Competitive Advantage

Competitive advantage is the way a firm gains over its rivals. SWOT analysis helps you see competitive edge.

There is rivalry among organizations. This is obvious in business.

Many non-profit organizations (NPO) also compete. They compete for grants, donors, and budget allocations.

Clarity of purpose is the ultimate competitive edge

The key to becoming a leader in your industry or community is single mindedness.

Successful organizations show a strong competitive lead over their peers. They are not just firms striving for higher profits. Some nonprofits take a lead in addressing the problems faced by society. They know what they are doing for whom. They are single-minded in pursuit of this aim.

Companies have an advantage. More of them are single-minded. They know what they are doing, for whom, and how well they are doing it. Companies can answer the simple question of what their purpose is. Far too many NPOs cannot do this!

There is a systematic way for NPOs to clarify their fundamental purpose. John Argenti developed this way. It is the 'Purpose Sequence'.

However, idea of advantage usually applies to rivalry among business firms.

Competitive advantage of business firms

A firm with an advantage is more able to create value for its investors. If it is more difficult for rivals to counter the advantage, the advantage is more sustainable.

A business has an advantage if it sustains profits above the industry average.

The advantage usually takes one of two forms -

  • cost management advantage
  • market differentiation advantage. Paying customers see the firm’s services and/or products as superior to those of rivals.

These advantages are both ‘positional’. They place the firm in a leadership position in the industry. The Harvard Professor Michael E Porter made this distinction well known among strategy makers.

Michael E. Porter's Competitive Advantage: Creating and Sustaining Superior Performance explores the underpinnings of competitive edge in the individual firm. Competitive Advantage introduces a way of understanding the operations of a business enterprise, using the concept of the ‘value chain’. This disaggregates a company into ‘activities’, or the discrete functions or processes, which represent the basic building blocks of competing effectively.

The value chain enables managers to isolate the sources of buyer value. This guides the setting of above average prices. It provides scope for improving cost management relative to competitors. Competitive leadership lies not only in activities themselves. It also depends on the way activities relate to each other. Key relationships include supplier activities, and to customer activities. 'Competitive sustainable advantage’ has become so popular partly due Porter's ideas.

Resource based view of competitive effectiveness

The resource-based view (RBV) sees the business as consisting of a set of assets or resources used by the firm in its pursuit of profit.

In this view, a competitive edge requires resources that are heterogeneous, and not perfectly mobile. In effect, the firm needs to develop or select resources that are valuable, rare, not easily imitated, and non-substitutable. Further, they are configured in ways that are hard to replicate. If they can do this over time, they may be able to build a sustained advantage over their competitors.

If the firm can manage to do this over time, it will achieve above average returns. There seems to be some evidence in support of the RBV, in Crook et al, 2008.
•    Some examples of such resources could include
•    Patents and trademarks
•    Proprietary know-how or design expertise
•    Established and loyal customer base
•    Reputation and brand equity
•    Exclusive access to key infrastructure such as rail or sea transport corridors.

Picturing advantage

The positional and resource-based views of competitiveness are complimentary.

The resource-based view emphasizes that a firm utilizes its resources and capabilities to create a competitive edge.

The positioning view stresses that industry economics provide two main emphases in using these resources. These are better than industry average cost management, and providing goods and services which customers value highly enough to pay above average industry or market process.

The following diagram combines the resource-based and positioning views to illustrate the concept of competitiveness -

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Some resources for studying the concept of competitive advantage -

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