Competitive advantage
Competitive advantage is...
Creating better value for customers than competitors (so increasing sales and
profits).
How to gain competitive
advantage
1. Michael Porter’s generic strategies
These are three strategies to beat competitors, discussed in Harvard Business School professor Michael Porter’s (pictured right) book, Competitive Strategy (1980):
a) differentiation
Selling to a broad market something unique and better than competitors.
b) cost leadership
Selling to a broad market with lower costs (and so lower prices) than competitors.
c) focus (or segmentation)
Selling to a particular customer group (a market segment or niche) - see market segmentation
Focus can be achieved by selling something:
- unique (called differentiation focus), or
- at the lowest cost (cost focus).
Porter recommends pursuing only one of these strategies, or a business will become “stuck in the
middle”, achieve none of them and lose its competitive advantage.
But the best organizations contradict this conclusion by achieving both differentiation and cost leadership.
2. Michael Porter’s value chain
The value chain shows the activities an organization must carry out to delight its
customers.
Michael Porter (pictured right) in his book, Competitive
Advantage (1985) divided these activities into primary and support:
Primary activities
a) Inbound logistics
The delivery and storage of goods and services required by the organization.
b) Operations
Producing or selling the organization’s product(s).
c) Outbound logistics
Distribution of product(s) to customers.
d) Marketing and sales
Persuading people to buy the product(s).
e) Service
After-sales service.
Support activities
a) Human resource management
Employee recruitment, training and motivation.
b) Procurement
Purchasing of goods and services.
c)Technology development
Using technology to improve products (e.g. research and development), raw materials and processes (e.g.
production).
d) Infrastructure
The organization’s structure and systems (e.g. finance).
All these activities (and their co-ordination to achieve customer satisfaction) must be done better than
competitors.
3. Core competencies
These are skills and technologies that enable an organization to satisfy its customers better than its
competitors
(e.g. Apple’s superiority in design and
innovation)
See core competencies for more detail.
4. Change and innovation
An organization can never be complacent. It must be continuously learning, improving and
innovating to beat its competitors.
It will have to satisfy and create new customers with brilliant new
products.
Speed of action and adaptability to change are vital.
Key quotes
explained
“If you don’t have competitive advantage, don’t
compete”,
Jack
Welch, ex-boss of General Electric (pictured
right) .
Competitive advantage is a prerequisite of successful business, resulting, says Welch, from an organization’s
ability to translate “learning into action rapidly”.
“No leadership position is more than a temporary
position”,
Peter Drucker in his
book, Managing for Results (pictured right)
If you are complacent, competitors will overtake you. So constant innovation is vital.
“A clever fighter is one who not only wins but excels in winning with
ease”,
Sun Tzu, general in
ancient China (pictured right)
Seek the quickest and easiest route to competitive advantage. “Speed is the essence of war”,
Sun Tzu also said.
Best books and
articles
Michael Porter,
Competitive Advantage (1985)
Competitive advantage is created by generic strategies (from Porter’s 1980 book, Competitive Strategy) and the
value chain (see above).
For more detail see Competitive
Advantage in the Business Books section.
PIMS (Profit Impact of Market Strategy), 1987
A research study of 450 American companies which found that quality is the most important source of competitive
advantage.
Gary
Hamel (pictured right) and
C.K.
Prahalad (pictured below), Competing for the Future (1994)
Competitive advantage comes from:
- core competencies (what a company does better than its competitors).
- constant innovation (having the vision, imagination and foresight to anticipate and
satisfy present and future customer needs i.e. “to create the future”).
For more detail see Competing for the Future in
the Business Books section.
Kenneth Andrews
(pictured right), The Concept of Corporate Strategy
(1971)
Competitive advantage depends on an organization’s “distinctive competence” i.e.
“what it can do particularly well”.
George Stalk (pictured right) and Thomas Hout (pictured
right below), Competing Against Time (1990)
The most powerful source of competitive advantage is speed (in new product development, production, sales and
marketing)
Pankaj Ghemawat (pictured right
below), Sustainable Advantage (1986 Harvard Business Review article)
Competitive advantage comes from:
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