Competitive Advantages Of Services

CHAPTER ONE

INTRODUCTION

1.1. Back ground of the study

Nowadays there are number of banks in Ethiopia specially in dessie and kombolecha and
they have high computation between them to attract new customers and retain them . The
economic importance of banking institutions on national development and human capital
growth is a motivating factor for researches in the area. Competitive advantage of the
banking institutions is therefore an important institutional framework to achieve success in
the global competitive market. The role of banking organization in risk hedging and as
economic shock absorber must be strengthened with continuous innovative banking
practices. It is against this backdrop that this study is conducted to identify the factors that
influence competitive advantage in banking organizations and conceptualized the construct
through both financial and non-financial perspectives.
1.2. Objective of the study
Main objective
 To understand the competitive advantage concept
Specific objective
 To determine the compitative advantage strategy of abbay banke and awash bank
 To understand different compitative advantega strategies
 Competitive Advantages Of Services

CHAPTER TWO

LITRATURE REVIEW

2.1. Definition

Competitive advantage :-

 is the leverage that a business has over its competitors.

 is what makes you better than the competition in your customers' minds.
 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
 is the central element to a company’s performance on competitive markets, and in
order to obtain it, the company can use one of the following strategic alternatives,
called generic competitive strategies: cost supremacy, differentiation and focus.
( Michael Porter)
2.2. Determinant of competitive advantage
I. Benefit.

Whether it's a good or service, you must be clear on the benefit your product provides. It must
be something that your customers truly need and that offers real value. You must know not only
your product's features, but also its advantages how they benefit your customers. That means
being constantly aware of new trends that affect your product, especially new technology. For
example, newspapers were slow to respond to the availability of free news on the internet.

II. Target market.

Who are your customers? You've got to know exactly who buys from you, and how you can
make their life better. That’s how you create demand, the driver of all economic growth.
Newspapers' target market drifted to older people who weren't comfortable getting their news
online.

III. Competition.
 Competitive Advantages Of Services

That's more than just similar companies or products. It includes anything else your customer
could do to meet the need you can fulfill. Newspapers thought their competition was other
newspapers until they realized it was the internet. They fought to compete with a news provider
that was instant and free.

To be successful, you need to be able to articulate the benefit you provide to your target
market that's better than the competition. That's your competitive advantage.( Kimberly
Amadeo 2017)

2.3. Sustainable competitive advantage

Just because a company is the market leader now, doesn't mean it will be forever. A company
must create clear goals, strategies, and operations to build sustainable competitive advantage.
The corporate culture and values of the employees must be in alignment with those goals. It's
difficult to do all those things well. That's why few companies can create a sustainable
competitive advantage.

In 1985, Harvard Business School professor Michael Porter wrote Competitive Advantage. It
is the definitive business school textbook on the topic.

Porter outlined the three primary ways companies achieve a sustainable advantage. They are cost
leadership, differentiation, and focus. Porter identified these strategies by researching companies.

i. Cost leadership means you provide reasonable value at a lower price. Companies do this
by continuously improving operational efficiency. That usually means paying their
workers less. Some compensate by offering intangible benefits such as stock options,
benefits or promotional opportunities. Others take advantage of unskilled labor surpluses.
As these businesses grow, they can use economies of scale and buy in bulk.

Cost leadership is a business ability to produce a product or service that will be at a

lower cost than other competitors. If the business is able to produce the same quality
product but sell it for less this gives them a competitive advantage over other businesses.
Therefore, this provides a price value to the customers. Lower costs will result in higher
 Competitive Advantages Of Services

profits as businesses are still making a reasonable product on each good or service sold. If
businesses are not making a large enough profit, Porter recommends finding a lower-cost
base such as labor, materials and facilities. This gives businesses a lower manufacturing
cost over those of other competitors. The company can add value to the customer via
transfer of the cost benefit to them.With this strategy, the objective is to become
the lowest-cost producer in the industry.The traditional method to achieve this
objective is to produce on a large scale which enables the business to exploit economies
of scale.Why is cost leadership potentially so important? Many (perhaps all) market
segments in the industry are supplied with the emphasis placed on minimising costs. If
the achieved selling price can at least equal (or near) the average for the market, then the
lowest-cost producer will (in theory) enjoy the best profits.This strategy is usually
associated with large-scale businesses offering "standard" products with relatively little
differentiation that are readily acceptable to the majority of customers. Occasionally, a
low-cost leader will also discount its product to maximise sales, particularly if it has a
significant cost advantage over the competition and, in doing so, it can further increase its
market share. A strategy of cost leadership requires close cooperation between all the
functional areas of a business

ii. Differentiation means you deliver better benefits than anyone else. A company can
achieve differentiation by providing a unique or high-quality product. Another method is
to deliver it faster. A third is to market in a way that reaches customers better.
A company with a differentiation strategy can charge a premium price. That means it
usually has a higher profit margin. A differential advantage is when a business' products
or services are different to its competitors. Michael Porter recommended making those
goods or services attractive to stand out from their competitors. The business will need
strong research, development and design thinking to create innovative ideas. These
improvements to the goods or service could include delivering high quality to customers.
If customers see a product or service as being different from other products, consumers
are willing to pay more to receive these benefits Companies typically achieve
differentiation with innovation, quality or customer service. Innovation means you meet
the same needs in a new way. Quality means you provide the best product or service.
 Competitive Advantages Of Services

