Competitive Advantage

The competitive advantage is thought to be stronger when it lasts for longer period of time. Those companies who are able to maintain a competitive advantage for many years are thought to have a sustainable competitive advantage. Understanding the Concept Sustainable competitive advantages are company assets, attributes, or abilities that are difficult to duplicate or exceed; and provide a superior or favorable long term position over competitors. Sustainable competitive advantages are required for a company to thrive in today's global environment.Value investors search for companies that are bargains. In order to avoid purchasing a value trap one Of the factors we search for is sustainable competitive advantages. Without one or more sustainable competitive advantages a company may not be able to recover from whatever caused the stock to become a bargain. We only want to buy the stocks of companies that are real value investments, not value traps. In other words, we want to buy stock s trading below their intrinsic value and will grow cash flow for shareholders.If sustainable competitive advantage is dependent on maintaining a higher profit margin than other companies in the same industry, how does a company set out to develop a strategy to both achieve and maintain competitive advantage? The two main components of profit are that customers both value the goods and services and will pay for them; and that a company can keep production costs related to goods and services low, so that there is a higher profit margin. For example, if Sally's Cupcake Shop can make a chocolate cupcake for 25 cents and sell it for $1. 0, the profit on each cupcake is 75 cents. Sally's customers will pay $1. 00 per cupcake because the cupcakes are delicious and made with high quality ingredients. A few blocks away, Bobby's Cupcakes & More spends 40 cents making a chocolate cupcake, but can only sell the cupcake for 50 cents. Bobby's profit is only 10 cents per cupcake. Customers will n ot pay as much money per cupcake, because Bobby's cupcakes are not as tasty and are not made with ingredients that match the quality of Sally's cupcakes.Sally will be able to maintain a competitive advantage as long as she keeps costs lower than the amount customers will pay, allowing her to build a higher profit than Bobby. If this continues year after year, even as costs and prices change, Sally would be said to have the sustainable competitive advantage. However, Sally cannot become too comfortable with her advantage, and instead must antique to find ways to maintain a competitive advantage. Bobby may become motivated to outperform Sally. If Bobby is able to increase his own profit substantially, he could potentially take away the sustainable competitive advantage.Your competitive advantage is what sets your business apart from your competition. It highlights the benefits a customer receives when they do business with you. It could be your products, service, reputation, or even y our location. For example, do you offer home delivery, a money back guarantee, a 2-hour call-out service or childcare facilities? Types ND Examples of Sustainable Competitive Advantages Low Cost Provider/ Low pricing Economies of scale and efficient operations can help a company keep competition out by being the low cost provider.Being the low cost provider can be a significant barrier to entry. In addition, low pricing done consistently can build brand loyalty be a huge competitive advantage (I. E. Wall-Mart). Market or Pricing Power A company that has the ability to increase prices without losing market share is said to have pricing power. Companies that have pricing power are usually taking advantage of high barriers to entry or have earned the dominant session in their market. Powerful Brands It takes a large investment in time and money to build a brand. It takes very little to destroy it.A good brand is invaluable because it causes customers to prefer the brand over competitor s. Being the market leader and having a great corporate reputation can be part of a powerful brand and a competitive advantage. Strategic assets Patents, trademarks, copy rights, domain names, and long term contracts would be examples of strategic assets that provide sustainable competitive advantages. Companies with excellent research and development might have label strategic assets. Barriers To Entry Cost advantages of an existing company over a new company is the most common barrier to entry.High investment costs (I. E. New factories) and government regulations are common impediments to companies tying to enter new markets. High barriers to entry sometimes Create monopolies or near monopolies (I. E. Utility companies). Adapting Product Line A product that never changes is ripe for competition. A product line that can evolve allows for improved or complementary follow up products that keeps customers coming back for the â€Å"new ‘ and improved version (I. . Apple phone) a nd possibly some accessories to go with it.Product Differed tuition A unique product or service builds customer loyalty and is less likely to lose market share to a competitor than an advantage based on cost. The quality, number of models, flexibility in ordering (I. E. Custom orders), and customer service are all aspects that can positively differentiate a product or service. Strong Balance Sheet/ Cash Companies with low debt and/or lots of cash have the flexibility to make opportune