Competitive Advantage Framework

Competitive Advantage is a business theory proposed by Michael Porter in 1985. This theory suggests that states and businesses should pursue policies that create high-quality goods to sell at high prices in the market. Porter emphasizes productivity growth as the focus of national strategies. Competitive Advantage rests on the notion that cheap labor is ubiquitous and natural resources are not necessary for a good economy. The other theory, comparative advantage, can lead countries to specialize in exporting primary goods and raw materials that trap countries in low-wage economies due to terms of trade. Competitive Advantage attempts to correct for this issue by stressing maximizing scale economies in goods and services that garner premium prices (Stutz and Warf 2009). Traditional thinking on growth strategy is based on Michael Porter’s theories on business strategy and competition.

Competitive Advantage occurs when an organization acquires or develops an attribute or combination of attributes that allows it to outperform its competitors. These attributes can include access to natural resources, such as high grade ores or inexpensive power, or access to highly trained and skilled personnel human resources. New technologies such as robotics and information technology can provide competitive advantage, whether as a part of the product itself, as an advantage to the making of the product, or as a competitive aid in the business process (for example, better identification and understanding of customers).

According to the Competitive Advantage model of Porter, a competitive strategy takes offensive or defensive action to create a defendable position in an industry, in order to cope successfully with competitive forces and generate a superior Return on Investment. According to Michael Porter, the basis of above-average performance within an industry is sustainable competitive advantage.

2 basic types of Competitive Advantage

  1. Cost Leadership (low cost)
  2. Differentiation

Both can be more broadly approached or narrow, which results in the third viable competitive strategy:

  1. Focus

Competitive Advantage type 1: Cost Leadership

  • Achieving Cost Leadership means that a firm sets out to become the low cost producer in its industry.
  • A cost leader must achieve parity or at least proximity in the bases of differentiation, even though it relies on cost leadership for its competitive advantage.
  • If more than one company try to achieve Cost Leadership, this is usually disastrous.
  • Often achieved by economies of scale.

Competitive Advantage type 2: Differentiation

  • Achieving of Differentiation means that a firm seeks to be unique in its industry along some dimensions that are widely appreciated  by buyers.
  • A differentiator can not ignore its cost position. In all areas that do not affect its differentiation it should try to decrease cost; in the differentiation area the costs should at least be lower than the price premium it receives from the buyers.
  • Areas of differentiation can be: product, distribution, sales, marketing, service, image, etc.

Competitive Advantage type 3: Focus

  • Achieving Focus means that a firm sets out to be best in a segment or group of segments.
  • 2 variants: Cost Focus and Differentiation Focus.

Stuck in the middle

  • This is usually a recipe for below-average profitability compared to the industry.
  • Still, attractive profits are possible if and as long as the industry as a whole is very attractive.
  • Manifestation of lack of choice.
  • Especially dangerous for Focusers that have been successful, and then start neglecting their focus. They must seek other Focus niches. Rather then compromise their focus strategy.

Overview of the Book “Competitive Strategy”

  • In Part I, Porter discusses the structural analysis of industries (with the five forces), the three generic competitive strategies (overall Cost Leadership, Focus, and Differentiation), offering an excellent framework for competitor analysis, competitive moves, strategy toward buyers and suppliers, structural analysis within industries (strategic groups, strategic mapping, mobility barriers), and industry evolution (life cycle, evolutionary processes).
  • In Part II, Porter discusses competitive strategy within various generic industry environments. Such as: fragmented industries (with no real market leader), emerging industries, mature industries, declining industries, and global industries.
  • In Part III, Porter discusses strategic decisions which businesses/firms can take. Such as: vertical integration (forward, backward, partnerships), capacity expansion, and entry into new industries/businesses.

For an alternate view on growth strategy, check out Blue Ocean Strategy.  BOS theorizes that head-on competition in the market can be avoided.

Source: Michael E. Porter – Competitive Strategy, Competitive Advantage

Strategy Development Reference Documents

Business Strategy Design
https://flevy.com/browse/business-document/complete-guide-to-business-strategy-design-375

Breakthrough Strategy Formulation
https://flevy.com/browse/business-document/formulating-a-breakthrough-strategy-598

Strategy Development Methodology
https://flevy.com/browse/business-document/strategy-development-methodology-264

Strategic Analysis
https://flevy.com/browse/business-document/strategic-analysis-framework-146

Creative Thinking in Strategy Development
https://flevy.com/browse/business-document/creative-thinking-in-strategy-development-205

Evolution of Strategy
https://flevy.com/browse/business-document/evolution-of-strategy-705

Corporate Strategy Primer
https://flevy.com/browse/business-document/corporate-strategy-primer-697

Research for Breakthrough Strategy
https://flevy.com/browse/business-document/research-for-breakthrough-strategy-715

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