Competitive Advantage (Encyclopedia of Management)
Many firms strive for a competitive advantage, but few truly understand what it is or how to achieve and keep it. A competitive advantage can be gained by offering the consumer a greater value than the competitors, such as by offering lower prices or providing quality services or other benefits that justify a higher price. The strongest competitive advantage is a strategy that that cannot be imitated by other companies.
Competitive advantage can be also viewed as any activity that creates superior value above its rivals. A company wants the gap between perceived value and cost of the product to be greater than the competition.
Michael Porter defines three generic strategies that firm's may use to gain competitive advantage: cost leadership, differentiation, and focus. A firm utilizing a cost leadership strategy seeks to be the low-cost producer relative to its competitors. A differentiation strategy requires that the firm possess a "non-price" attribute that distinguishes the firm as superior to its peers. Firms following a focus approach direct their attention to narrow product lines, buyer segments, or geographic markets. "Focused" firms will use cost or differentiation to gain advantage, but only within a narrow target market.
COST ADVANTAGE RESULTING FROM EFFICIENCY
Efficiency is the ratio of inputs to outputs. Inputs can be any materials, overhead, or labor that is assigned to the product or service. The outputs can be measured as the number of products produced or services performed. The firm that can achieve the highest efficiency for the same service or product can widen the gap between cost and perceived value and may have greater profit margins.
There are many ways a company can increase efficiency. Efficiency is enhanced if, holding outputs constant, inputs are reduced; or if holding inputs constant, outputs are increased. Inputs can be reduced in many ways. Labor inputs can be reduced if employees are better trained so that time spent on each individual output is decreased.
Decreasing waste can decrease materials needed. If a method can be devised to decrease waste, it would increase efficiency. For instance, a bottling plant might determine that 10 gallons of liquid are spilled every day as a result of the bottling process. If the amount of lost liquid can be reduced, efficiency will increase.
Outputs can be increased by increasing the number of units a machine can produce in given period of time. Decreasing downtime can also increase outputs. For example, if a machine regularly breaks down and is out of order for two hours a day, finding a way to eliminate this downtime would increase the number of outputs.
It is often argued that large companies, by definition, are able to be more efficient because they can achieve economies of scale that others are not able to reach. Large companies usually offer more products in each product line, and their products may help to satisfy many different needs. If a consumer is not sure of the exact product he needs, he can go to the larger producer and be confident that the larger producer has something to offer. The consumer might believe that the smaller producer may be too specialized. Larger companies can cater to a larger population because of sheer size, while smaller companies have fewer resources and must specialize or fall victim to larger, more efficient companies.
Product differentiation is achieved by offering a valued variation of the physical product. The ability to differentiate a product varies greatly along a continuum depending on the specific product. There are some products that do not lend themselves to much differentiation, such as beef, lumber, and notebook paper. Some products, on the other hand, can be highly differentiated. Appliances, restaurants, automobiles, and even batteries can all be customized and highly differentiated to meet various consumer needs. In Principles of Marketing (1999), authors Gary Armstrong and Philip Kotler note that differentiation can occur by manipulating many characteristics, including features, performance, style, design, consistency, durability, reliability, or reparability. Differentiation allows a company to target specific populations.
It is easy to think of companies that have used these characteristics to promote their products. Maytag has differentiated itself by presenting "Old reliable," the Maytag repairman who never has any work to do because Maytag's products purportedly function without any problems and do not require repairs. The Eveready Battery Co./Energizer has promoted their products' performance with the Energizer Bunny® that "keeps going and going."
Many chain restaurants differentiate themselves with consistency and style. If a consumer has a favorite dish at her local Applebee's restaurant, she can be assured it will look and taste the same at any Applebee's restaurant anywhere in the country. And, the style of theme restaurants is the key to some establishments. Planet Hollywood and Hard Rock Cafe profit from their themes.
In the auto industry, durability is promoted by Chevrolet's "Like a Rock" advertising campaign.
Companies can also differentiate the services that accompany the physical product. Two companies can offer a similar physical product, but the company that offers additional services can charge a premium for the product. Mary Kay cosmetics offers skin-care and glamour cosmetics that are very similar to those offered by many other cosmetic companies; but these products are usually accompanied with an informational, instructional training session provided by the consultant. This additional service allows Mary Kay to charge more for their product than if they sold the product through more traditional channels.
In the personal computer business, Dell and Gateway claim to provide excellent technical support services to handle any glitches that may occur once a consumer has bought their product. This 24-hour-a-day tech support provides a very important advantage over other PC makers, who may be perceived as less reliable when a customer needs immediate assistance with a problem.
Hiring and training better people than the competitor can become an immeasurable competitive advantage for a company. A company's employees are often overlooked, but should be given careful consideration. This human resource-based advantage is difficult for a competitor to imitate because the source of the advantage may not be very apparent to an outsider. As a Money magazine article reported, Herb Kelleher, CEO of Southwest Airlines, explains that the culture, attitudes, beliefs, and actions of his employees constitute his strongest competitive advantage: "The intangibles are more important than the tangibles because you can always imitate the tangibles; you can buy the airplane, you can rent the ticket counter space. But the hardest thing for someone to emulate is the spirit of your people."
This competitive advantage can encompass many areas. Employers who pay attention to employees, monitoring their performance and commitment, may find themselves with a very strong competitive advantage. A well-trained production staff will generate a better quality product. Yet, a competitor may not be able to distinguish if the advantage is due to superior materials, equipment or employees.
