Strategic Finance and Competitive Advantage
Globalization has led to increased competition. Artificial boundaries no longer stop competitors from entering markets and even dominating them. This is the reason that having a distinct and clear competitive advantage has become important for most organizations. However, a lot of companies do not have this competitive advantage. This is because competitive advantages do not spring up overnight. Competitive advantage is the cumulative result of years of decision-making.
There are various types of competitive advantages possible. Different companies across the world have used different strategies in order to build a competitive advantage which has allowed them to dominate the marketplace. In this article, we will have a closer look at the top four sources of competitive advantage and explain how they are linked to strategic financial decisions.
Strategy #1: Reputation: There are many products in the world that have become commoditized. This means that from a sellers point of view, there is very little that can be done to distinguish the product from the competition.
In such cases, companies use the reputation strategy to build a competitive advantage. The Coca-Cola Company is a case in point, which explains this strategy. There are many colas in the market and there is very little to choose from between the different types of colas. Coca-Cola realized early on, that they could not compete on the basis of the product alone. This is the reason that they decided to build a larger-than-life reputation.
Coca-Cola literally invented the field of brand management. They came up with the idea that advertisements should not be considered an expense. Instead, it should be considered to be an investment that reinforces the brand image of the company. It is important to understand, that Coca-Colas reputation was not built overnight. In fact, it would be impossible to build overnight, no matter how much money is spent on marketing. The positive brand image which Coca-Cola enjoys is the result of decades of investments made towards the same goals. This means that the Coca-Cola Company we see in existence today is the result of sustained investments made using the principles of strategic finance. Coca-Cola Company is not the only one to use this strategy. There are premium companies in almost every market that have tried to emulate this strategy to some extent.
Strategy #2: Innovation: Just like some companies focus on investing money in advertisements, there are other companies that focus on investing in research and development. These companies focus on delighting their consumers by providing the most technologically advanced products in the market. Now, if these companies have to be technologically ahead of their competitors, then it is important that they spend large sums of money on research and development. Apple Corporation is an example of a company that follows this strategy.
For years, Apple has been ahead of the market in providing products that are intuitive and simple to use but advanced at the same time. This too has not happened overnight by accident. The decision to make Apple a technological leader was made by finance executives following the principles of strategic finance. Then, over the years, they allocated large sums of money towards research and development. Finally, this money was used to develop the iPod, iPhone, and iPad which made Apple a global leader.
Strategy # 3: Architecture: There are other companies that build the architecture of their companies in such a way that it provides them with a competitive advantage. The architecture is often enabled by rapid advances in information technology.
For example, prior to Dell computers, companies would make and stock laptops. They would then be distributed in the market and sold using the push method. Michael Dell revolutionized the industry when he started selling laptops that were made to order. This meant that the order was received first and then using the advances in information technology, components were assembled at warp speed and the laptop was delivered within a few days.
Once again, the capabilities which provided a competitive advantage were clearly identified by Dell Corporation, and money was allocated towards enhancing these capabilities. The finances of the company were strategically directed so as to increase the competitive capabilities of the company.
Strategy # 4: Intellectual Assets: Intellectual assets prove to be another source of competitive advantage. Companies that rely on intellectual assets often rely on highly capable employees to file for patents. They then use the superior technology that they have in order to develop better products themselves.
Sometimes, they may even license the use of these patents to other companies and collect royalty fees. In such cases, the finances of the company have to be structured so that they can hire the best talent and continue their competitive advantage.
The bottom line is that companies can become successful in many different ways. It is important for companies to pick one of these ways and allocate their finances towards the achievement of that goal. The goal becomes a reality only after sustained strategic efforts over a long period of time.
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