Competitive advantage
Competitive advantage is gained when a firm acquires attributes that allow it to perform at a higher level than others in the same industry. A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices. An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retains more customers than its competition. There can be many types of competitive advantages including the firm's cost structure, product offerings, distribution network and customer support. 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.
Characteristics of Competitive Advantage
- Distinctive competence - Special skills and resources that generate strengths those competitors cannot easily match or imitate.
- First mover advantage - The competitive advantage held by a firm from being first in a market or first to use a particular strategy.
- Late mover advantage - The competitive advantage held by firms that are late in entering a market. Late movers often imitate the technological advances of other firms or reduce risks by waiting until a new market is established.
- Sustainable competitive advantage - A competitive advantage that cannot easily be imitated and won’t erode over time.
- Group thinks - A tendency of individuals to adopt the perspective of the group as a whole. It occurs when decision makers don’t question the underlying assumptions.
Michael Porter suggested four "generic" business strategies that could be adopted in order to gain competitive advantage. The strategies relate to the extent to which the scope of a business' activities is narrow versus broad and the extent to which a business seeks to differentiate its products.
Michael Porter four strategies are summarized in the figure below:
1. Cost leadership
With this strategy, the objective is to become the lowest-cost producer in the industry. The traditional method to achieve this objective is to produce on a large scale which enables the business to exploit economies of scale. Why is cost leadership potentially so important? Many (perhaps all) market segments in the industry are supplied with the emphasis placed on minimizing costs. If the achieved selling price can at least equal (or near) the average for the market, then the lowest cost producer will (in theory) enjoy the best profits. This strategy is usually associated with large scale businesses offering "standard" products with relatively little differentiation that are readily acceptable to the majority of customers. Occasionally, a low-cost leader will also discount its product to maximize sales, particularly if it has a significant cost advantage over the competition and in doing so, it can further increase its market share.
To be the lowest-cost producer, a firm is to achieve or use several of the following:
- High levels of productivity
- High-capacity utilization
- Use of bargaining power to negotiate the lowest prices for production inputs
- Lean production methods (e.g. Just in time - JIT)
- Effective use of technology in the production process
- Access to the most effective distribution channel
2. Cost focus
Here a business seeks a lower cost advantage in just one or a small number of market segments. The product will be basic - perhaps a similar product to the higher-priced and featured market leader but acceptable to sufficient consumers. Such products are often called “me too”.
3. Differentiation focus
In the differentiation focus strategy, a business aims to differentiate within just one or a small number of target market segments. The special customer needs of the segment mean that there are opportunities to provide products that are clearly different from competitors who may be targeting a broader group of customers. The important issue for any business adopting this strategy is to ensure that customers really do have different needs and wants, in other words that there is a valid basis for differentiation and that existing competitor products are not meeting those needs and wants. Differentiation focus is the classic niche marketing strategy. Many small businesses are able to establish themselves in a niche market segment using this strategy, achieving higher prices than un-differentiated products through specialist expertise or other ways to add value for customers. There are many successful examples of differentiation focus. A good one is Tyrrell’s Crisps which focused on the smaller hand-fried, premium segment of the crisps industry.
4. Differentiation leadership
With differentiation leadership, the business targets much larger markets and aims to achieve competitive advantage across the whole of an industry. This strategy involves selecting one or more criteria used by buyers in a market and then positioning the business uniquely to meet those criteria. This strategy is usually associated with charging a premium price for the product often to reflect the higher production costs and extra value-added features provided for the consumer. Differentiation is about charging a premium price that more than covers the additional production costs, and about giving customers clear reasons to prefer the product over other, less differentiated products. There are several ways in which this can be achieved, though it is not easy and it requires substantial and sustained marketing investment. The methods include:
- Superior product quality (features, benefits, durability, reliability)
- Branding (strong customer recognition & desire; brand loyalty)
- Industry-wide distribution across all major channels (i.e. the product or brand is an essential item to be stocked by retailers)
- Consistent promotional support - often dominated by advertising, sponsorship etc
Great examples of a differentiation leadership include global brands like Nike and Mercedes. These brands achieve significant economies of scale, but they do not rely on a cost leadership strategy to compete. Their business and brands are built on persuading customers to become brand loyal and paying a premium for their products.
Sustainable Competitive Advantage
A sustainable competitive advantage occurs when an organization acquires or develops an attribute or combination of attributes that allows it to outperform its competitors. These attributes can include access to natural resources or access to highly trained and skilled personnel human resources. It is an advantage (over the competition), and must have some life; the competition must not be able to do it right away, or it is not sustainable. It is an advantage that is not easily copied and, thus, can be maintained over a long period of time. Competitive advantage is a key determinant of superior performance, and ensures survival and prominent placing in the market. Superior performance is the ultimate, desired goal of a firm; competitive advantage becomes the foundation. It gives firms the ability to stay ahead of present or potential competition and ensure market leadership.
When these four criteria meet then a firm can be said to have a sustainable competitive Advantage
- Are they valuable? (Do they enable a firm to devise strategies that improve efficiency or effectiveness?)
- Are they rare? (If many other firms possess it, then it is not rare.)
- Are they imperfectly imitable (because of unique historical conditions, causally ambiguous, and/or are socially complex)?
- Are they non-substitutable? (If a ready substitute can be found, then this condition is not met?)
Developing Sustainable Competitive Advantages
- Customer Loyalty: Customers must be committed to buying merchandise and services from a particular retailer. This can be accomplished through retail branding, positioning, and loyalty programs. A loyalty program is like a "Target card." Now, when the customer uses the card as a credit card, Target can track all of their transactions and store it in their data warehouse, which keeps track of the customer’s needs and wants outside of Target. This will entice Target to offer products that they do not have in stock. Target tracks all sales done on their cards. So, Target can track customers who use their card at other retailers and compete by providing that merchandise as well.
- Location: Location is a critical factor in a consumer's selection of a store. Starbucks coffee is an example. They will conquer one area of a city at a time and then expand in the region. They open stores close to one another to let the storefront promote the company; they do little media advertising due to their location strategy.
- Distribution and Information Systems: Wal-Mart has killed this part of the retailing strategy. Retailers try to have the most effective and efficient way to get their products at a cheap price and sell them for a reasonable price. Distributing is extremely expensive and timely.
- Unique Merchandise: Private label brands are products developed and marketed by a retailer and available only from the retailer. For example, if you want Craftsman tools, you must go to Sears to purchase them.
- Vendor Relations: Developing strong relations with vendors may gain exclusive rights to sell merchandise to a specific region and receive popular merchandise in short supply.
- Customer Service: This takes time to establish but once it's established, it will be hard for a competitor to a develop a comparable reputation.
- Multiple Source Advantage: Having an advantage over multiple sources is important. For example, McDonald's is known for fast, clean, and hot food. They have cheap meals, nice facilities, and good customer service with a strong reputation for always providing fast, hot food.
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