Introduction
Maintaining a competitive advantage is a primary objective in a competitive market. Small businesses and international corporations cannot operate successfully or achieve long-term financial success without implementing a variety of techniques and measures that appeal to consumers. Furthermore, efficiently managing suppliers and the workforce, staying abreast of trends, and understanding the market by examining competitors are additional ways for companies to gain an advantage over their rivals.
To achieve this advantage, it is essential to highlight existing economic concepts and frameworks that are evidence-based and well-practiced. Furthermore, identifying the strategies of several world-leading corporations is another measure that can help recognize elements of effective competition. This paper assesses how companies achieve and sustain a competitive advantage by examining the microeconomic environment. Namely, price advantage, differentiation, innovation, and focus are examined using tools from transaction cost economics and game theory.
Overview
Needless to say, competitive advantage comprises a multitude of variables and aspects that a business considers implementing to become more desirable and sought after compared to its rivals. Researchers highlight that it comprises a set of unique values that correlate with the effectiveness of goods and service provision to customers, resulting in greater success than competitors in the same market (Lee et al., 2022). The current paper assesses existing strategies that correlate with the advantage above, including cost and differentiation leadership, innovation, and focus. Each concept can be examined from the perspectives of transaction cost economics and game theory to assess how the frameworks can be implemented, the connections between different implementation stages, risks, and the ultimate result, and the evaluation of success or lack thereof.
Cost Leadership
Cost leadership is one of the main microeconomics concepts linked to competitive advantage. The framework has been developed within Porter’s Generic Competitive Strategies model, which implies that both cost and differentiation on various levels are central components in a company’s aim to outperform rivals (Islami et al., 2020). The notion itself implies that an entity aims to position itself as the most affordable option in a particular market category for a specific good or service.
Needless to say, it is a commonly implemented strategy that is well-researched and reported as successful. For example, researchers have highlighted that price adjustments toward cost leadership are associated with competitive gains, with quality management serving as a mediator (Kharub et al., 2019). This implies that a company can implement cost leadership principles effectively or ineffectively.
The timeline for an ineffective application of the framework illustrates the problems. For example, Apple decides to halve the prices of all smartphones. If the transaction costs remain unchanged, the company will either lose half of its profit or have to reduce quality. On the one hand, more consumers will be able to invest in Apple smartphones, while on the other hand, the brand’s appeal will decline.
Needless to say, cost leadership is not the strategy implied by every company, as consumers demand more than just affordability. For example, return on equity (ROE) is a microeconomic measure that can be used to determine which company is more attractive to investors. Apple’s ROE was almost 150% in 2020 and had been steadily increasing over the last few years (Jiang et al., 2022).
Hence, despite not offering the most affordable prices on the market, Apple Inc. manages to convert investment capital into profits. However, Apple employed a cost-based strategy to achieve a competitive advantage by offering its products at relatively reasonable prices. By applying game theory, the decision to focus on both quality and price, rather than solely on price or solely on quality, becomes more understandable.
Suppose Apple and its main competitor, Samsung, are revising pricing strategies. Apple can reduce prices and gain new consumers at Samsung’s expense, or maintain prices and retain its current position within its consumer base. Similarly, Samsung can reduce or maintain the price of its goods. Additionally, both Samsung and Apple can reduce their prices. However, if Samsung maintains its prices, Apple can do so because it already holds the majority of the market share and would not lose its appeal due to branding, design, and features.
The transactional economics segment, which aligns with the microeconomics element of price adjustments, can be highlighted through the lens of make-or-buy decisions. Needless to say, Apple has a variety of suppliers for the parts and components required to design and produce the goods it sells, most of which are located in China (Chen et al., 2021). However, there have been recent efforts to bring microchip production back within the corporation. The decision would have the following timeline: Apple makes microchips instead of buying them; production costs increase; reliance on suppliers decreases; Apple potentially loses short-term profits; and consumer satisfaction increases.
It is essential to highlight that microeconomics and a company’s internal economic environment do not depend solely on financial variables, such as investment, profit, and spending. For example, Big Tech is transitioning to more sustainable models as consumers are increasingly willing to support ethical businesses that do not rely on sweatshops or cheap labor for materials (Arogyaswamy, 2020). A term for this phenomenon is the Triple Bottom Line, which exemplifies the critical aspects a business should focus on: social, economic, and environmental (Yip et al., 2023). Hence, while ethics may not directly translate into a competitive advantage, they do, as reliance on suppliers decreases when materials are no longer outsourced. Consequently, consumers are more determined to support an ethical brand, and transparency is maximized.
According to the make-or-buy theory, transactional costs are also minimized to some extent. Transactional costs typically increase when uncertainty is present. Researchers note that the economic relationship between China and the US is experiencing tensions, which may lead to import and export restrictions, price increases from the supplier side, and similar outcomes (Jiang et al., 2022). Since transactional costs include variables such as transportation and various commissions, it would be easier to predict them when the materials are being produced in-house rather than abroad. At the same time, these costs increase due to the need for more new labor. However, they become more stable, which makes it easier for the company to predict and stabilize them.
