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Competitive Advantage

Competitive advantage can come from any and all of the different activities a business performs in order to create, produce, sell and deliver their products and services. In perfectly competitive markets, businesses cannot make profits over the long-run. That is, if an industry is profitable it will continue to attract increased business activity that drives prices down until profitability is zero. Having a competitive advantage can support higher profit margins and customer growth and retention.

Competitive advantage can come from any of the business activities required to create, produce, sell and distribute a customers products or services. In the short-term, competitive advantage typically comes from an advantage in one of four areas: cost minimization, differentiation, innovation and operational effectiveness. These advantages can come from things such as customer support, product offerings, cost structure and distribution networks.

Competitive advantage can come from strategic positioning and fit. When an advantage in one activity is reinforced by another, a company begins to build sustainable competitive advantage - advantage that cannot easily be copied. For example, BIC has a competitive advantage from its large distribution network. This reflects its product offering: a pen of acceptable quality and price that can be widely used. It reinforces this advantage by employing a large sales force, mass marketing, and constant package changes to inspire impulse buying. This system of reinforcing activities is what gives BIC a sustainable competitive advantage.¹

Sustainable competitive advantage can also come from a company's position in the value chain. For example, when Intel became the standard for computer processing, customers looked for the little stickers that said "Intel Inside" to guarantee the computer was one of quality. As a result, Intel became irreplaceable in the value chain, and was able to extract profits from other members of the value chain: especially PC equipment manufacturers such as IBM.²

The conclusion is that since short-term strategies for gaining competitive advantage can be matched, companies need to extend their time-horizon for strategic planning. Strategic planning should look 10 years into the future, not merely to the next operating cycle.¹

 

 

References:
1. Porter, M. E. (1996). What is strategy? Harvard Business Review, November-December.
2. Jacobides, M. G., & MacDuffiee, J. P. (2013). How to drive value your way. Harvard Business Review, July-August.

Categories within Competitive Advantage

Operational Effectiveness

Postings: 77

Advantages from operational effectiveness come from performing the same or similar activities as other companies, but in better ways.

Innovation Strategies

Postings: 311

Innovation strategies involve delivering new products or services that disrupt existing marketplaces.

Cost Minimization Strategies

Postings: 52

A company can gain a cost advantage by performing certain activities more efficiently than competitors.

Differentiation Strategies

Postings: 221

A company can gain an advantage by differentiating the mix of products and services they deliver.

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