investments and never have a problem with access to working capital, liquidity, or solvency.The balance sheet is the foundation of the company. Outstanding Management / People There is always the intangible of outstanding management. This is hard to quantify, but there are winners and losers. Winners seem to make the right decisions at the right time. Winners somehow motivate and get the most out of their employees, particularly when facing challenges. Management that has been successful for a number f ears is a competitive advantage. Value Investing and Sustainable Competitive Advantages Companies with one sustainable competitive advantage might be successful.Finding companies with multiple sustainable competitive advantages will greatly improve the chances you have found a real value stock. Can you think of any sustainable competitive advantages I may have missed? Http://arborinvestmentplanner. Com/sustainable-competitive-advantages- definition-types-examples/ How to identify your competitive advantage To identify your competitive advantage, you need to understand your competitors and your customers. Ask yourself: Why do customers buy from Why do customers buy from our competitors and not us?Why do some potential customers not buy at all? What do we need to do to be successful in the future? Market research will help you to answer these questions. Good market research will reveal how your business is different from your competitors, and what you have to offer that appeals to you r customers. In-depth customer research will help you identify your customers' needs and increase your competitive edge. Use our market research kit to find key economic, demographic and statistical information about your industry.Customers buy benefits When customers buy your product or service, they are buying the benefit that it gives them. It may be that your product makes their life simpler, or your service helps them to feel better about themselves. Think about how your competitive advantage benefits your customers. For example, the competitive advantage for a sandwich shop may be: We use fresh, local ingredients to make-to-order the highest quality gourmet sandwiches in the local area.Different customers may see different benefits: customers with allergies or particular dislikes will enjoy the convenience of ordering a sandwich with their preferred ingredients customers who want to treat themselves will be attracted by the fresh, high-quality ingredients, and he fact that the sandwiches are gourmet customers who want to support local businesses will appreciate thou use only local ingredients. Thinking about how your business can benefit your customers will help you to pinpoint your competitive advantage. A strong competitive advantage: reflects the competitive strength of your business (e. . Quality of service) is preferably, but not necessarily, unique is clear and simple may change over time as competitors try to cash in on your idea must be supported by honest and ongoing market research must highlight the benefits to customers rather than boast Of your business itself. After you have highlighted your competitive advantage, the best way to tell your customers about it is to create your unique selling proposition. COMPETITIVE ADVANTAGE OF Samsung Electronics is part of one of the largest multi-billion dollar corporations in the world.In 2007 it exceeded the $Bonn mark in annual sales for the first time in its history. This makes it one of the world's top three companies in the electronics industry where only two other companies, Siemens and Hewlett-Packard, have posted larger revenues. The name Samsung literally means ‘three stars' or ‘Tristan' in Korean, reflecting the Samsung Group's dominance in two further sectors: Samsung Heavy Industries and Samsung Engineering and Construction. â€Å"The support need – when and where you need it' Samsung respects the choice customers have in how and with whom they do business.That why, to more effectively support product lines, Samsung has established a geographically-dispersed base of direct dealers and indirect channel partners that result in tight-knit national coverage. So, as a single- or multi-location operation, you benefit from having Samsung partners right where you need them most – near corporate headquarters, at branch offices r out in the field. A direct connection to Samsung through your authorized dealer. As a decision maker for your business, it's your job to make the right choices to keep your business competitive and vibrant.With an authorized Samsung dealer as your telecommunications solutions provider you can rest assured that your telecommunications needs are being fulfilled. Look at your Samsung dealer as your trusted advisor, keeping you informed about new technology advancements, service options and cost-effective measures that can give your business a competitive advantage. Samsung singular focus is n businesses like yours. Its authorized dealers represent a commitment to supporting you with outstanding solutions and service capabilities.Dealer expertise is sharpened in Samsung mandated certification courses, so you can be confident in the technology and service you are receiving. Samsung supports its authorized dealers along the entire continuum with product training, deployment, installation and professional services. This life cycle of support provides you with an additional Samsung advantage – a five-year hardware warranty that reduces your long