Harvard Business School’s renowned professor, Michael E. Porter, in one of his books, mentioned strategies that business organizations deploy to gain an edge over their competitors.
A company sells its product at a certain price. However, the same product another company sells at a lower price. So, is the second company making losses? How they can sell the same stuff at a lower price?
And, sometimes I can get a much better product by spending the same amount of money.
So, how to achieve this without making losses?
They can achieve these all by having some kind of advantage over the competitors.
What advantage? We will discuss this in a bit.
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Competitive Advantage definition
According to Oxford language, “A condition or circumstance that puts a company in a favorable or superior business position.” Expansion is vital to maintaining a competitive advantage.
According to an American Professor Jay Barney –
“A firm is said to have a competitive advantage when it is implementing a value-creating strategy not simultaneously being implemented by any current or potential player”
The definitions above try to explain that leverage over the competition is necessary to remain in the market for a longer-term.
Competitive Advantage meaning and importance
We all know market dynamics keep changing at a very high pace. What we had targeted in the beginning would not work after a year or so. Customer requirements can change, and if companies don’t adopt them, they will be thrown out by their competitors.
We all know what happened to Nokia, once undisputed leader now nowhere in the competition.
When a company is out to sell the product, they have to think about why customers would buy from them and not the competitors? This reason is a great candidate to be a competitive advantage.
Dr. Porter explains that an organization can achieve a Competitive Advantage over its rivals with either Cost advantage or Differentiation advantage
Also, the advantage that we are talking about should be maintainable. It is not a one-time job.
If my cost of manufacturing a chair is $100, I can’t sell them for $90. This can be an exception perhaps, but surely, not normal, in order to attract customers and increase sales.
However, if my competition is selling the same chair at $90 then certainly, I will have to rethink and curtail my cost. That cost may be procurement, manufacturing, or labor otherwise, I will be out of business.
So, it is extremely important that the advantage should be such that no one could copy it. Or at least it should be really hard to be copied.
Competitive Advantage Strategies
Cost Leadership
As the name suggests, the cost of the product or services would be lower enough to keep competitors from matching it.
This pricing provides an advantage because even after selling at a lower price, the company still be able to make profits. The lower cost increases sales and, in turn, profit. Remember EDLP (“Everyday Low Prices”)? Yes, Walmart is a cost leader.
Another way of achieving cost leadership is economies of scale. A product produced in a huge number brings down the cost involved, hence a better margin.
Dr. Porter says that in order to produce at a lower cost, the company has to find below three components that match the objective.
Labor – one reason outsourcing is so popular and has maintained its importance. They manufacture several parts of the iPhone in different countries.
Material – Similar to Labor, a company should source the materials where the cost is lower.
Facilities – they set companies up where they find better facilities and are easily accessible. It will reduce the overheads in a big way. A better infrastructure provides cost efficiency.
Differentiation Leadership
This is the strategy when a company’s product differs from its competitors. A sense of uniqueness is being created.
However, to achieve this, an immense level of research and innovation goes into it.
But when this happens, people will happily pay the price asked for.
We are all aware of iPhone. There are a lot of products in the market. Still, Apple is a leader when it comes to differentiation. We all have examples in front of us, as to how iPod, iPhone, iWatch, etc. had created a buzz in the market.
Focused Strategy
This strategy works on a targeted approach. Not to focus on everyone but to target the most suitable ones in terms of market or the people.
This strategy is also known as the Segmentation strategy. A very important aspect, especially in the digital marketing world. The segmentation works on demography, geography, and even on behavioral activity.
A lot of start-ups also followed this strategy these days. They don’t have the resources to target a large geographic location. Hence, they often focus on a few cities first, then gradually they move on to other cities.
Similarly, companies that have just begun tend to focus on a couple of products initially. Later on, they will expand their product portfolio.
These strategies, however, don’t work in silos. There could be a combination.
So, at first, a company has to decide whom to focus on or where to focus. The second step is to decide whether they want to follow a cost leadership or differentiation leadership path.
It now becomes –
Cost Leadership Focused
Differentiation Leadership Focused.
