Evaluate the Relevance of the Concept of Competitive Advantage to Firms Within the Banking and Finance Sector and Using Relevant Examples Consider How Firms in This Sector Have Attempted to Create and Sustain a Competitive Advantage

Topics: Product differentiation, Firm, Economics Pages: 6 (1907 words) Published: March 20, 2012

The following piece of writing includes a first personal attempt to present some segments of the Competitive Advantage theory and to relate the above to the Banking-Finance sector. My general knowledge on the subject is quite limited. Nevertheless, I tried to handle the topic given to the best of my knowledge.

Competitive advantage in theory

The last decades there is a brand new term going around in the world of business. Its name is Competitive Advantage. As various extremely important executives claim this factor can be the missing key, which will lead eventually a company to success. Allow me to give a first description of what I have understood, so far, of the competitive advantage term. According to what I have read and heard in lectures of the course Business Economics, I consider the C.A. to be the difference a company has from the rest of the market, which will help her to obtain not only higher profits but also longevity. As Michael Porter in his 1985 text says that, it is about the distinct and ideally sustainable edge over the competitors. The competitive advantage is said to be based on monopoly profits and on/or the Ricardian Rents and is used to generate another important factor, the added value. The writer – expert in finance John Kay implies that the C.A. presents no stability and it is always relative for each one of the companies in all the markets of the world. It is also something measurable enough in order the executives to extract useful conclusions and plan the company strategies. The relevant benchmark is the marginal firm in the industry. The company with the least potentials and the smallest market power is used as the baseline against which the competitive advantage of all other firms can be set.

Methods of building a Competitive Advantage
A general but for most people questionable claim would be that all the existing firms in a market are able to create a competitive advantage. That on theoretical basis is correct. Significant economists have worked for years in a row towards this goal and have elaborated strategies and methods a firm can use in order to obtain the competitive advantage.

The Resource Based View of the Firm
The Resource Based View of the Firm has its origins in four different significant experts of finance: Edith Penrose (1959), Birger Wernerfelt (1984), Jay Barney (1991) and last but the most important writer Margaret Peteraf (1993). M. Peteraf put together the existent elements of the work of the previous three writers and produced the well-known > in her article reprinted in Foss. The main idea of the above-mentioned methods is that all of them give considerable importance on the resources, those that a company already possesses or the ones it procures from the outside environment. These resources must exhibit a special characteristic in order that C.A. to be produced. That is the so-called Resource Heterogeneity, meaning that they need to be rare so as not the competitors to use them and valuable in order to increase the firms efficiency and effectiveness. For example rarity could a minor of diamonds have and valuable could software program of a computer company be. The Recourse Heterogeneity can be obtained through either Product Differentiation or Cost Advantages. As far the product is concerned when a company differ one of its products it instantly creates a heterogeneous resource and approaches the C.A. (as per Peteraf 1993). Then it can offer those products in the whole market or in some market segments. The differentiation can be on the quality and the market segments can be large, small or of special interest. The market selection must be done with extra care and attention. The firm is in position to choose either to offer its products following the Broad Coverage Strategies e.g. unisex cosmetics and obtain Economies of Scale or...
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