Definition: Competitive advantage is the ability of a firm to create a sustainable, profitable position within its industry. Michael Porter defines it as "the search for a favorable competitive position in an industry."
Few advantages last forever; companies must focus on defensible, long-term strategies.
Resource-Based View (RBV): Emphasizes leveraging unique, valuable, and hard-to-imitate resources.
Reference: Porter (1985); Collis & Montgomery (1997).
To create a sustainable competitive advantage (SCA), resources must meet three criteria:
Value Creation: Contribute to customer satisfaction and organizational value.
Example: Superior technology or effective cost management.
Rarity: Be unique or scarce relative to competitors.
Example: Distinctive competencies in proprietary technology.
Inimitability: Be difficult for competitors to copy or substitute.
Example: Strong brand reputation or organizational culture.
Easiest to Imitate: Unskilled workforce, cash reserves.
Harder to Imitate: Brand image, corporate culture.
Nearly Impossible to Imitate: Patents, unique physical locations.
Reference: Collis & Montgomery (1997); Lecture Content.
Michael Porter's two main strategies for creating competitive advantage:
Cost Leadership: Achieving the lowest operational costs in the industry.
Differentiation: Offering unique products/services valued by customers.
Definition: Competing by being the lowest-cost producer while maintaining acceptable quality.
Economies of Scale: Larger operations lead to reduced per-unit costs.
Example: Walmart's bulk purchasing power.
Experience Effects: Efficiency gained through learning and repeated processes.
BCG Study: Costs drop 15-20% with cumulative production doubling.
Capacity Utilization: Maximizing production efficiency to reduce costs.
Example: Avoiding seasonal fluctuations in demand.
Integration: Backward or forward integration reduces dependency on suppliers or distributors.
Example: Amazon's in-house logistics network.
Timing: First-mover advantages can reduce costs through early adoption of technology or securing resources.
Challenges:
Over-reliance on scale may lead to diseconomies of scale.
Cost leadership alone may not guarantee customer loyalty.
Reference: Porter (1985); Gluck (1986).
Definition: Offering products/services perceived as unique or superior by customers.
Product:
Core: Basic product/service (e.g., fuel for cars).
Augmented: Extra features exceeding customer expectations (e.g., complimentary car washes).
Potential: Future benefits (e.g., advanced technology for autonomous cars).
Quality:
High quality drives customer satisfaction and loyalty.
Example: Dyson’s reputation for innovation and reliability.
Design:
Combines aesthetics with functionality (e.g., Apple’s sleek product design).
Branding:
Strong brands signal quality and create emotional connections.
Example: Nike's "Just Do It" campaign.
Service:
Enhanced customer service can differentiate a product.
Example: Matchpots for paint selection.
Differentiation must be valued by customers and justify a premium price.
It must be difficult for competitors to replicate.
Reference: Levitt (1986); Parasuraman et al. (1988).
Hybrid Strategy:
Pursue both cost efficiency and product uniqueness.
Example: IKEA offers affordable, well-designed furniture by optimizing production and distribution.
Companies failing to achieve either cost leadership or differentiation may struggle to compete effectively.
Unique Products:
Regular innovation prevents competitors from catching up.
Example: Apple’s constant product upgrades.
Targeted Markets:
Clear segmentation allows tailored offerings to meet specific customer needs.
Example: Nespresso’s luxury-focused distribution model.
Enhanced Customer Linkages:
Creating strong customer relationships builds loyalty and increases switching costs.
Example: Amazon Prime’s ecosystem of services.
Brand and Credibility:
Reputation for quality and reliability can defend market position.
Example: Mercedes-Benz as a luxury automotive leader.
Reference: Buzzell & Gale (1987); Hagel (2016).
Build strategies: Expand into new markets or increase market share.
Market expansion: Target new users or introduce new uses for products.
Confrontation: Compete head-to-head with rivals in established markets.
Holding strategies: Defend market position against competitors.
Retrenchment: Withdraw from unprofitable segments.
Building barriers: Patent protection, strong brand loyalty, or switching costs.
Reference: Kotler & Singh (1981).
Differentiation appeals to customers valuing uniqueness.
Cost leadership targets price-sensitive customers.
The best strategies leverage unique resources and customer insights.
Collis, D. J., & Montgomery, C. A. (1997). Corporate Strategy: A Resource-Based Approach.
Levitt, T. (1986). The Marketing Imagination.
Porter, M. E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance.
Parasuraman, A., Zeithaml, V. A., & Berry, L. L. (1988). SERVQUAL: A Multiple-Item Scale for Measuring Consumer Perceptions of Service Quality.