In the case of cost leadership, Apple does not face a competitive threat, as its biggest competitor, Samsung, operates in a different price bracket for tech devices, which is similar to Apple’s. Since Apple consumers are more preoccupied with quality than affordability, increasing or decreasing the price would risk losing customers. On the one hand, the brand would appear less desirable and high quality, while on the other hand, consumers would opt for the more affordable Samsung.
Hence, the threat of market changes from rival Samsung, with products that are more affordable due to their broader range, is not critical. Based on the framework above, Apple’s strategy would be to retain the current prices, as they benefit both brand attractiveness and the value of the goods. At the same time, the evaluation suggests that price adjustments can be achieved by advancing the make-or-buy decisions for microchips, as making them in-house appears to be a more sustainable long-term solution that would address competition.
Differentiation
Differentiation is another competitive advantage point that can be assessed from the perspective of competitive advantage. Similar to price leadership, the differentiation strategy implies that a company offers something unique to its consumers that cannot be replicated (Islami et al., 2020). A case study that can be implemented is McDonald’s, one of the world’s largest fast-food chains. Arguably, McDonald’s is distinct as a brand due to its accessibility, branding, and speed of service.
However, the food offered is similar to that of multiple other chains. Furthermore, there have been reports of McDonald’s price increases, which have diminished consumer desire to choose the restaurant solely because it is perceived as convenient and affordable, rather than sought out for its food (Lucas, 2023). In this case, the competitive threat is that McDonald’s does not offer unique products or experiences, and a price increase may cause consumers to choose other dining options.
Apple differs from McDonald’s in that it offers unique goods. McDonald’s, on the other hand, is less likely to withstand competition, as highlighted during the COVID-19 pandemic, when it struggled to control its prices (Ma, 2021). One of the chain’s biggest competitors in the US is Burger King. Arguably, both fast-food chains are similar in the food items they offer and the service they provide. Game theory implies that, in a sequential game in which both McDonald’s and Burger King aim for greater product differentiation, their current ease of substitution leads to lower profits and prices (Rusescu & Roman, 2020).
The Nash equilibrium suggests that McDonald’s will opt for product differentiation, despite potential risks. The current situation in which McDonald’s has managed to increase its prices highlights the price elasticity. However, product differentiation that entails higher costs may not be effective in retaining the brand’s consumer base.
Since the competitive threat has been identified as a lack of differentiation compared to rivals, it is essential to assess the action-reaction as the market is addressed, evaluate the results, and assess the risks. Suppose McDonald’s returns to lower prices and maximizes the speed of product delivery, as these two factors are what can differentiate the company from Burger King. Undoubtedly, a customer influx will be accompanied by higher transaction costs due to increased labor and supply expenditures.
Burger King cannot match McDonald’s prices and speed, both because the companies employ different pricing strategies and due to their technical capabilities. At the same time, it could be argued that McDonald’s quality will decrease. However, quality is not critical when the aim is to differentiate the brand through affordability. Nonetheless, a lack of quality improvement is a risk that needs to be recognized in this scenario. The long-term results correlate with the retention of a loyal consumer base and a competitive advantage over less affordable fast-food places, as McDonald’s cannot be matched in terms of price or consumer satisfaction.
Innovation
Another element that is linked to competitiveness is innovation. A lack of innovation can significantly reduce a company’s market potential, hindering its ability to maintain its position or capitalize on consumer demand more effectively than rivals. Existing studies highlight the interconnection between innovation and a company’s success in becoming more competitively advantaged in the market (Lee & Yoo, 2019).
The case study applicable to this situation is J.C. Penney, a department store chain that faced several difficulties in the market over the last few decades. Researchers note that both J.C. Penney and its competitor, Macy’s, have not effectively integrated innovation into their business models, as neither has a strong enough online presence to sustain high sales. Game theory highlights that both competitors can invest in building a more substantial online presence, which would be a Nash equilibrium and a dominant strategy (Murnigham, 2018). Needless to say, this would inevitably increase transaction costs. However, the trajectory of potential results suggests that the strategy is effective in achieving long-term economic and competitive objectives.
To connect microeconomics to game theory, it is essential to evaluate the outcomes of the department store establishing a more substantial and prominent online presence. To support their evidence, researchers indeed point out that consumers prefer purchasing clothing online, and any clothing business would benefit from building a platform for customers to shop on (Menz et al., 2021). In the assumption of a market-as-a-game, player 1, meaning J.C. Penny, decides to invest a portion of its assets in establishing a high-quality website and managing all the logistics associated with running the online platform. This, in turn, would lead to two short-term outcomes. On the one hand, the corporation will spend more resources despite economic pressures.
