Ten Sources of Competitive Advantage

In The Origin of Species by Natural Selection, published in 1859, Charles Darwin wrote:

“The most successful species are those which adapt to the changing environment.  The most successful individuals are those with the greatest competitive advantage over others.”

Darwin’s words apply equally if you replace the word individuals with businesses. The strategic tool used in business to develop and sustain competitive advantages is marketing.

Michael Porter proposed that a superior competitive advantage grows out of the value the firm is able to create from its customers which exceeds the cost of creating that competitive advantage.  ‘Value’ is what the customer is willing to pay.  ‘Superior’ stems from offering lower prices compared to your competitors for equivalent benefits of by providing greater benefits which are more than offset by a higher price.

Porter suggests that value chain analysis should be used to identify where customers see value.  The firm’s scarce resources can then be targeted in those areas.  He argues there are five key areas where competitive advantages can be developed:

  1. When you bring in raw materials: so a chef may develop competitive advantage by only using organic ingredients.
  2. When those raw materials are processed and modified; so our chef cooks them in a particularly skilful or special way
  3. Through the distribution of the modified raw materials: which has seen the rise of services such as Deliveroo, Ocado and Just Eat.
  4. In the marketing of those finished products;  the development of a specific marketing mix
  5. Through customer services both before and after sale.

The following anonymous quote also applies:

The only truly sustainable competitive advantage comes from out-innovating the competition”.

Every time a product-market combination changes, so does the relative strengths and weaknesses of market actors.

Often the problem is not gaining a competitive advantage but sustaining it over time.  Many firms are first to market with a new technology, product or business model only to be overtaken by more agile competitors.  For example Tesco was the first cut price supermarket but it lost its focus on cost reduction.  The arrival of Lidl and Aldi in the UK supermarket environment has placed significant pressure on Tesco and other discount retailers such as Asda.  If you are following a low-cost strategy you need to be ruthless in driving costs from your business.  If that focus is lost you will fail.  A prime example was Kwiksave.

Davidson (1987|) said:

Competitive advantage is achieved when you do something better than your competitors.  I you do one thing better than competitors or a number of smaller advantage can be combined, you have an exploitable competitive advantage.  One or more competitive advantages are usually necessary in order to develop a winning strategy and that this in turn should enable a company to achieve above average growth and profits”

Davidson then identified what he believed to be the ten most significant potential competitive advantages.

  1. A superior product or service offer
  2. A perceived advantage or superiority in the minds of consumers (the sale of bottled water or designer clothes).
  3. Low-cost operations through high productivity, low overheads etc.
  4. Global experience, skills or coverage (e.g. Coca Cola or McDonald’s)
  5. Legal advantages such as intellectual property rights
  6. Superior contacts and relationships with both internal and external stakeholders
  7. Economies of scale
  8. An offensive attitude; a competitive toughness and a determination to win
  9. Superior competencies in areas like design, distribution and professional ability
  10. Superior assets e.g. property and distribution outlets.  In recent years many firms have invested in their distribution and warehousing systems often introducing sophisticated robotic technologies.

To Davidson’s ten areas of competitive advantage you can add:

  • Intellectual capital – developing a strong knowledge base across your business
  • A willingness to innovate:  Virgin Group consists of over 200 companies only a small number of which are well-known.  Virgin places great importance on innovation.  At the current time Elon Musk’s Tesla are developing a hyper-loop mass transportation system, Uber are investing in flying taxis and Amazon are looking at automated drones for deliveries.
  • Investing in market research to get a better understanding of costs and target market attitudes
  • Superior technologies: such as the use of robots and cloud computing.
  • Complex selling processes. Microsoft are currently investing heavily in the promotion of Office 365.  Instead of consumers and businesses buying the software outright, it is sold on a subscription basis.  Microsoft then receive a regular injection to their cash flow.
  • There is an advantage in having the ability to be the first into a market (although this may not be sustainable).  You must look at your speed to market.
  • The development of a brand image and reputation (e.g. BMW as the ultimate driving experience)
  • Focusing on giving excellent service to your customers (“not customer satisfaction but customer delight”)
  • Efficient supply chain management.

The critical factor in any successful business is the creation of strong competitive advantages and sustaining them over time.  Far to many businesses are either first to market or first to innovate but lose any advantages they develop by concentrating of financial objectives over their wider vision.