Here is the graphic to understand better
(Source: www.techtarget.com)
A great way to blend things to create an advantage.
Examples of Competitive Advantage
The competitive advantage of Amazon
The company has started off by selling books. But today it is a behemoth. It is pretty much into everything. In the beginning, customers were skeptical of buying online.
Soon, the company understood the customer’s pain points. They were the pioneers in the “No Question Asked Return Policy”.
Amazon’s “free shipping” or “next day delivery” has worked as a disruptor in the market. Again, a great convenience. It has become a new normal in the e-commerce sector. The services Amazon provides are unparalleled.
The products are available at a much lower cost and have a vast variety.
Further, the company is also into cloud computing, storage, digital streaming, artificial intelligence.
It has now become a differentiation leader. The company is one of the first to provide such a service.
By looking at this, the rivals like Walmart, BestBuy had no choice but to incorporate shipping-related convenience to their customers.
Talk about sales, 28% in 2015 and 43% in 2019 of the US e-commerce sales. 1 in 3 Americans has an Amazon Prime membership. And almost everyone tries to match the pricing offered by Amazon.
Amazon works on economies of scale. It has its own logistics services to handle bulk as well as last-mile delivery.
A market leader for a reason with amazing advantages.
The competitive advantage of Apple
A top-notch differentiator. The product offered is so unique that people are buying with no hesitation. The price is nowhere in the scene. Every asking price of their products seemed justified.
The key to these all is nothing but innovation. Their products create a whole new segment in the market.
The company started off in a garage as a computer company. Now a leader, which is completely unrivaled.
Apple enjoys a very strong competitive advantage through the ecosystem it has created. When people use any of the devices like iPhones, iMacs, Apple TV the connectivity is so seamless that it gives another experience altogether.
Moreover, as the mass appeal is very high, even the content creators, app developers benefit in a big way.
From the supplier’s side, Apple’s demands are always well accepted to the extent that even machinery and technology to be used will be discussed with Apple.
Because of its popularity, no one wants to miss the opportunity to be associated with Apple.
To this day, Apple uses proprietary software, the iOS, this way it fully controls what goes in and what should not.
Overall, Apple product creates trust, provide a seamless experience, and give a sense of premium feel, mark of a true leader, a disruptor, and a differentiator.
Sustained Competitive Advantage
Dr. Barney, a well-known name in the management field, extended Dr. Porter’s idea. He says it is not enough to create a competitive edge for once and relax. It is a rigorous and continuous process. Tomorrow some other company, a rival, would copy your idea. So, you will lose your advantage and, in turn, business.
Sustainable competitive advantage talks about maintaining it for a pretty long term.
He proposed a Resource-Based View (RBV) which segregates resources into two types.
Tangible
Resources such as technology can be built or bought. Similarly, Land, buildings, machinery, equipment, etc are tangible assets.
Intangible
Brand recognition or the goodwill a company has can’t be bought, and this is an ideal candidate to have a sustained competitive advantage. Similarly, trademark, reputation, intellectual property, etc.
Dr. Barney further says pillars of sustained competitive advantage are “VRIN”, which stands for
Valuable, Rare, Inimitable, Non-Substitutable
Valuable – The resource available, makes the company create more value for its customers. The productivity increases with efficiency. They can achieve all these by increasing the differentiation factor or decreasing the cost.
Rare – They are resources that are not available to competitors. This makes that resource rare.
Inimitable – The resource should be such that it cannot be copied. A competitor will not be able to implement it, as it is too costly to apply.
Non-substitutable – A resource that is valuable and strategically speaking can’t be replaced by others. When two resources are used to gain the same advantage, then they are substitutable and should be avoided.
Conclusion
It doesn’t take long for a company to be out of business if they don’t have any advantage. One way or the other, it needs to find the right strategy which will be in accordance with the company’s objectives.
To generate or increase profit, a company should have a clear focus, to become a cost leader or a differentiation leader as described by Dr. Porter. Also, as Dr. Barney has proposed, just being advantageous is not enough, you will have to sustain the momentum for a much longer period of time,
It is a cyclic process; organizations need to adapt to the market demands, change accordingly increase value, and have a competitive advantage.