January 29th, 2012 Competitive Advantage
Michael Porter's Competitive advantage (CA) is a position that a firm occupies in its competitive landscape. Michael Porter posits that a competitive advantage, sustainable or not, exists when a company makes economic rents, that is, their earnings exceed their costs (including cost of capital). That means that normal competitive pressures are not able to drive down the firm's earnings to the point where they cover all costs and just provide minimum sufficient additional return to keep capital invested. Most forms of competitive advantage cannot be sustained for any length of time because the promise of economic rents drives competitors to duplicate the competitive advantage held by any one firm.
A firm possesses a Sustainable Competitive Advantage (SCA) when it has value-creating processes and positions that cannot be duplicated or imitated by other firms that lead to the production of above normal rents. An SCA is different from a competitive advantage (CA) in that it provides a long-term advantage that is not easily replicated. But these above-normal rents can attract new entrants who drive down economic rents. A CA is a position a firm attains that lead to above-normal rents or a superior financial performance. The processes and positions that engender such a position are not necessarily non-duplicable or inimitable.
Analysis of the factors of profitability is the subject of numerous theories of strategy including the five forces model pioneered by Michael Porter of the Harvard Business School.
In marketing and strategic management, sustainable competitive advantage is an advantage that one firm has relative to competing firms. The source of the advantage can be something the company does that is distinctive and difficult to replicate, also known as a core competency — for example Procter & Gamble's ability to derive superior consumer insights and implement them in managing its brand portfolio. It can also be an asset such as a brand (e.g. Coca Cola) or a patent, such as Viagra. It can also simply be a result of the industry's cost structure — for example, the large fixed costs that tend to create natural monopolies in utility industries. To be sustainable, the competitive advantage must be:
- distinctive, and
In the past decades, IT is becoming more and more important. Especially the internet plays a major role in todayï¿½s world and not to forget in businesses.The ability to effectively manage information helps organizations dealing with changes in the environment, which can result in a competitive advantage over other firms. An example of gaining competitive advantage: Organizations make information available for each other in an efficient way in order to reduce all difficulties of purchasing, marketing and distribution.
In 2006, Jaynie L. Smith authored Creating Competitive Advantage (Doubleday). This book outlines how companies fail to understand their own existing competitive advantages and use them in sales/marketing. She provides a framework for how companies can evaluate their own operations and develop competitive advantage/competitive positioning statements to better hone their sales/marketing messages. Competitive advantage statements help distinguish companies by highlighting what they offer to the customer using tangible terms and concepts. The next step is to test those CA statements through independent market research. This allows a company to understand their customers' hierarchy of buying criteria in an objective indepenedent context. From there, companies can tailor their CA statements to speak directly to the buying interests of the customer.
Competitive Advantage: a company is said to have a competitive advantage over its rivals when its profitability is greater than the average profitability of all other companies competing for the same set of customers.
Sustainable Competitive Advantage
Sustainable Competitive Advantage: a company has a sustained competitive advantage when its strategies enable it to maintain above-average profitability for a number of years.
Competitive advantages vary from situation to situation and from time to time. Some basic examples of CAs can be divided in 4 main global areas:
- Cost: Low-cost operations
- Quality: High quality, Consistent quality
- Time: Delivery speed, On-time delivery, Development speed
- Flexibility: Customization, Volume flexibility, Variety
Michael Porter's Generic Competitive Strategies (Ways of Competing)
A firm's relative position within its industry determines whether a firm's profitability is above or below the industry average. The fundamental basis of above average profitability in the long run is sustainable competitive advantage. There are two basic types of competitive advantage a firm can possess: low cost or differentiation. The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them, lead to three generic strategies for achieving above average performance in an industry: cost leadership, differentiation, and focus. The focus strategy has two variants, cost focus and differentiation focus.
1. Cost Leadership
In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors. A low cost producer must find and exploit all sources of cost advantage. if a firm can achieve and sustain overall cost leadership, then it will be an above average performer in its industry, provided it can command prices at or near the industry average.
In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs. It is rewarded for its uniqueness with a premium price.
The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others.
The focus strategy has two variants.
(a) In cost focus a firm seeks a cost advantage in its target segment, while in
(b) differentiation focus a firm seeks differentiation in its target segment. Both variants of the focus strategy rest on differences between a focuser's target segment and other segments in the industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments. Cost focus exploits differences in cost behaviour in some segments, while differentiation focus exploits the special needs of buyers in certain segments.