Comparative advantage, or cost advantage, is a firm's ability to produce a good or service at a lower cost than its competitors, which gives the firm the ability to sell its goods or services at a lower price than its competition or to generate a larger margin on sales. A differential advantage is created when a firm's products or services differ from its competitors and are seen as better than a competitor's products by customers.
When you examine most industries, you will find that some companies do much better than others and there is always a stand out firm. For example in the automotive industry, Toyota is considered the superior performer, in online retail Amazon.com is respected as the giant. In brick and mortar retail Wal-Mart is the leader and in online search engines Google continues to dominate worldwide.
So how do firms outperform others and achieve competitive advantage? How can you analyze a company and identify its strategic advantage. How can you develop a strategic advantage for your own company? One answer to these questions is through the examination of the Porter five forces model.
Sustaining competitive advantage can best be achieved by using Porter’s five forces model to assess an industry structure based on five pertinent questions:
1. How much bargaining power do customers have?
2. How much of a threat do substitution products or services pose?
3. How much bargaining power do suppliers have?
4. How great is the threat of new competitors entering the marketplace?
5. How great is the rivalry among existing firms?
According to Porter (1979) the intensity of each force determines the characteristics of the industry, how profitable it is, and how sustainable that profitability will be. An organization can then develop its competitive strategy based on how it intends to respond to these forces.
The strategy will need to take into account the target market, the business’ strengths and weaknesses, the business’ goals, the product/service the business has developed, and the strategies of the competition. Key questions to address include:
• Are the business and the target market clearly defined?
• Who is/are the business’ competitors?
• What is the business’ specific strategy for success?
• Are the competition’s moves being tracked regularly?
• Is the business taking advantage of the competition’s weaknesses and/or any competitive opportunities?
• What has been learned from the competition’s mistakes/strengths?
• How do the business’ prices and products compare with the rest of the industry?
• Who are the customers? Does the business have (or can it build) a loyal base?
• Are the employees trained in customer service?
• What trends are ahead, and can the business take advantage of them?
Is Competitive Advantage sustainable?
A sustainable competitive advantage means that a company has developed a unique position in relation to its competitors that allows it to outperform them consistently. Such a sustainable competitive advantage can be achieved by continuously developing existing and new resources and capabilities in response to changing market conditions.
It must also be noted that a firm can lose its competitive advantage when competitors make strategic changes. A classic example of this is where Sears lost its competitive advantage to Wal-Mart due to Wal-Mart successful implementation of its superior decision support system.
The rate of technological change which is so rapid can also cause the business strategy to lose traction in the short term. Combine that with the reality that customer loyalty can wane very easily and affect sales and market share; thus erasing any competitive advantage
The competition is stiff owing to the fact that a company’s strategy can be replicated and oftentimes easily.
Every business has a competitive strategy. However many strategies are implicit, having evolved over time, rather than explicitly formulated from thinking and planning process. Implicit strategies may lack focus, produce inconsistent decisions, and unknowingly become obsolete. Without a well-defined strategy, organizations will be driven by current operational issues rather than by a planned future vision.
The case of Apple: ability to think different
Apple’s philosophy has always been to create products that consumers will find easy to use and marry innovative technology to work productivity and personal entertainment. Throughout its history, Apple Inc. has accomplished these goals.
The case of Kodak:
While other firms in the film business (e.g. Fuji) embraced the move away from film by owning the digital compact camera market early in this transition, Kodak’s emphasis was in extending the life of film-based technologies; this strategy was a failure from which the company was unable to recover. Kodak introduced its first digital camera in 2001, more than a decade later than others, despite employing the inventor of the digital camera in 1982.
How can competitive advantage be sustainable?
The firm must seek competitive advantage in combining resources & capabilities
Develop resources and capabilities, which are rare, valuable, non-tradable
Make those resulting competences sustainable by precluding imitation or substitution by competitors
The firm must offer competitive products
For any company to remain highly competitive, the Management plays a key role because the greatest responsibility lies on them to ensure its growth and sustainability. They are to decide and guide the organisational strategy to ensure its realisation. When the organisational strategy is right, the means to achieve it becomes easy to implement.