Information about Competitive Advantage

Competitive advantage (CA) is a position that a firm occupies in its competitive landscape. Michael Porter posits that a competitive advantage, sustainable or not, exists when a company makes economic rents, that is, their earnings exceed their costs (including cost of capital). That means that normal competitive pressures are not able to drive down the firm's earnings to the point where they cover all costs and just provide minimum sufficient additional return to keep capital invested. Most forms of competitive advantage cannot be sustained for any length of time because the promise of economic rents drives competitors to duplicate the competitive advantage held by any one firm.

A firm possesses a Sustainable Competitive Advantage (SCA) when it has value-creating processes and positions that cannot be duplicated or imitated by other firms that lead to the production of above normal rents. An SCA is different from a competitive advantage (CA) in that it provides a long-term advantage that is not easily replicated. But these above-normal rents can attract new entrants who drive down economic rents. A CA is a position a firm attains that lead to above-normal rents or a superior financial performance. The processes and positions that engender such a position are not necessarily non-duplicable or inimitable.

Analysis of the factors of profitability is the subject of numerous theories of strategy including the five forces model pioneered by Michael Porter of the Harvard Business School.

In marketing and strategic management, sustainable competitive advantage is an advantage that one firm has relative to competing firms. The source of the advantage can be something the company does that is distinctive and difficult to replicate, also known as a core competency -- for example Procter & Gamble's ability to derive superior consumer insights and implement them in managing its brand portfolio. It can also be an asset such as a brand (e.g. Coca Cola) or a patent, such as Viagra. It can also simply be a result of the industry's cost structure -- for example, the large fixed costs that tend to create natural monopolies in utility industries. To be sustainable, the advantage must be:

1. distinctive, and
2. proprietary

In 2006, Jaynie L. Smith authored Creating Competitive Advantage (Doubleday). This book outlines how companies fail to understand their own existing competitive advantages and use them in sales/marketing. She provides a framework for how companies can evaluate their own operations and develop competitive advantage/competitive positioning statements to better hone their sales/marketing messages. Competitive advantage statements help distinguish companies by highlighting what they offer to the customer using tangible terms and concepts. The next step is to test those CA statements through independent market research. This allows a company to understand their customers' hierarchy of buying criteria in an objective indepenedent context. From there, companies can tailor their CA statements to speak directly to the buying interests of the customer.

Competitive Advantage: a company is said to have a competitive advantage over its rivals when its profitability is greater than the average profitability of all other companies competing for the same set of customers.

Sustainable Competitive Advantage: a company has a sustained competitive advantage when its strategies enable it to maintain above-average profitability for a number of years.

External Links

• Article on Competitive Advantage Through Strategic Synergy

Competitive advantages vary from situation to situation and from time to time. Some basic examples of CAs can be devided in 4 main global areas:

Cost: Low-cost operations

Quality: High quality, Consistent quality

Time: Delivery speed, On-time delivery, Development speed

Flexibility: Customization, Volume flexibility, Variety