters in different countries, thereby attaining more localized management but at the higher cost of forgoing the economies of scale from cost sharing and centralization.
Examples:
i. ii. iii. iv. v. Phillips NV Cadbury Schweppes Body shop Hard rock Cake Nokia
Global strategy:
Global strategy as defined in business terms is an organization's strategic guide to globalization. A sound global strategy should address these questions: what must be (versus what is) the extent of market presence in the world's major markets? How to build the necessary global presence? What must be (versus what is) the optimal locations around the world for the various value chain activities? How to run global presence into global competitive advantage • • • • • Economies The world is seen as a single marketplace Low cost strategy Standardised product worldwide Functions located in a small number of favourable Countries
Examples;
i. ii. iii. Intel Texas Instruments Otis Elevator National University of Modern Languages Islamabad
6
7 iv. v. Sony Disney
Translational strategy:
A transnational strategy allows for the attainment of benefits inherent in both global and multi domestic strategies. The overseas components are integrated into the overall corporate structure across several dimensions, and each of the components is empowered to become a source of specialized innovation. It is a management approach in which an organization integrates its global business activities through close cooperation and interdependence among its headquarters, operations, and international subsidiaries, and its use of appropriate global information technologies (Zwass, 1998). The key philosophy of a transnational organization is adaptation to all environmental situations and achieving flexibility by capitalizing on knowledge flows (which take the form of decisions and value-added information) and two-way communication throughout the organization. The principal characteristic of a transnational strategy is the differentiated contributions by all its units to integrated worldwide operations. As one of its other characteristics, a joint innovation by headquarters and by some of the overseas units leads to the development of relatively standardized and yet flexible products and services that can capture several local markets. Decision making and knowledge generation are distributed among the units of a transnational organization..
Examples:
i. ii. iii. iv. v. Coca cola Nestle Unilever Caterpillar Ford
National University of Modern Languages Islamabad
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National University of Modern Languages Islamabad
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Difference between Comparative advantage and Competitive advantage Comparative advantage:
In economics, the law of comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party. It is the ability to produce a product most efficiently given all the other products that could be produced. It can be contrasted with absolute advantage which refers to the ability of a party to produce a particular good at a lower absolute cost than another Comparative advantage explains how trade can create value for both parties even when one can produce all goods with fewer resources than the other. The net benefits of such an outcome are called gains from trade. It is the main concept of the pure theory of international trade. Comparative advantage was first described by Robert Torrens in 1815 in an essay on the Corn Laws. He concluded it was to England's advantage to trade with Portugal in return for grain, even though it might be possible to produce that grain more cheaply in England than Portugal. However the term is usually attributed to David Ricardo who explained it in his 1817 book On the Principles of Political Economy and Taxation in an example involving England and Portugal. In Portugal it is possible to produce both wine and cloth with less labor than it would take to produce the same quantities in England. However the relative costs of producing those two goods are different in the two countries. In England it is very hard to produce wine, and only moderately difficult to produce cloth. In Portugal both are easy to produce. Therefore while it is cheaper to produce cloth in Portugal than England, it is cheaper still for Portugal to produce excess wine, and trade that for English cloth. Conversely England benefits from this trade because its cost for producing cloth has not changed but it can now get wine at a lower price, closer to the cost of cloth. The conclusion drawn is that each country can gain by specializing in the good where it has comparative advantage, and trading that good for the other.
Competitive advantage:
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. When a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. The goal of much of business strategy is to achieve a sustainable competitive advantage. Michael Porter identified two basic types of competitive advantage cost advantage. A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, a competitive advantage enables the firm to create superior value for its customers and superior profits for itself.
