Competitive Advantage

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Objectives:

Learners willUnderstand the meaning of competitive advantageUnderstand what are the main types of competitive advantage Identify how competitive advantage may be createdRecognize the basis of sustainable competitive advantage*

What is Competitive advantage?

a basis for the firms long term success? a basis for value creation?

Do we really know where it resides?Can it be sustainable?

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Competitive advantage is the base for a companys long terms success in the competitive arena. When a company is ahead of its competitors in terms of innovation, quality or customer service, it may achieve higher prices and therefore higher performance. *

In an turbulent and continuously changing market, however, it is difficult to know the exact sources of competitive advantage and if it is sustainable over time. It is not easy for companies to understand what is the base for success. Is it, for example, high customer service in a niche market or a combination of unique low cost and quality capabilities? *

Moreover, even if they recognize the base of their success they wouldnt know if this could be sustainable as it was the case some years ago (e.g. in the past companies like Xerox or IBM could take advantage of their advanced technologies for a long time period, this may not happen today).The quest for sustainable competitive advantage becomes more and more difficult. *

It could be suggested that companies should look for competitive advantage at the integration of various advantages for the development of products/ services combining different characteristics as for example quality, design, efficiency, safety, e.t.c. *

What is Competitive advantage?When two or more firms compete within the same market, one firms possesses a competitive advantage over its rivals when it earns a persistently higher rate of profit (or has the potential to earn a persistently higher rate of profit) R. M. Grant, 2000

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Competitive advantage is the ability of the firm to outperform rivals on the primary performance goal, e.g. profitability. Sometimes competitive advantage may be revealed OTHERWISE than in higher profitability, e.g. - when a firm trade current profit for investment in market share or - when a firm forgoes profits in the interests of customer satisfaction.

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The main types of Competitive Advantage*

A firm can achieve a higher rate of profit over a competitor in two ways:By establishing low cost advantage: e.g. provide products or services similar to those of its competitors but at a lower costBy establishing a differentiation advantage: e.g. provide a unique product for which the customer is willing to pay a premium

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Competitive strategiesby Porter*Types of competitive advantageLow costDifferentiationCost leadershipDifferentiationIndustry-wideNicheFocus with low costFocus with differentiationMarket

M. Porter has combined the types of competitive advantage with a companys market scope. In this way, he has established four generic competitive strategies, as it is shown in the slide: cost leadership, differentiation, focus with low cost and focus with differentiation. *

Porter suggested that cost leadership and differentiation are mutually exclusive and they can not be combined by a company. Trying to achieve both types of competitive advantage would cause a firm to be stuck in the middle without managing to create competitive advantage and achieving higher profitability.

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Competitive strategies extending Porter*Types of competitive advantageLow costDifferentiationCost LeadershipDifferentiationIndustry-wideNicheFocus with low cost Focus with differentiationMarketHybrid StrategyIn-between there might be a successful strategy (Value for Money)Hybrid strategies can be more effective

Today, however, it is recognized that competitive advantage cannot only be found in only one of the four types. On the contrary lots of companies seek to create intermediate levels of differentiation and low cost establishing a hybrid strategy. E.g. to provide a given quality at a cost lower than competitors, or for a given price to offer the highest company.

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Hybrid strategies target markets or market segments that demand the combination of various characteristics (including low cost and differentiation). This was, for example, the position of Toyota and other Japanese companies. Their strategy combined the delivery of enhanced value in terms of customer needs whilst having a cost that would permit low (not the lower) prices.*

Features of competitive strategies

Cost LeadershipEfficient scaleStandardizationDesign for low production costControl of overheads and R&D DifferentiationQualityInnovationDesignCredibilityBrand nameReputationEnvironmental posture Customer serviceIntegrated services *

In order to achieve a low cost competitive advantage and follow a low cost competitive strategy, a company must succeed to have the following capabilities compared to its competitors: - Size, so as to achieve economies of scale and scope- Previous experience in order to achieve economies of learning and to improve dexterity, coordination e.t.c.*

- Low input costs, e.g. low cost raw materials, appropriate location, good cooperation with suppliers- Design for low cost production, including automation, precision, cost controls, low waste of materials, high capacity utilization and low organizational slack- Appropriate product design, to produce standardized products, without expensive extra characteristics- No need for customization of products, marginal customers with special demands are avoided.*

On the other hand for the creation of a differentiation competitive advantage, a company must produce unique products which will be rewarded by premium prices or higher market shares or both. There are several ways to differentiate, including quality, design, credibility, efficiency, innovation, customer service, reputation e.t.c. In order to achieve a differentiation advantage, a company must optimize its:

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- Product features and performance, by improving among others the quality of inputs, design, e.t.c- Complementary services e.g. delivery, repair, etc- Marketing activities- Technology embodied in design and manufacture- Design of processes, e.g. quality control, service process, e.t.c. - Experience and skills of employees- Location, e.t.c.

