A competitive advantage is defined as the advantage or ability a firm has over its rivals in the industry or the ability to outperform its competition. This advantage allows the firm to do better than its competitors by generating greater sales or margins and/or retaining more customers.
Two main types of competitive advantages exist: Comparative Advantage and Differential Advantage.
Comparative advantage, or cost advantage, is a firm’s ability to produce a good or service at a lower cost than its competitors, which allows the firm to sell its goods or services at a lower price than its competition or generate a larger margin on sales. A differential advantage is created when a firm’s products or services differ from its competitors and are seen as better than a competitor’s products by customers.
When you examine most industries, you will find that some companies do much better than others, and there is always a standout firm. For example, Toyota is considered the superior performer in the automotive industry. In online retail, Amazon.com is respected as the giant. In brick-and-mortar retail, Wal-Mart is the leader, and in online search engines, Google continues to dominate worldwide.
So, how do firms outperform others and achieve competitive advantage? How can you analyze a company and identify its strategic advantage? How can you develop a strategic advantage for your own company? One answer to these questions is examining the Porter Five Forces model.
Sustaining competitive advantage can best be achieved by using Porter’s five forces model to assess an industry structure based on five pertinent questions:
- How much bargaining power do customers have?
- How much of a threat do substitution products or services pose?
- How much bargaining power do suppliers have?
- How great is the threat of new competitors entering the marketplace?
- How great is the rivalry among existing firms?
According to Porter (1979), each force’s intensity determines the industry’s characteristics, how profitable it is, and how sustainable that profitability will be. An organization can then develop its competitive strategy based on how it intends to respond to these forces.
The strategy must consider the target market, the business’s strengths and weaknesses, the business goals, the product/service the business has developed, and the competition’s strategies. Key questions to address include:
- Are the business and the target market clearly defined?
- Who is/are the business’ competitors?
- What is the business’ specific strategy for success?
- Are the competition’s moves being tracked regularly?
- Is the business taking advantage of the competition’s weaknesses and/or any competitive opportunities?
- What has been learned from the competition’s mistakes/strengths?
- How do the business’ prices and products compare with the rest of the industry?
- Who are the customers? Does the business have (or can it build) a loyal base?
- Are the employees trained in customer service?
- What trends are ahead, and can the business take advantage of them?
