A competitive advantage 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.
Competitive advantage is very simply a position a firm holds against its competitors.
Cost leadership – Cost advantage occurs when a firm delivers the same services as its competitors but at a lower cost.
Differentiation – Differentiation advantage occurs when a firm delivers greater services for the same price of its competitors. They are collectively known as positional advantages because they denote the firm’s position in its industry as a leader in either superior services or cost.
Focus (economics) – A focused approach requires the firm to concentrate on a narrow, exclusive competitive segment (market niche), hoping to achieve a local rather than industry wide competitive advantage. There are cost focus seekers, who aim to obtain a local cost advantage over competition and differentiation focuser, who are looking for a local difference.
See Porter’s 1980 classic Competitive Strategy: Techniques for Analysing Industries and Competitors.
Porter’s generic strategies
“Competitive advantage is a company’s ability to perform in one or more ways that competitors cannot or will not match.” Philip Kotler
“If you don’t have a competitive advantage, don’t compete.” Jack Welch, GE
Competitive advantage occurs when a organisation acquires or develops an attribute or combination of attributes that allows it to outperform its competitors. These attributes can include access to natural resources, such as high grade ores or inexpensive power, or access to highly trained and skilled personnel human resources. New technologies such as robotics and information technology either to be included as a part of the product, or to assist making it.
Four generic strategies
A firm possesses a sustainable competitive advantage when its value-creating processes and position have not been able to be duplicated or imitated by other firms. Sustainable competitive advantage results, according to the resource-based view theory in the creation of above-normal (or supranormal) rents in the long run.
If we are seeking to create competitive advantage, consider:
1. Positions of advantage
- Superior customer value
2. Lower relative total cost
- Performance advantages
- Customer satisfaction, Loyalty, Market Share, Profit
3. Sources of advantages
- Superior skills & knowledge, Superior resources, Superior business process.
Key Characteristics of Competitive Advantage:
- Is it substantial enough to make a difference?
- Can it be neutralized by competitors quickly?
3. Ability to be leveraged into visible business attributes that will influence customers.
Where to compete?
Analysis of competitive advantage is the subject of numerous theories of strategy, including the five forces model pioneered by Michael Porter of the Harvard Business School. For the book shown below click here.
Porter’s Five Forces
The Porter’s 5 Forces tool is a simple tool for understanding where power lies in a business situation. It helps you understand both the strength of your current competitive position, and the strength of a position you’re considering moving into.
If you understand where the balance of power lies, you can take advantage of a strength, improve a situation of weakness, and overall, avoid taking wrong steps. This makes it an important part of your planning toolkit.
Conventionally, Porter’s Five Forces is used to identify whether new products, services or businesses have the potential to be profitable.
Five Forces Analysis assumes that there are five important forces that determine competitive power in a situation. These are:
Supplier Power: Ask – how easy it is for suppliers to drive up prices. This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and so on. The fewer the supplier choices you have, and the more you need suppliers’ help, the more powerful your suppliers are.
Buyer Power: Ask – how easy it is for buyers to drive prices down. Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to those of someone else, and so on. If you deal with few, powerful buyers, they are often able to dictate terms to you.
Competitive Rivalry: Ask – what is the number and capability of your competitors – if you have many competitors, and they offer equally attractive products and services, then you’ll most likely have little power in the situation. If suppliers and buyers don’t get a good deal from you, they’ll go elsewhere. On the other hand, if no-one else can do what you do, then you can often have tremendous strength.
Threat of Substitution: Ask – how easy is it for your customers to find a different way of doing what you do – for example, if you supply a unique software product that automates an important process, people may substitute by doing the process manually or by outsourcing it. If substitution is easy and substitution is viable, then this weakens your power.
Threat of New Entry: Ask – how easy is it for new people to enter your market. If it costs little in time or money to enter your market and compete effectively, if there are few economies of scale in place, or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position. If you have strong and durable barriers to entry, then you can preserve a favourable position and take fair advantage of it.
There are many different versions of Porters Five Forces Diagram but below are some of the ones I have collected or created – you can play with these when you download for free (absolutely & no strings!) the SMHC Strategic Planning Toolbox (PowerPoint).
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