On the other hand, it would attract more consumers who may have never shopped at JCPenney. The department store already has an online presence, but it is not prominent, and most of its sales still occur in-store. However, in the game-as-a-market, the business would invest in improving the website and advertising it through efficient marketing.
Under the condition that JCPenney builds a stronger online platform and Macy’s does not, JCPenney gains a competitive advantage. On the contrary, if Macy’s reaches the said objective instead of JCPenney, JCPenney loses its competitive advantage. The condition in which both fail to advance in online sales, losing customers to a lesser degree, yet it is not an efficient strategy, given the prominence of online sales overall.
Hence, the most efficient strategy would be for both competitors to build an internet presence. However, in this case, JCPenney needs to identify additional points that would generate an innovative competitive advantage, either through price leadership, as is currently the case, or through additional measures, such as more efficient logistics and supply chain improvements. Each scenario corresponds to risks, yet it is essential to highlight those linked to the scenario in which both players chose optimization.
Several threats correlate with innovative solutions, such as investing in a larger online platform that includes better algorithms for data collection and analysis, logistics, and customer support. The first risk is the uncertainty generated by proposing the measure (Menz et al., 2021). Uncertainty implies that, while the company predicts benefits, it cannot guarantee success, particularly given the high level of competition in the online market. The presence of numerous clothing stores suggests that JCPenney, as a brand, may not be as noticeable to consumers. On the contrary, the department store’s physical locations, along with its ability to improve online sales, are a competitive advantage, as most clothing platforms are online-only.
Another potential threat is the high expenses that may require time to be replenished. Nonetheless, the benefits outweigh the negative aspects. Hence, the results appear promising, even though both competitors may employ the same strategy to compete in the online space. Nonetheless, while both benefit, JCPenney can still gain an advantage through additional measures in conjunction with innovation. Such measures include price leadership and more effective research and design techniques.
Focus Strategies
Focus strategies correlate with a competitive advantage in a particular market. Specifically, based on Porter’s Generic Competitive Strategies model, focus implies that the company strives to achieve product desirability either through differentiation or cost minimization in a particular niche (Islam et al., 2020). Hence, the said product may not be designed to appeal to a specific demographic; yet, the target audience is being offered something they cannot receive from other brands and retailers.
An example is Harley-Davidson, the motorcycle manufacturer specializing in chopper-style vehicles. The motorcycles sold by the brand differ from those manufactured and produced by Yamaha, a competitor of the brand. Researchers highlight that the company has established a loyal consumer base through effective branding and by fostering a sense of exclusivity, similar to Harley-Davidson (Sarkar & Sarkar, 2020). Nonetheless, competition exists, and it is essential to examine it from a game-theoretic perspective.
Suppose Harley-Davidson and Yamaha decide to invest in creating a niche vehicle by designing a line of touring motorcycles. Player 1, Harley Davidson, may invest, while Yamaha decides to pass on the opportunity. In this case, Harley achieves a favorable outcome by expanding its customer base. If Player 2 (Yamaha) continues to invest in the model and Player 1 avoids it, the benefits accrue to Player 2. If both parties avoid the solutions, risks are minimized, yet neither experiences the benefits.
Last but not least, in the market-as-a-game, both players can invest in the framework and experience both threats and benefits. Once again, the solution is both the Nash equilibrium and a dominant strategy. Hence, both actors benefit from participating in the decision and would follow through, even in the case of non-cooperation, given the Nash equilibrium. Since the selected framework has been identified, it is crucial to discuss the solution’s further outcomes, risks, and evaluation.
If both players opt to launch the motorcycle designed for long trips, the first consequence they will face is increased spending. Needless to say, alongside design and research, transactional costs are maximized too. The competitive threat posed by substitution is another factor to be expected if both companies opt to design the said motorcycle. However, as mentioned earlier, Harley-Davidson is already specializing in niche chopper-style vehicles.
Hence, with an existing loyal consumer base interested in such motorcycles, Harley is likely to sell more units compared to Yamaha, which is better known for faster, more innovative vehicles. Thus, the action-reaction would generate a competitive advantage for Harley-Davidson in the market-as-a-game scenario. The aforementioned risks, such as economic losses and increased competition with Yamaha, do not outweigh the potential benefits, including retaining and expanding the loyal consumer base and increasing profits.
Conclusion
Needless to say, competitive advantage is a broad subject that includes a variety of different models and frameworks. The current paper exemplifies several elements of Porter’s Generic Competitive Strategies, including differentiation, price leadership, and focus, as well as the individual variable of innovation. Case studies of companies including Apple, McDonald’s, JCPenney, and Harley-Davidson highlight the multiple possibilities within the market-as-a-game scenario. The assessment highlights that opting for a low-risk, moderate-reward strategy appears to yield the best possible outcome, despite the competitor also having an advantage.
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