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December 2016 Economy and Policy

Published on: 2016-12-11 16:32:03     787 times read    0  Comments
Capabilities Based Competition

In this dynamic business environment, strategy has to assume a more dynamic feature.

--BY SUJIT MUNDUL

We are aware of the fact that the story of Kmart and Wal-Mart illustrates the newer dimensions of competition during the 1990s. It has been noticed that in one after another of the industries, established players are being overtaken by more dynamic rivals. Following an article by George Stalk et al, some examples could very well vindicate the position.
•    The greatest challenge to departmental store giants like Macy’s comes neither from other large departmental stores nor from small players, but from The Limited, a USD 5.25 billion design, procurement, delivery, and retailing company that exploits numbers of consumer segments with the agility of many small boutiques.

•    City bank may still be the largest US bank in terms of assets, but Banc One had performed much better in terms of ROA in the US banking industry prior to the global financial crisis.

•    Xerox invented xerography and the office copier market. But between mid 70s and early 80s, Canon introduced a range of more than 90 models, diminishing Xerox’s share of the mid – range copier market in half. Today Canon is a key competitor not only in mid – range but also in high-end colour copiers.

These examples signify more than just the triumph of individual companies. They indicate a fundamental shift in the logic of competition, thus revolutionising corporate strategy.

When an economy remains relatively static, strategy can afford to remain static for a while. But in a world marked by durable products, increasing customer needs, well defined national and regional markets and clearly identified players, competition becomes a “war of position” in which the companies occupy competitive spaces, having to defend the market share in the defined market segments and products. Hence the competitive strategies would assume a much higher importance in order to retain the market positioning and the brand value. One point, however, remains very important in that the key to competitive advantage is where a company chooses to compete and how it would execute its strategy.

There is sufficient empirical evidence to support the fact that few managers (from various markets) need to be reminded of the changes that have made this traditional approach virtually obsolete. As markets fragment and expand, they undergo a process of natural evolution and “owning” any particular market segment becomes increasingly difficult and less valuable. Another noticeable point is that, as product life cycles accelerate, dominating existing product segments become less important than being able to create new products and market them successfully. The situation becomes more competitive as globalisation breaks down the barriers between national and regional markets, allowing the entry of more players with different “value adding” capabilities.

In this dynamic business environment, strategy has to assume a more dynamic feature. Joseph Schumpeter (and the Austrian School of Economics) viewed competition, as a “perennial gale of creative destruction” in which market dominating incumbents are challenged and often unseated, by rivals that deploy innovatory products and innovatory strategies.

Schumpeter’s view that competition is a dynamic process in which industry structure is constantly changing raises the issue of whether competitive behaviour should be seen as an outcome or a determinant of industry structure.

In most industries, Schumpeter’s process of “creative destruction” tends to be more of a breeze than a gale. It has been observed that in established industries entry occurs so slowly that profits are undermined only gradually. But what about recent trends? Has accelerating technological changes and intensifying international/ regional competition reinforced the processes of “creative destruction”? According to Rich D’Avimi, a general feature of industries today is “hyper completion”, intense and rapid competitive moves, in which competitors must move quickly to build new advantages and erode the advantages of their rivals. If the industries are hyper competitive, their structures are likely to be less stable than in the past.

Competition is now a “war of movement” in which success depends on anticipation of market trends and a quick response to the changing customer needs. A scan of the global markets reveals that successful competitors move quickly in and out of products, markets and sometimes even entire businesses. In such an environment, according to George Stalk, the essence of strategy is not the structure of a company’s products and markets, but the dynamics of its behaviour. The goal of the leadership would be to identify and develop the hard – to – imitate organisational capabilities that distinguish a company from its competitors in the eyes of customers, the intimate choice – maker.

Many companies, the Canon, Wal-Mart, Honda etc. have learned this lesson. Their collective experience and of other successful companies globally, suggest the principles of capabilities–based competition, which are as follows:
•    Success in any competitive environment depends on transforming a player’s key processes into strategic capabilities that would provide superior value/services to the consumers.
•    Companies/Players create these capabilities by making strategic investments in the required areas.
•    The building blocks of corporate strategy are not products and markets but processes which are the fundamental base of competitive advantage.
•    As capabilities cross functions, the champion of a capabilities-based strategy is the CEO.

When a company does not own every link of the capability chain, it is seen that the capabilities–based competitor works to tie these parts into its own business systems. A good example would be Wal-Mart’s relationships with its suppliers. To support Wal-Mart’s inventory – replenishment capability to function smoothly, vendors have had to change their own business processes. As a quid pro quo, they get far better payment terms from Wal-Mart than they do from other discount retailers. Another point to remember is that a major attribute of capabilities is that they are cross functional and collective – i.e. a small part of many people’s jobs, not a large part of a few. 

I believe that a CEO’s success in building and managing capabilities will be the principal test of management skills in the current days of “hyper competition”.

The writer is a Member in the Board of Directors of Standard Chartered Bank Nepal Ltd. 


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