What is competitive advantage?
Competitive advantage, as the name implies, is an advantage that a company or market participant has over other competitor market participants in a given function or industry. Plainly stated, it concerns the ability of a company to better provide a value proposition to consumers than competitors who provide the same or a similar value proposition. Competitive advantage generally arises in the following contexts:
- Efficiencies & Quality – A business that has a method of delivering a value proposition in a manner that is superior to other competitors may give rise to a competitive advantage. Operational efficiencies may lower cost of production/delivery, which allows for lower prices to customers or higher profit margins to the provider. For example, Wal-Mart gained a long-term competitive advantage over competitors through its real-time inventory system. Efficiencies may also give rise to a differentiated product that stands out from competitor products. For example, Mercedes-Benz depends upon quality of engineering to stand out compare to other competitor luxury automobiles?
- Knowledge & Ownership – The ability to provide something that others cannot provide (or provide well) is often linked to proprietary knowledge or ownership of a functional article, method, or design. This is generally the subject of intellectual property law. A business may establish a competitive advantage by employing a trade secret (a protected form of knowledge), such as a secret formula. Likewise, owning a trademark for a product or brand may provide a sustainable advantage over market competitors. Copyrights exclude others from reproducing a creative work that is recorded to a tangible medium. Design and utility patents allow individuals the sole right to commercialize a design or useful invention.
- Relationships – Having legal or personal relationships with suppliers of buyers to the exclusion of other competitors can give rise to a competitive advantage. For example, SouthWest Airlines achieved a competitive advantage in the market by locking in long-term contract with fuel suppliers before the price of fuel spiked. For years, US Steel Corp has exclusive supply contracts for many commercial builders (purchasers of steel).
Examples of Competitive Advantage
Examples of factors producing a competitive advantage include:
- Intellectual Property or Other Strategic Assets
- Strategic assets can provide a temporary or long-term advantage over competitors. Notably, IP rights exclude others from imitating or copying a process or design. This can effectively block or hinder direct competition for the duration of the intellectual property rights.
- First Mover Advantages
- First mover advantage is generally a limited competitive advantage. This position may allow you to acquire a larger percentage of the potential customer market at a rapid pace and at lower cost. Later competitors now face your business as a primary barrier to entering the market.
- Business Size or Capitalization
- Business size allows for economies of scale in operations. Heavy capitalization provides the financial resources to undertake the operational and marketing tasks necessary to effectively compete with or beat other competitors. Further, it can give rise to marketing and pricing power.
- Brand Recognition
- Brand recognition is a powerful temporary competitive advantage. Brand recognition reduces the future customer acquisition cost and provides operational opportunities within an established value chain. Brand recognition generally entails a level of customer loyalty that can serve as a barrier to entry for competitors.
- Geographic Location
- Geographic location can provide temporary or permanent operational advantages that effectively hinder or exclude competition. Think of a person owning land adjoining a waterway that has far more efficient ingress and egress that other options. Other times legal rights will establish a geographic advantage through contractual arrangement. A good example is the anti-encroachment rights included in many franchise agreement. This grants an exclusive right to carry on the franchise business in a given area.
- Distribution Advantages
- A business may have a superior operational structure that provides a temporary advantage. These operational efficiencies can arise through supply-chain agreements or long-term contracts for low-price material cost. A great example of massive success through supply-chain efficiency is Wal-Mart.
- Management or Personnel
- Often individuals can be a key resource that provides a long-term or short-term competitive advantage. These individuals through intelligence, ingenuity, or other ability provide immense value to the business that is capable of duplication by competitors.
- Legal Advantages
- The law may provide a barrier to entry to competitors that provides a temporary competitive advantage. Think of highly regulated industries, such as finance, medicine, and law. The regulatory hurdles in place to carrying on these types of business may make market entry difficult (prohibitively costly or complicated) for new competitors.
- Industry Relationship
- Sometimes who you know means everything. Establishing close or exclusive relationships with suppliers or service providers can effectively provide a temporary or long-term competitive advantage.
The important thing to note about competitive advantages is that they are rarely sustainable. That is most competitive advantages provide only a temporary benefit over other competitors. In any event, the effect of the above attributes or resources is to effect the power struggle between the forces identified by Porter. Some of these attributes or resources are sustainable and others are not.
Strategic Management and Competitive Advantage
Strategic management is largely concerned with competitive advantage. That is, the strategic manager will plan and implement a strategy that seeks to establish, maintain, or grow the business’s competitive advantage. The objective or intended result of those decisions are to exceed the profits or incur less loses than competitors.
Sustained Competitive Advantage and Strategy
Markets are, by nature, competitive. Sustained competition tends to erode any advantage that one market participant has over others. This may happen because competitors copy the advantaged competitor, or the competitors create their own unique competitive advantage that outpaces others. So, competitive advantage is generally limited in time. Managers seek to maintain, establish new, and increase competitive advantage through strategic planning. This requires the manager to constantly assess the company, the value proposition, the market, the competitors, and the customer. The manager must develop new objectives, value propositions, and methods.