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Competitive Advantage

Competitive Advantage

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4 views

Competitive Advantage

Competitive Advantage

Uploaded by

deepakskrm
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Competitive Advantage

When a firm sustains profits that exceed the average for its industry, the firm is said to
possess a competitive advantage over its rivals. The goal of much of business
strategy is to achieve a sustainable competitive advantage.

Michael Porter identified two basic types of competitive advantage:

 cost advantage
 differentiation advantage

A competitive advantage exists when the firm is able to deliver the same benefits as
competitors but at a lower cost (cost advantage), or deliver benefits that exceed those
of competing products (differentiation advantage). Thus, a competitive advantage
enables the firm to create superior value for its customers and superior profits for itself.

Cost and differentiation advantages are known as positional advantages since they
describe the firm's position in the industry as a leader in either cost or differentiation.

A resource-based view emphasizes that a firm utilizes its resources and capabilities to
create a competitive advantage that ultimately results in superior value creation. The
following diagram combines the resource-based and positioning views to illustrate the
concept of competitive advantage:

A Model of Competitive Advantage

Resources

Cost Advantage
Distinctive Value
or
Competencies Creation
Differentiation Advantage

Capabilities

Resources and Capabilities


According to the resource-based view, in order to develop a competitive advantage the
firm must have resources and capabilities that are superior to those of its competitors.
Without this superiority, the competitors simply could replicate what the firm was doing
and any advantage quickly would disappear.

Resources are the firm-specific assets useful for creating a cost or differentiation
advantage and that few competitors can acquire easily. The following are some
examples of such resources:

 Patents and trademarks


 Proprietary know-how
 Installed customer base
 Reputation of the firm
 Brand equity

Capabilities refer to the firm's ability to utilize its resources effectively. An example of a
capability is the ability to bring a product to market faster than competitors. Such
capabilities are embedded in the routines of the organization and are not easily
documented as procedures and thus are difficult for competitors to replicate.

The firm's resources and capabilities together form its distinctive competencies.
These competencies enable innovation, efficiency, quality, and customer
responsiveness, all of which can be leveraged to create a cost advantage or a
differentiation advantage.

Cost Advantage and Differentiation Advantage

Competitive advantage is created by using resources and capabilities to achieve either


a lower cost structure or a differentiated product. A firm positions itself in its industry
through its choice of low cost or differentiation. This decision is a central component of
the firm's competitive strategy.

Another important decision is how broad or narrow a market segment to target. Porter
formed a matrix using cost advantage, differentiation advantage, and a broad or narrow
focus to identify a set of generic strategies that the firm can pursue to create and
sustain a competitive advantage.

Value Creation

The firm creates value by performing a series of activities that Porter identified as the
value chain. In addition to the firm's own value-creating activities, the firm operates in a
value system of vertical activities including those of upstream suppliers and downstream
channel members.

To achieve a competitive advantage, the firm must perform one or more value creating
activities in a way that creates more overall value than do competitors. Superior value is
created through lower costs or superior benefits to the consumer (differentiation).

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