Competitive Advantages

Why, within a particular industry or market, do some companies outperform others? When a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rival. The competitive advantages translate into the ability to win market share or earn a higher profit than competitors. A successful business model results from business-level strategies that create a competitive advantage over rivals and achieve superior performance in an industry, that is, they must optimize competitive positioning. They must first decide on (1) customer needs, or what is to be satisfied, (2) customer groups, or who is to be satisfied, and (3) core competencies, or how customer needs are to be satisfied. These decisions determine which strategies they formulate and implement to put a company’s business model into action.

This essay will examine the nature of competitive advantage and why managers need to perform internal analysis, just as they must conduct industry analysis, to achieve superior performance and profitability. And it will find out as well how business is looking to maintain competitive advantages beyond the present, well into the future. In other words, what are the difficulties the enterprise would face and have to overcome to maintain its competitive advantages over a longer period of time?

According to Colin White, competitive advantage is “the ability to provide utility to, or to satisfy, customers better than competitors can”. Or “a competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices” (tutor2u, 2006). Competitive advantages exist thanks to the combination of an appropriate application of the core competencies possessed by the enterprise and an appropriate positioning of the enterprise in the relevant industries or market segment (Colin, 2004). However, competitive advantages are not sustainable, not lasting long unless business undertakes methods to maintain them. The goal of much of business strategy is to achieve sustainable competitive advantage.

Let’s have a look at a Model of Competitive Advantage

A MODEL OF COMPETITIVE ADVANTAGE

This essay is concerned with identifying the strengths of the company which gives managers the information they need to choose the business model and strategies that will enable company to attain a sustained competitive advantage. The core competencies of an organization arise from its resources and capabilities which are superior to those of its competitors. Resources are the firm-specific asset useful for creating a cost or differentiation advantage that few competitors can acquire easily. They consist of both tangible (financial, physical, human, technological, and organizational assets) & intangible assets (patent & trade mark, proprietary know-how, installed customer base, reputation of the firm, brand equity) of the organization. Capability refers to the firm’s ability to utilize its resources effectively. However, Core Competencies are not seen as being fixed and should change in response to changes in the company's environment. As a business evolves and adapts to new circumstances and opportunities, so its Core Competencies will have to adapt and change.

In order to achieve a competitive advantage, a company needs to pursue strategies that build on its existing resources and capabilities and formulate strategies that build additional resources and capabilities (develop new competencies). The source of a competitive advantage is superior value creation. To create superior value, a company must lower its costs or differentiate its product so that it creates more value and can charge a higher price, or do both simultaneously. The key drivers for competitive advantage are cost leadership and differentiation of product (Micheal Portel). Business-Level Strategy deals with decisions and actions pertaining to each business unit in order to make each unit more competitive in its market-place. Or in simpler words, it raises the question HOW DO WE COMPETE at Business-Level Strategy.

BUSINESS-LEVEL STRATEGY

The four building blocks of competitive advantage are efficiency, quality, innovation, and responsiveness to customers. These are generic core competencies. Superior efficiency enables a company to lower its costs; superior quality allows it to charge a higher price and lower its costs; and superior customer service lets it charge a higher price. Superior innovation can lead to higher prices, particularly in the case of product innovations, or lower unit costs, particularly in the case of process innovations.

Let’s have a look at Functional-level Strategies at which HOW DO WE SUPPORT THE BUSINESS-LEVEL COMPETITIVE STRATEGY question to be raised. Core competencies shape the functional-level strategies that a company can pursue and that managers, through their choices with regard to functional-level strategies, can build resources and capabilities that enhance a company’s core competencies. Companies that increase the utility consumers get from their products through differentiation, while simultaneously lowering their cost structure, create more value than their rivals, and this leads to a competitive advantage and superior profitability and profit growth. To achieve superior innovation, a company must build skills in basic and applied research; design good processes for managing development projects; and achieve close integration between the different functions of the company, primarily through the adoption of cross-functional product development teams and partly parallel development processes.

As far as we know, customers choose a product based on (1) the way a product is differentiated from other products of its type and (2) the price of the product. There are three main approaches toward market segmentation. First, cost leadership strategy: a company might choose to ignore differences and make a product targeted at the average or typical customer. Second, differentiation strategy: a company can choose to recognize the differences between customer groups and make a product targeted toward most or all of the different market segments. Last, focused strategy: a company might choose to target just one or two market segments. Competitive strategy is means by which organization seeks to achieve and sustain competitive advantages. Porter argues that competitive strategy means “taking