Competitive advantage

Competitive advantage is a business concept describing attributes that allow an organization to outperform its competitors. These attributes may include access to natural resources, such as high grade ores or inexpensive power, highly skilled personnel, geographic location, high entry barriers, etc. New technologies, such as robotics and information technology, can also provide competitive advantage, whether as a part of the product itself, as an advantage to the making of the product, or as a competitive aid in the business process (for example, better identification and understanding of customers).

Overview

Michael Porter defined the two types of competitive advantage an organization can achieve relative to its rivals: lower cost or differentiation. This advantage derives from attribute(s) that allow an organization to outperform its competition, such as superior market position, skills, or resources. In Porter's view, strategic management should be concerned with building and sustaining competitive advantage.

Competitive advantage seeks to address some of the criticisms of comparative advantage. Porter proposed the theory in 1985. Porter emphasizes productivity growth as the focus of national strategies. Competitive advantage rests on the notion that cheap labor is ubiquitous and natural resources are not necessary for a good economy. The other theory, comparative advantage, can lead countries to specialize in exporting primary goods and raw materials that trap countries in low-wage economies due to terms of trade. Competitive advantage attempts to correct for this issue by stressing maximizing scale economies in goods and services that garner premium prices (Stutz and Warf 2009).

The term competitive advantage refers to the ability gained through attributes and resources to perform at a higher level than others in the same industry or market (Christensen and Fahey 1984, Kay 1994, Porter 1980 cited by Chacarbaghi and Lynch 1999, p. 45). The study of such advantage has attracted profound research interest due to contemporary issues regarding superior performance levels of firms in the present competitive market conditions. "A firm is said to have a competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential player" (Barney 1991 cited by Clulow et al.2003, p. 221).

Successfully implemented strategies will lift a firm to superior performance by facilitating the firm with competitive advantage to outperform current or potential players (Passemard and Calantone 2000, p. 18). To gain competitive advantage, a business strategy of a firm manipulates the various resources over which it has direct control and these resources have the ability to generate competitive advantage (Reed and Fillippi 1990 cited by Rijamampianina 2003, p. 362). Superior performance outcomes and superiority in production resources reflects competitive advantage (Day and Wesley 1988 cited by Lau 2002, p. 125).

Above writings signify competitive advantage as the ability to stay ahead of present or potential competition. Also, it provides the understanding that resources held by a firm and the business strategy will have a profound impact on generating competitive advantage. Powell (2001, p. 132) views business strategy as the tool that manipulates the resources and create competitive advantage, hence, viable business strategy may not be adequate unless it possess control over unique resources that has the ability to create such a unique advantage.

Generic competitive strategies

Cost leadership strategy

The goal of cost leadership strategy is to offer products or services at the lowest cost in the industry. The challenge of this strategy is to earn a suitable profit for the company, rather than operating at loss and draining profitability from all market players. Companies such as Walmart succeed with this strategy by featuring low prices on key items on which customers are price-aware, while selling other merchandise at less aggressive discounts. Products are to be created at the lowest cost in the industry. An example is to use space in stores for sales and not for storing excess product.

Innovation strategy

Porter describes innovation strategy as determining how, and to what degree, firms use innovation to deliver a unique mix of value and achieve competitive advantage. The goal of innovation strategy is to leapfrog other market players by the introduction of completely new or notably better products or services. This strategy is typical for technology start-up companies which often intend to "disrupt" the existing marketplace, obsoleting the current market entries with a breakthrough product offering. It is harder for more established companies to pursue this strategy because their product offering has achieved market acceptance. Apple has been a notable example of using this strategy with its introduction of iPod personal music players, and iPad tablets. Many companies invest heavily in their research and development programs to achieve such statuses with their innovations.

Operational effectiveness strategy

The goal of operational effectiveness as a strategy is to perform internal business activities better than competitors, making the company easier or more pleasurable to do business with than other market choices. It improves the characteristics of the company while lowering the time it takes to get the products on the market with a great start.

See also

• Resource-based view
• Core competency
• Economies of scale
• Comparative advantage
• Value chain
• Differentiation (economics)
• Cost leadership
• Tacit knowledge

Further reading

• Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter
• Creating Competitive Advantage: Give Customers a Reason to Choose You Over Your Competitors by Jaynie L. Smith
• Using MIS by David M. Kroenke pages 71–77
• Unraveling The Resource-Based Tangle by Peteraf M. & Barney J (2003). Managerial and Decision Economics 24. doi:10.1002/mde.1126
• Erica Olsen (2012). Strategic Planning Kit for Dummies, 2nd Edition. John Wiley & Sons, Inc.
• Profit from the Core: Growth Strategy in an Era of Turbulence by Chris Zook and James Allen
• Beyond the Core: Expand Your Market Without Abandoning Your Roots by Chris Zook
• Unstoppable: Finding Hidden Assets to Renew the Core and Fuel Profitable Growth by Chris Zook
• Value Migration: How to Think Several Moves Ahead of the Competition by Adrian Slywotzky

External links

• Competitive Advantage
• Porter and Competitive Advantage
• Competitive Advantage in Business