term costs. Less one Of the ways Samsung thanks you for investing in their solutions. A strong commitment to research & development Samsung strives to understand what customers need ahead of its competitors.Their engineers adjust their thinking to develop original and innovative products that will meet those needs, along with new technologies to lead the future market. They respond to the â€Å"voice of the customer' by designing and testing new products, and through hands-on management of product lifestyles. Each year Samsung has invested at least 9% of sales revenue into R&D activities. As the company continues to increase R&D pending, their commitment to leading technology standardization and securing intellectual property rights remains strong.In fact, Samsung was the largest publisher of U. S. Patents in 2006 and is the owner of one of the largest U. S. Patent portfolios-?increasing patent procurement by 1 1 percent year over year. Cut ting-edge tech oenology that's affordable. Samsung expertise in voice/data convergence, wired, wireless communications, Vivo and core network technologies has produced Offices†;' 7000 – a family of groundbreaking business communications solutions that are redefining the rules of the game.The Officers†Ã¢â‚¬Ëœ platform provides you with business advantages across your entire spectrum of needs. First, you'll enjoy the peace of mind that comes from knowing that your communications are being routed over a secure, reliable platform. Second, the intuitive design and scalable architecture of this platform enables growth in affordable increments, so your investment will carry you well into the future with significant ROI. In addition, the system's architecture provides flexibility-?a medium where additional applications can be added to enhance the power of Samsung solutions.More and more small and mid-sized genuineness are realizing the need for Computer Telephony Integrat ion solutions to manage their resources and desktops. In response, Samsung has developed a suite of Officers†;' CT I applications for improving call handing, managing the user interface, interpreting and gathering call reporting and improving customer affinity through screen pops that detail names and call history. Standards-based technology means that system serviceability is just a phone call away and your telecommunications are reduced in operational complexity.With its single expandable architecture, Officers 7000 installs ND configures easily. You are considering a platform that not only gives you access to voice and data throughout your office complex and even off-site, but also eliminates divergent systems, bottlenecks and competition between voice and data applications. Whether you are upgrading or are launching a converged system for the very first time, this line-up of systems offers a perfect blend of versatility and power that will speed up your business.Sources of Samsung cost advantage in DRAMS Samsung cost advantage is clearly visible from the comparison of costs (and heir elements) that were borne by the company and its competitors in 2003 (Tab. 3): Samsung* overall cost was 24 per cent lower than the weighted average cost of the other four producers; two most significant elements of the cost structure, I. E. Raw materials and labor, were 36 and 27 per cent lower respectively. When expressed by means of a relation of average selling price to costs (â€Å"productivity' of cost elements), the differences are even more visible (com. Tab. Overall superiority of Samsung over its competitors exceeded 51 per cent! The cost advantages related to raw materials may be explained by better negotiated agreements with suppliers (perhaps due to the larger volumes of purchases – com. Fig. 5) and possibly less shipping and distribution costs that stem from the fact that Samsung FAA facilities are geographically collocated (while competitors' facil ities are spread world-wide). In terms of labor productivity only Chinese SIMI outperformed Samsung, but that came hardly unexpectedly: low labor costs in China had been and were to remain unbeatable for some time yet.Other possibly meaningful factors that cannot be forgotten include: higher yields (due to process quality ND use of more efficient, larger silicon wafers), use Of Common core design for different products supported by the flexibility of production lines (which enabled cost-efficient production of a wide variety of different semiconductors), and – reportedly -? 12 per cent lower investment in capital assets related to the aforementioned strategic decision on FAA collocation.The last but not least element of the Samsung â€Å"cost puzzle† (which, unfortunately cannot be supported by concrete numbers from the case study, and is rather based on intuition) was the way the firm built and maintained intellectual capital and stimulated innovativeness and creativi ty among employees. It had established an incentive-based remuneration system, it sponsored employees for Pads and MBA education, it created a family-friendly working environment in which more of employees' energy could be devoted to solving problems at work instead of troubles in private lives.In most modern industries, such a long-term approach and investing in human capital eventually pays off resulting in higher productivity and better and cheaper products. Sources of Samsung price premium in DRAMS Samsung achieved an almost 1 5 per cent price premium over (the weighted average price of) its