Competitive Advantage

Objectives:

Learners will
Understand the meaning of competitive
advantage
Understand what are the main types of
competitive advantage
Identify how competitive advantage may
be created
Recognize 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?
3

 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?
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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.
6

 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
8

 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.
9

The main types of

Competitive Advantage

Competitive
Competitive
advantage
advantage

uct
d
pro st
r
a
il
co
Sim wer
o
at l

Hig
he
for
rp
un
ric
iqu
e
ep
rod
uc
t

Cost
Costadvantage
advantage

Differentiation
Differentiationadvantage
advantage

10

 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 cost
- By 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 strategies
by Porter
Types of competitive advantage
Low cost
Industry-wide

Market
Niche

Cost leadership

Focus with
low cost

Differentiation

Differentiation

Focus with
differentiation

12

 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.
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 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 advantage

Low cost
Industry-wide

Cost Leadership

Market

Differentiation
Differentiation

Hybrid Strategy
Niche

Focus with
low cost

Focus with
differentiation

In-between there might be a successful strategy (Value for Money)

Hybrid strategies can be more effective

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 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.
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Features of competitive strategies

Cost Leadership
Efficient scale
Standardization
Design for low
production cost
Control of
overheads and R&D

Differentiation
Quality
Innovation
Design
Credibility
Brand name
Reputation
Environmental
posture
Customer service
Integrated services
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 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.
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 - 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.
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 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 service
Design
Innovative product
Customized product with integrated
services
Environmental friendly

23

 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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References
R.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, 7 th
eds, 2005
C. Prahalad & G. Hamel, The core
competences of the corporation, Harvard
Business Review, vol. 28, n.3, may-june, 1990.
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References
S. 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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