Customer service means going out of the way to delight shoppers. With differentiation
leadership, the business targets much larger markets and aims to achieve competitive
advantage through differentiation across the whole of an industry. This strategy
involves selecting one or more criteria used by buyers in a market - and then positioning
the business uniquely to meet those criteria. This strategy is usually associated with
charging a premium price for the product - often to reflect the higher production costs
and extra value-added features provided for the consumer. Differentiation is about
charging a premium price that more than covers the additional production costs, and
about giving customers clear reasons to prefer the product over other, less differentiated
products. There are several ways in which this can be achieved, though it is not easy and
it requires substantial and sustained marketing investment

iii. Focus means you understand and service your target market better than anyone else. You
can use either cost leadership or differentiation to do that. The key to focusing is to
choose one specific target market. Often it's a tiny niche that larger companies don't
serve. For example, community banks use a focus strategy to gain sustainable
competitive advantage. They target local small businesses or high net worth individuals.
Their target audience enjoys the personal touch that big banks may not be able to give.
They are willing to pay a little more in fees for this service. These banks are using a
differentiation form of the focus strategy

Focus strategy ideally tries to get businesses to aim at a few target markets rather than
trying to target everyone. This strategy is often used for smaller businesses, as they may
not have the appropriate resources ability to target everyone. Businesses that use this
method usually focus on the needs of the customer and how their products or services
could improve their daily lives. In this method, some firms may even let consumers give
their inputs for their product or service. This strategy can also be called the segmentation
strategy, which includes geographic, demographic, behavioral and physical segmentation.
By narrowing the market down to smaller segments, businesses are able to meet the
needs of the consumer. Porter believes that once businesses have decided what groups
they will target, it is essential to decide if they will take the cost leadership approach or
differentiation approach. Focus strategy will not make a business successful. Porter
 Competitive Advantages Of Services

mentions that it is important to not use all 3 generic strategies because there is a high
chance companies will come out achieving no strategies instead of achieving success.
This can be called ‘stuck in the middle’ and the business won't be able to have a
competitive advantage. When businesses can find the perfect balance between price and
quality, it usually leads to a successful product or service. A product or service must offer
value through price or quality to ensure the business is successful in the market. To
succeed, it’s not enough to be ‘just as good as’ another business. Success comes to firms
that can deliver a product or service in a manner that is different, meaningful and based
on their customers' needs and desires. Deciding on the appropriate price and quality
depends on the business' brand image and what they hope to achieve with relation to their
competition.

 Cost Focus Here a business seeks a lower-cost advantage in just one

or a small number of market segments. The product will be basic -
perhaps a similar product to the higher-priced and featured market
leader, but acceptable to sufficient consumers. Such products are often
called "me-too's".
 Differentiation Focus In the differentiation focus strategy, a business
aims to differentiate within just one or a small number of target
market segments. The special customer needs of the segment mean
that there are opportunities to provide products that are clearly
different from competitors who may be targeting a broader group of
customers. The important issue for any business adopting this strategy
is to ensure that customers really do have different needs and wants -
in other words that there is a valid basis for differentiation - and that
existing competitor products are not meeting those needs and wants.
Differentiation focus is the classic niche marketing strategy. Many
small businesses are able to establish themselves in a niche market
segment using this strategy, achieving higher prices than un-
differentiated products through specialist expertise or other ways to
add value for customers. There are many successful examples of
 Competitive Advantages Of Services

differentiation focus. A good one is Tyrrells Crisps which focused on

the smaller hand-fried, premium segment of the crisps industry.

COMPETITIVE ADVANTAGE
Lower Cost Differentiation

Broad 1. Cost Leadership 2. Differentiation

Target
COMPETITIVE
SCOPE
Narrow 3A. Cost Focus 3B. Differentiation
Target Focus

Graph 1. Porter's Generic Strategies

2.4. Porter’s five forces of competitive position analysis.

Porter's Five Forces of Competitive Position Analysis were developed in 1979 by Michael E
Porter of Harvard Business School as a simple framework for assessing and evaluating the
competitive strength and position of a business organisation.

This theory is based on the concept that there are five forces that determine the competitive
intensity and attractiveness of a market. Porter’s five forces help to identify where power lies in a
business situation. This is useful both in understanding the strength of an organisation’s current
competitive position, and the strength of a position that an organisation may look to move into.

Strategic analysts often use Porter’s five forces to understand whether new products or services
are potentially profitable. By understanding where power lies, the theory can also be used to
identify areas of strength, to improve weaknesses and to avoid mistakes.
 Competitive Advantages Of Services

Porter’s five forces of competitive position analysis:

The five forces are:

1. Supplier power. An assessment of how easy it is for suppliers to drive up prices. This is
driven by the: number of suppliers of each essential input; uniqueness of their product or service;
relative size and strength of the supplier; and cost of switching from one supplier to another.