National University of Modern Languages Islamabad
1
2 Cost and differentiation advantages are known as positional advantages since they describe the firm's position in the industry as a leader in either cost or differentiation. A resource-based view emphasizes that a firm utilizes its resources and capabilities to create a competitive advantage that ultimately results in superior value creation. The following diagram combines the resource-based and positioning views to illustrate the concept of competitive advantage. A Model of Competitive Advantage
Resources
Distinctive Competencies Capabilities
Cost Advantage or Differentiation Advantage
Value Creation
How Companies through which get Competitive advantages:
Any business with a competitive advantage is able to attract more customers than its competitors by having some special factor that no one else possesses. The key to capturing competitive advantage is knowing what your customers want and finding a way to give it to them. Very few sources of competitive advantage last very long however, so businesses are engaged in a never ending search to find new angles to beat their competitors. It’s all about finding some way of differentiating products and services from other offerings. The whole purpose of business strategy is to find new sources of competitive advantage I will present you the four main competitive advantages. Remember that even so you can probably be the best only at one of them, you still need to be good enough in all the others. The one that you are the best in is the winning factor and all the others are the qualifying factors. Why qualifying and why winning because the winning factor makes you win on the market and the qualifying factors keep you in the game.
Cost:
National University of Modern Languages Islamabad
2
3 First competitive advantage is of course the costs. Many companies compete with their competition by lowering the costs and consequently lowering the price. Price is very important competitive advantage in today’s capitalism because people are always looking to buy something cheaper. But you really have to think about it. Is low price really something you want to be known for? Usually a low price is connected with low-quality and even so this might not be the case in your company people will associate low price with low quality in your company as well.
Quality:
The second and also very important competitive advantage is quality. On most economy schools, in course “management of production process” they separate the quality advantage into two different areas. First one are “normal” qualities such as quality materials, long life of a product and similar stuff. While the other is compatibility. This side is becoming more and more important in today’s global connected world. Why you will ask? Because people are traveling a lot and it is very important that they can use their cell phone for example and charge it in every country they go to. Compatibility is a very important competitive advantage also because of the global market. Not so many years ago companies were selling their products in special areas or with other words in their own country. But today there is no such thing as a local market anymore as I wrote in one of the previous articles already. We have one global market and almost every company that produce anything interesting cell their products all around the world. So it’s very important that their product is compatible on all the markets around our beautiful planet Earth.
Flexibility:
Another important competitive advantage is flexibility. And here I’m not talking about how flexible your TV is, how much it can bend, but how much your product can adjust the customers needs. For example if you are making boats do you have only three models in your offer or can you make boats specially by customer requests. IBM for example has this on a very high level. They make custom ordered computers on daily basis and that for sure gives them a very big competitive advantage against other computer producers on our planet
Delivery:
Last but not least of our competitive advantage examples is delivery. This one is also separated into different fields. First one is speed or in other words time of delivery and second one is reliability of the delivery. I don’t think I have to explain this in much more details. First one is of course how much time you need to deliver the product to the customer and the second one is how sure you are or how trustworthy you are to deliver the product on the date you have promised to.
What do you mean by? Strategy, Mission, Goal, Vision, Task for an organization?
National University of Modern Languages Islamabad 3
4
Mission:
A mission statement is a formal short written statement of the purpose of a company or organization. The mission statement should guide the actions of the organization, spell out its overall goal, provide a sense of direction, and guide decisionmaking. It provides "the framework or context within which the company’s strategies are formulated. The mission of the company is the answer of the question: why does the organization exists? The mission statement communicates the firm's core ideology and visionary goals, generally consisting of the following three components: Core values to which the firm is committed Core purpose of the firm Visionary goals the firm will pursue to fulfill its mission
Vision:
Vision statement is sometimes called a picture of your company in the future but it’s so much more than that. Your vision statement is your inspiration, the framework for all your strategic planning.
Strategy:
A strategy is a plan of action designed to achieve a particular goal. The word strategy has military connotations, because it derives from the Greek word for general. Strategy is distinct from tactics. In military terms, tactics is concerned with the conduct of an engagement while strategy is concerned with how different engagements are linked. In other words, how a battle is fought is a matter of tactics: the terms that it is fought on and whether it should be fought at all is a matter of strategy. Military strategy is the overarching, long-term plan of operations that will achieve the political objectives of the nation. It is part of the four levels of warfare: political goals, strategy, operations, and tactics.