competitors (com. Tab. How was that possible? There were, apparently, two main reasons for that: quality and product mix.The former was definitely a unique advantage in the semiconductor industry which was, generally, characterized by little product differentiation (in terms of physical and functional properties), and where demand was highly price- driven. Even though, due to the outstanding quality and reliability of its products, Samsung had managed to achieve a position which justified paying remit for its products. Between 1995 and 2005 the company won awards for performance from most of its major customers, and many of them (even rivals of one another) named Samsung their supplier of choice.Of course, the highly-recognizable brand (the value of which was estimated at almost USED 11 billion in 2003 ! ) helped to maintain the price premium as well. The Samsung successful product mix strategy, on the other hand, was realized through extremely wide differentiation of products that the company manufactured: in DRAM memory segment it was over 1,200 different types! The large product portfolio allowed Samsung to address a very broad market and to avoid fierce price fighting in the most competitive sector of so called commodity DRAMS (where many producers had to sell below production costs).Apart from the ‘mainstream' mass products (in general: low-cost commodity DR AMs), Samsung offered: ; â€Å"legacy products†, I. E. Older types of chips, production of which was continued after the industry had moved to newer generations and which – due to limited supply – could be sold at price premium; ; â€Å"specialty products† – chips designed for niche uses where the rice was usually agreed on bilaterally between Samsung and a given buyer (at the same time, the company was able to optimism costs by building the customized architectures using a common core design).How Samsung should react to threat of large-scale Chinese entry? In my opinion, none of the two options of reacting to the Chinese â€Å"menace† that were presented in the case study, should have be chosen by Samsung as the only one. Rather, a mix of the two seemed to be an optimal approach. Samsung unique ability to maintain the low-cost and, at the same time, differentiated production should have been maintained, but – simultaneously certain a spects of the changing industry environment might have been taken advantage of as well.It was not necessary for Samsung to desperately look for ways to decrease its labor costs (which is usually a reason for established companies to move their production to China): its cost advantage over competitors was supposed to remain for some time. On the other hand, in line with an old Chinese saying: â€Å"keep your friends close, but the enemies even closer†, it was not advisable to ignore the rising competitors (as the industry had done years earlier with regards to Samsung itself).Earlier of eater, China itself was posed to become a significant (if not the most significant) market for semiconductors, thus all actions aiming at better positioning itself to sell in the market seemed to be highly desirable. Therefore, Samsung should have decided to partner with a Chinese firm for production of its low-end, legacy products. At the same time, its state-of-the- art technologies had to be kept in-house.Such a strategy would let Samsung preserve its valuable intellectual property; manufacturing of the mass market products together with Chinese did not pose a threat to the IP, since cosmologies necessary for that usually were no longer proprietary information. On the other hand, the partnership might result in a possibility to further decrease the costs due to availability of attractive subsidizing from the Chinese government and lower labor costs, and – of course – prepare grounds for enlarging sales to customers in the opening and growing market.There was, however, a number of important aspects that had to be remembered while implementing the strategy: ; Samsung competitive advantage related to the unique breeding environment for innovation and efficacy of the centralized R&D and production should have been preserved, thus all new product development had to be kept in the Korean headquarters; ; another competitive advantage of the company, the quality, should have been definitely maintained, too; it might have become a challenge if part of the production was to be moved to China, therefore Samsung had to ensure it could properly influence its Chinese partner (e. . By remaining a majority stakeholder in the joint undertaking); ; while overall reduction of costs was not of key importance for Samsung, the partnership tit a Chinese firm could have been, nonetheless, used for reduction Of labor costs related to production of legacy products (in case of which the associated gain was to be most significant) with no risk of compromising valuable intellectual property; that way, another competitive advantage of Samsung, the industry best ASP to cost ratio, would be further strengthened.However, in parallel to building the partnership, Samsung couldn't have forgotten about other Chinese would-be competitors which would supposedly flourish around. Therefore, the company should have kept throng focus on maintaining its technological leadersh ip through cutting-edge R (still unavailable at the time, despite having relatively easy access to capital, for Chinese start-ups), especially towards future substitutes for DRAMS: flash memory chips.