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Sustainable competitive advantage reflected on product

Quality and quality of customer serviceDesignInnovative productCustomized product with integrated servicesEnvironmental friendly*

Firms must offer competitive products. What are the main elements of competitive products? It could be suggested that the integration of: 1) quality as mainly presented in customer service (which in turn is reflected on employees skills), 2) design, reflected on aesthetic quality, innovation and customization and 3) reputation as provided by social responsibility and environmental posture constitute elements of competitive products.

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ReferencesR.M. Grant, Contemporary Strategy Analysis, Blackwell Publishers, 2000.M.E. Porter, Competitive Advantage, New York: Free Press, 1985.J. Kay, Foundations of Corporate Success, Oxford University Press, 1995.G. Johnson, K. Scholes & R. Whittington, Exploring Corporate Strategy, Prentice Hall, 7th eds, 2005C. Prahalad & G. Hamel, The core competences of the corporation, Harvard Business Review, vol. 28, n.3, may-june, 1990.

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ReferencesS. Marthur, How firms compete? The Journal of General Management, vol.14, no 1, autumn 1988. F. Tilley, P. Hooper & L. Walley, Sustainability and competitiveness: Are there mutual advantages for SMEs?, in J. Oswald & F. Tilley, Competitive Advantage in SMEs: Organising for innovation and change, Wiley, 2003. K. Weigelt &C. Camerer, (1988), Reputation and Corporate Strategy: A review of recent theory and applications, Strategic Management Journal, 9

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***Competitive advantage is the base for a companys long terms success in the competitive arena. When a company is ahead of its competitors in terms of innovation, quality or customer service, it may achieve higher prices and therefore higher performance. In an turbulent and continuously changing market, however, it is difficult to know the exact sources of competitive advantage and if it is sustainable over time. It is not easy for companies to understand what is the base for success. Is it, for example, high customer service in a niche market or a combination of unique low cost and quality capabilities? Moreover, even if they recognize the base of their success they wouldnt know if this could be sustainable as it was the case some years ago (e.g. in the past companies like Xerox or IBM could take advantage of their advanced technologies for a long time period, this may not happen today).The quest for sustainable competitive advantage becomes more and more difficult. It could be suggested that companies should look for competitive advantage at the integration of various advantages for the development of products/ services combining different characteristics as for example quality, design, efficiency, safety, e.t.c. **Competitive advantage is the ability of the firm to outperform rivals on the primary performance goal, e.g. profitability. Sometimes competitive advantage may be revealed OTHERWISE than in higher profitability, e.g. - when a firm trade current profit for investment in market share or - when a firm forgoes profits in the interests of customer satisfaction.*6A firm can achieve a higher rate of profit over a competitor in two ways:By establishing low cost advantage: e.g. provide products or services similar to those of its competitors but at a lower costBy establishing a differentiation advantage: e.g. provide a unique product for which the customer is willing to pay a premium*8M. Porter has combined the types of competitive advantage with a companys market scope. In this way, he has established four generic competitive strategies, as it is shown in the slide: cost leadership, differentiation, focus with low cost and focus with differentiation. Porter suggested that cost leadership and differentiation are mutually exclusive and they can not be combined by a company. Trying to achieve both types of competitive advantage would cause a firm to be stuck in the middle without managing to create competitive advantage and achieving higher profitability.*8Today, however, it is recognized that competitive advantage cannot only be found in only one of the four types. On the contrary lots of companies seek to create intermediate levels of differentiation and low cost establishing a hybrid strategy. E.g. to provide a given quality at a cost lower than competitors, or for a given price to offer the highest company. Hybrid strategies target markets or market segments that demand the combination of various characteristics (including low cost and differentiation). This was, for example, the position of Toyota and other Japanese companies. Their strategy combined the delivery of enhanced value in terms of customer needs whilst having a cost that would permit low (not the lower) prices.*In order to achieve a low cost competitive advantage and follow a low cost competitive strategy, a company must succeed to have the following capabilities compared to its competitors: - Size, so as to achieve economies of scale and scope- Previous experience in order to achieve economies of learning and to improve dexterity, coordination e.t.c.- Low input costs, e.g. low cost raw materials, appropriate location, good cooperation with suppliers- Design for low cost production, including automation, precision, cost controls, low waste of materials, high capacity utilization and low organizational slack- Appropriate product design, to produce standardized products, without expensive extra characteristics- No need for customization of products, marginal customers with special demands are avoided.On the other hand for the creation of a differentiation competitive advantage, a company must produce unique products which will be rewarded by premium prices or higher market shares or both. There are several ways to differentiate, including quality, design, credibility, efficiency, innovation, customer service, reputation e.t.c. In order to achieve a differentiation advantage, a company must optimize its: - Product features and performance, by improving among others the quality of inputs, design, e.t.c- Complementary services e.g. delivery, repair, etc- Marketing activities- Technology embodied in design and manufacture- Design of processes, e.g. quality control, service process, e.t.c. - Experience and skills of employees- Location, e.t.c.

*Firms must offer competitive products. What are the main elements of competitive products? It could be suggested that the integration of: 1) quality as mainly presented in customer service (which in turn is reflected on employees skills), 2) design, reflected on aesthetic quality, innovation and customization and 3) reputation as provided by social responsibility and environmental posture constitute elements of competitive products.**