Competitive advantage
Porter's Competitive
Advantage
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
-
proprietary
In the past decades, IT
is becoming more and more important. Especially the internet plays a
major role in today�s 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
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
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.
2. Differentiation
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.
3. Focus
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.
References
(Competitive Advantage)
http://en.wikipedia.org/wiki/Competitive_advantage
http://www.ifm.eng.cam.ac.uk/dstools/paradigm/genstrat.html
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