Competitive advantage

see also:  barriers to entry 

 

Competitive advantage (CA) is a position that a firm occupies in its competitive landscape. Michael Porter posits that a competitive advantage, sustainable or not, exists when a company makes economic rents, that is, their earnings exceed their costs (including cost of capital). That means that normal competitive pressures are not able to drive down the firm's earnings to the point where they cover all costs and just provide minimum sufficient additional return to keep capital invested. Most forms of competitive advantage cannot be sustained for any length of time because the promise of economic rents drives competitors to duplicate the competitive advantage held by any one firm.

 

A firm possesses a Sustainable Competitive Advantage (SCA) when it has value-creating processes and positions that cannot be duplicated or imitated by other firms that lead to the production of above normal rents. An SCA is different from a competitive advantage (CA) in that it provides a long-term advantage that is not easily replicated. But these above-normal rents can attract new entrants who drive down economic rents. A CA is a position a firm attains that lead to above-normal rents or a superior financial performance. The processes and positions that engender such a position is not necessarily non-duplicable or inimitable.

 

Analysis of the factors of profitability is the subject of numerous theories of strategy including the five forces model pioneered by Michael Porter of the Harvard Business School.

 

In marketing and strategic management, sustainable competitive advantage is an advantage that one firm has relative to competing firms. The source of the advantage can be something the company does that is distinctive and difficult to replicate, also known as a core competency -- for example Procter & Gamble's ability to derive superior consumer insights and implement them in managing its brand portfolio. It can also be an asset such as a brand (e.g. Coca Cola) or a patent, such as Viagra. It can also simply be a result of the industry's cost structure -- for example, the large fixed costs that tend to create natural monopolies in utility industries. To be sustainable, the advantage must be:

 

1. distinctive, and

2. proprietary

 

Building Sustainable Competitive Advantage

There are basically three types of assets that help build an SCA. These categories are exhaustive and include all of the company's SCAs:

 

1. Organization and managerial process

• Coordination and integration: Coordination among teams in organization is key toorganizational success. Interdepartmental coordination and resource sharing to reach a common goal is fundamental to creating "value". Integrating resources is key to the success of firms. Firms that are able to integrate resources see synergistic effects of resources coming together.

 

• Learning: Organizational learning is key to the success of a firm. It determines how a firm collects, distributes, interprets and responds to market based information collection and changes in the environment. These changes in the environment could be customer based changes, technological developments, legal and government restrictions. Firms have to develop robust market sensing and spanning capabilities to effectively collect information. Once they collect info they have embed this knowledge in the products they produce.

 

• Reconfiguring and transformation: The environment for firms is constantly changing and constant reconfiguring and transformation is key to forming SCA. A double loop learning and transformation is key to producing innovative products. Innovative capacity of a firm determines how it reacts and learns from market information.

 

2. Positions: market positions are the assets of a company. Most of them are self-explanatory:

• Technological assets
• Financial assets like expensive pool covers
• Reputational assets
• Structural assets: The structure of a company can determine how it performs. The hierarchy of a company can influence its culture, procedure and routines.

 

3. Paths:

• Path dependencies: At the birth of a company usually accompanied with certain orientations. The progenitor brings certain orientations and attributes that stay with the company for a long time. The path the company takes then determines the development of its competencies.

 

• Technological opportunities: technology development at a time can determine how a firm can exploit opportunities to form SCA. Very often we see the advent of several technological factors converging into a capability that forms a SCA. An example would be the rise of companies such as Genentech at the turn of the previous century with the advent of gene mapping, significant developments in target selection and databases of previous studies and gene pools. and so on and so forth