2. Buyer power. An assessment of how easy it is for buyers to drive prices down. This is driven
by the: number of buyers in the market; importance of each individual buyer to the organization;
and cost to the buyer of switching from one supplier to another. If a business has just a few
powerful buyers, they are often able to dictate terms.

3. Competitive rivalry. The main driver is the number and capability of competitors in the
market. Many competitors, offering undifferentiated products and services, will reduce market
attractiveness.
 Competitive Advantages Of Services

4. Threat of substitution. Where close substitute products exist in a market, it increases the
likelihood of customers switching to alternatives in response to price increases. This reduces
both the power of suppliers and the attractiveness of the market.

5. Threat of new entry. Profitable markets attract new entrants, which erodes profitability.
Unless incumbents have strong and durable barriers to entry, for example, patents, economies of
scale, capital requirements or government policies, then profitability will decline to a competitive
rate.

Table. 1 porters s forces of compitation and their generic strategy

2.5. Potential Strategies for Differentiation

The following strategies may be helpful in differentiating a product or service from those of the
competition.
 Service Features and Benefits
 Competitive Advantages Of Services

What makes the product unique and desired? Consider product characteristics such as style,
handling, taste, quality ingredients, comfort, production methods (such as natural or organic),
certification and so on. Are the product characteristics significantly different from those of
currently available products? Can the venture provide these features or benefits effectively?
 Location(s)
What about the venture’s location is a draw to customers? The office or store location is often a
very important factor, particularly for ventures selling directly to the public. Location should be
chosen with care, preferably in an area near customer traffic.
 Staff
Consider the factors which ensure that front and managerial staff produce a good product and
provide a positive customer experience. Does the venture’s personnel follow these factors? Do
they act professionally? Do they have expertise with the product, on which customers can rely?
 Operating Procedures
What policies, processes, and standards could be employed to create value, and offer a positive
customer experience?
 Price
What fundamental cost advantage does the venture have which would justify permanently low
prices? Most ventures operating in the same industry in a location will tend to have pretty much
the same cost structure, meaning that when one competitor cuts price, others usually follow, thus
erasing whatever advantage the first competitor gained by reducing prices. Ways to achieve a
fundamental cost advantage might be through lower overhead or shipping costs (perhaps through
geographic closeness to markets), cheaper labor, and/or low-priced raw materials (perhaps
through long-term purchase agreements).
 Customer Incentive Programs
Does the company employ programs to attract new and repeat customers through efforts such as
giveaways, coupons, sales, promotions, and/or volume discounts?
 Goodwill
Is the business recognized within the community as a contributor and a valuable member?

2.6. Competitive advantage in banks

 Competitive Advantages Of Services

 Conceptualizing competitive advantage for banking organization: The

conceptualization of organization competitive advantage is often determined by the
nature of the organization being investigated. In financial institutions or studies that
measured competitive advantage using financial measures, it is defined as the yearly turn-
out profit of the company, measured by Return of Equity (ROE) or/and Return on Assets
(ROA). In these studies, competitive advantage is investigated as the dependent variable
i.e., the consequence. From the non-financial measure perspective, competitive advantage
is defined as the innovative ideas and creative product development process of the
organization. It is also defined as service development and increase in sales and growth,
service quality, responsiveness to customers, organizational core competence and cost
effectiveness. Kuettner and Schubert, Wang and Hong, Militaru and Ionescu and Schatz
and Bashroush conceptualized and measured competitive advantage as organization’s
strategic planning and corporate social responsibility. Notably, in studies that investigated
competitive advantage using non-financial measures, it is investigated as moderator,
mediator or antecedent variable to the actualization of organization performance. In
summary, competitive advantage is the same term as firm/organization performance
when measured with constructs that reflect the organization growth or in terms of
innovation and other associated constructs. In either of these cases, the position of the
construct in the research model determines the adopted measuring dimensions. This
clearly shows that strategy, through different conceptualizations like innovation, quality
management and corporate social responsibility have been found to be related with
competitive advantage.

 Antecedents factors of competitive advantage: Several previous studies have attempted

to conceptually discuss banking institution’s competitive advantages with respect to its
causative factors generally. Some of these studies showed encouraging levels of
effectiveness in many dimensions of composite marketing strategies with adequate
managerial recommendations. The antecedents factors of competitive advantage are
found to be (electronic) quality of service or/and management, corporate social
responsibility, strategy formulation, (electronic) marketing innovation and creativity,
customer orientation and market differentiation. Others are firm’s performance, core
 Competitive Advantages Of Services

competence, increased sales, business efficiency, product value, effective cost, product
customization, customer service and satisfaction, usability, sales management activities,
market-oriented product management activities, sales performance and efficiency.
Identifying these antecedents are essential for conceptualizing and investigating
constructs that are related to competitive advantage in the banking sector and extending
the previously-proposed related conceptual models

3. Reference

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