In The Origin of Species by Natural Selection, Charles Darwin wrote:
“The most successful species are those which adapt best to a changing environment. The most successful individuals are those with the greatest competitive advantage over others”.
The same principle applies in business. The most successful companies are those which adapt best to changing markets by having greater competitive advantages than their competitors.
In defining his three generic marketing strategies, the Harvard academic Michael Porter stated that competitive advantage grows out of the value that a firm creates and draws out from its customers. This value must exceed the cost of its creation. Value will depend on what consumers are willing to pay to obtain the perceived competitive advantage.
That value could be the achievement of value at a lower cost than that of competitors, a cost focus strategy. It could be offering additional benefits for an equivalent price, a best value strategy. It could be providing unique benefits for a higher price, a cost leadership through differentiation strategy.
These strategies match two of Porter’s three generic marketing strategies, Cost Focus and Differentiation.
Of course, Porter describes a third generic marketing strategy, Niche. This is offering specialist targeted products and services, often achieving a price premium, to specific groups of consumers. So with this strategy your competitive advantage will often be driven by specialist knowledge or products to meet specific specialist needs.
Porter suggests that competitive advantages can be achieved through value chain analysis. Identifying areas where targeted consumers perceive value and investing in those value activities.
Value chain analysis looks into business processes in two areas; primary activities, the process of production; and support activities, tasks which assist the production process.
Primary activities include:
- Bringing raw materials into the production process
- Modifying raw materials to create finished products
- Distributing finished products to market
- The marketing of finished products
- Provision of after sales service
Support activities include:
- Procurement of components and raw materials
- Technological development (R&D, process improvement, quality assurance)
- Human Resource Management
- Infrastructure development (e.g. automation of processes, IT improvements)
Porter suggests businesses need to continually look for areas of improvement along the value chain. This suggestion lends itself to concepts such as Kaizen, Six Sigma and total quality management. He also suggests that businesses need to be aware of the value chains of competitors and others in their production chain such as suppliers, distributors and retailers.
Another quote often cited, from an anonymous source is:
“The only true competitive advantage comes from out innovating the competition”.
You cannot out innovate your competitors if you do not know their market offer as well as their strengths and weaknesses.
For many businesses, the issue is not obtaining a competitive advantage. Most successful new entrants to a market do so on the basis of an identified competitive advantage. The issue is maintaining that competitive advantage. Some competitive advantages can be protected, through intellectual property laws such as copyright, patents and trade marks. Copyright laws in the UK include the ability to protect designs. Other protections include secret recipes and trade secrecy clauses in employment contracts.
Breaches of such contract terms can often lead to long and costly legal actions. A notable example is the long-running legal battle between Mattel, the maker of the Barbie Doll, and an ex-employee who moved to a competitor and created the Brats doll.
Cravens (1996) identified the following sources of competitive advantage:
- Superior skills
- Superior resources
- Superior control processes
- Country of Origin
- Brand reputation and image
- The ability to produce higher profitability (e.g. economies of scale or process experience)
Cravens also identified positional advantages:
- Superior customer value
- A lower cost base
- Differentiated product offerings
These positional advantages should lead to improved performance outcomes:
- Customer satisfaction
- Better customer retention and increased loyalty
- Market share growth
- Better distribution networks
To maintain these advantages, profits must be re-invested.
Often the primary competitive advantage is doing things better than your competitors. This could be through combining small advantages to create a greater whole and a single advantage which can be exploited.
However, to create a winning business strategy, more than one competitive advantage may be required.
Here is a list of ten competitive advantages:
- Superior product or service benefit
- A perceived advantage or superiority amongst target consumers (e.g. Fender guitars, Titleist golf balls, BMW saloon cars)
- Low-cost operations (note not necessarily resulting on low cost products; this is about bigger profit margins).
- Global experience, skills and reach
- Legal advantages
- Superior industry contacts and relationships
- Economies and advantages of scale
- Competitive toughness and a determination to win
- Superior competences (e.g. a luthier who has been making instruments for 20 years compared to an unskilled Chinese production line worker)
- Greater assets (e.g. Amazon can apply greater resources to search engine optimisation than a small trader, and Amazon can also rely on Zipf’s law to dominate click responses).
Other advantages can be added to this list:
- Intellectual capital
- Attitude to creativity and innovation – accepting you will often fail
- Service support sophistication
- Better market knowledge
- Superior technology
- Using complex selling structure to tie customers in (e.g. petrol manufacturers selling franchises to service station operatives which include proprietary equipment such as petrol pump technologies and forecourt software.)
- Better speed to market (although being first doesn’t always mean you win e.g. Betamax video cassettes and VCRs)
- Brand Reputation
- A focus on customer experience
- Better supply chain management.