People differentiation is important when consumers deal directly with employees. Employees are the frontline defense against waning customer satisfaction. The associate at Wal-Mart who helps a customer locate a product may result in the customer returning numerous times, generating hundreds of dollars in revenue. Home Depot prides itself on having a knowledgeable sales staff in their home improvement warehouses. The consumer knows that the staff will be helpful and courteous, and this is very important to the consumer who may be trying a new home improvement technique with limited knowledge on the subject.
Another way a company can differentiate itself through people is by having a recognizable person at the top of the company. A recognizable CEO can make a company stand out. Some CEOs are such charismatic public figures that to the consumer, the CEO is the company. If the CEO is considered reputable and is well-liked, it speaks very well for the company, and consumers pay attention. National media coverage of CEOs has increased tremendously, jumping 21 percent between 1992 and 1997 (Gaines-Ross).
Armstrong and Kotler pointed out in Principles of Marketing that when competing products or services are similar, buyers may perceive a difference based on company or brand image. Thus companies should work to establish images that differentiate them from competitors. A favorable brand image takes a significant amount of time to build. Unfortunately, one negative impression can kill the image practically overnight. Everything that a company does must support their image. Ford Motor Co.'s former "Quality is Job 1" slogan needed to be supported in every aspect, including advertisements, production, sales floor presentation, and customer service.
Often, a company will try giving a product a personality. It can be done through a story, symbol, or other identifying means. Most consumers are familiar with the Keebler Elves and the magic tree where they do all of the Keebler baking. This story of the elves and the tree gives Keebler cookies a personality. When consumers purchase Keebler cookies, they are not just purchasing cookies, but the story of the elves and the magic tree as well. A symbol can be an easily recognizable trademark of a company that reminds the consumer of the brand image. The Nike "swoosh" is a symbol that carries prestige and makes the Nike label recognizable.
Quality is the idea that something is reliable in the sense that it does the job it is designed to do. When considering competitive advantage, one cannot just view quality as it relates to the product. The quality of the material going into the product and the quality of production operations should also be scrutinized. Materials quality is very important. The manufacturer that can get the best material at a given price will widen the gap between perceived quality and cost. Greater quality materials decrease the number of returns, reworks, and repairs necessary. Quality labor also reduces the costs associated with these three expenses.
When people think of innovation, they usually have a narrow view that encompasses only product innovation. Product innovation is very important to remain competitive, but just as important is process innovation. Process innovation is anything new or novel about the way a company operates. Process innovations are important because they often reduce costs, and it may take competitors a significant amount of time to discover and imitate them.
Some process innovations can completely revolutionize the way a product is produced. When the assembly line was first gaining popularity in the early twentieth century, it was an innovation that significantly reduced costs. The first companies to use this innovation had a competitive advantage over the companies that were slow or reluctant to change.
As one of the first Internet service providers, America Online offered a unique innovation for accessing the nascent Internetts unique and user-friendly interface. The company grew at a massive rate, leading the rapidly developing Internet sector as a force in American business. While most innovations are not going to revolutionize the way that all firms operate, the small innovations can reduce costs by thousands or even millions of dollars, and large innovations may save billions over time.
SUSTAINABLE COMPETITIVE ADVANTAGE
The achievement of competitive advantage is not always permanent or even long lasting. Once a firm establishes itself in an area of advantage, other firms will follow suit in an effort to capitalize on their similarities. A firm is said to have a "sustainable" competitive advantage when its competitors are unable to duplicate the benefits of the firm's strategy. In order for a firm to attain a "sustainable" competitive advantage, its generic strategy must be grounded in an attribute that meets four criteria. It must be:
- Valuablet is of value to consumers.
- Raret is not commonplace or easily obtained.
- Inimitablet cannot be easily imitated or copied by competitors.
- Non-substitutableonsumers cannot or will not substitute another product or attribute for the one providing the firm with competitive advantage.
SELECTING A COMPETITIVE ADVANTAGE
A company may be lucky enough to identify several potential competitive advantages, and it must be able to determine which are worth pursuing. Not all differentiation is important. Some differences are too subtle, too easily mimicked by competitors, and many are too expensive. A company must be sure the consumer wants, understands, and appreciates the difference offered.
The maker of expensive suits may offer its suits in the widest array of colors, but if 95 percent of the consumers wear only black and navy blue suits, then the wide array of colors adds little perceived value to the product. Variety would not become a competitive advantage, and would be a waste of resources. A difference may be worth developing and promoting, advise Armstrong and Kotler, if it is important, distinctive, superior, communicable, preemptive, affordable, and profitable.
A competitive advantage can make or break a firm, so it is crucial that all managers are familiar with competitive advantages and how to create, maintain, and benefit from them.
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Dess, Gregory G., G.T. Lumpkin, and Alan B. Eisner. Strategic Management: Text and Cases. Boston: McGraw-Hill Irwin, 2006.
Gaines-Ross, Leslie, and Chris Komisarjevsky. "The Brand Name CEO." Across the Board 36, no. 6, (1999): 269.
Kelleher, Herb, and Sarah Rose. "How Herb Keeps Southwest Hopping." Money, 28, 1999, 612.
Raturi, Amitabh S., and James R. Evans. Principles of Operations Management. Mason, OH: Thomson South-Western, 2005.