Goals and Objectives:
Goals and objectives are statements that describe what your Vision Document will accomplish, or the results that will be achieve. Goals are high level statements that provide overall context for what the Vision Document is trying to achieve, and should align to its components.
National University of Modern Languages Islamabad
4
5 Objectives are lower level statements that describe the specific, tangible products, deliverables and fruits that will be delivered. The definition of goals and objectives is more of an art than a science, and it can be difficult to define them and align them correctly.
Task :
.In the Navy, an organization which assigns to responsible commanders the means with which to accomplish their assigned tasks in any planned action. 2. An organization table pertaining to a specific naval directive.
Global operations strategy options:
An international business is any firm that engages in international business or investment This is broad category and different from domestic or local firm. A multinational corporation (MNC) is a firm with extensive international business involvement..MNCs buy resources, create goods and services and sell goods and services in a variety of countries .The term International Corporation applies to most of the world’s large, well known business Certainly IBM is a good example of an MNC .It imports electronic components to the U.S from over 50 countries, export computers to 130 countries, has facilities to 45 countries and earns more than its half sale and profit and profit abroad. Operational mangers of international and multinational firms approach global opportunities with one four operations strategy. a) International strategy b) Multi domestic strategy c) Global strategy d) Translational strategy
International strategy:
An international strategy use exports and licensing to penetrate the global area. It is transfer of valuable skills and products developed in the home market. R&D and control of product and marketing strategy tends to be centralised “at home” Examples i. McDonalds ii. Wal-Mart iii. Mercedes Benz iv. Microsoft v. U.S.Steel National University of Modern Languages Islamabad 5
6
Multi domestic strategy:
Multi domestic strategy is a strategy by which companies try to achieve maximum local responsiveness by customizing both their product offering and marketing strategy to match different national conditions. Production, marketing and R&D activities tend to be established in each major national market where business is done. An alternate use of the term describes the organization of multi-national firms. International or multinational companies gain economies of scale through shared overhead and market similar products in multiple countries. Multi domestic companies have separate headquarters in different countries, thereby attaining more localized management but at the higher cost of forgoing the economies of scale from cost sharing and centralization.
Examples:
i. ii. iii. iv. v. Phillips NV Cadbury Schweppes Body shop Hard rock Cake Nokia
Global strategy:
Global strategy as defined in business terms is an organization's strategic guide to globalization. A sound global strategy should address these questions: what must be (versus what is) the extent of market presence in the world's major markets? How to build the necessary global presence? What must be (versus what is) the optimal locations around the world for the various value chain activities? How to run global presence into global competitive advantage • • • • • Economies The world is seen as a single marketplace Low cost strategy Standardised product worldwide Functions located in a small number of favourable Countries
Examples;
i. ii. iii. Intel Texas Instruments Otis Elevator National University of Modern Languages Islamabad
6
7 iv. v. Sony Disney
Translational strategy:
A transnational strategy allows for the attainment of benefits inherent in both global and multi domestic strategies. The overseas components are integrated into the overall corporate structure across several dimensions, and each of the components is empowered to become a source of specialized innovation. It is a management approach in which an organization integrates its global business activities through close cooperation and interdependence among its headquarters, operations, and international subsidiaries, and its use of appropriate global information technologies (Zwass, 1998). The key philosophy of a transnational organization is adaptation to all environmental situations and achieving flexibility by capitalizing on knowledge flows (which take the form of decisions and value-added information) and two-way communication throughout the organization. The principal characteristic of a transnational strategy is the differentiated contributions by all its units to integrated worldwide operations. As one of its other characteristics, a joint innovation by headquarters and by some of the overseas units leads to the development of relatively standardized and yet flexible products and services that can capture several local markets. Decision making and knowledge generation are distributed among the units of a transnational organization..
Examples:
i. ii. iii. iv. v. Coca cola Nestle Unilever Caterpillar Ford
National University of Modern Languages Islamabad
7
8
National University of Modern Languages Islamabad
8
