Competitive Advantage: Introduction
The traditional competitive advantage concept is derived from Michael Porter’s work:
“Competitive advantage grows out of value a firm is able to create for its buyers that exceeds the firm’s cost of creating it. Value is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset a higher price. ”
We can say that competitive advantage refers to the situation where a company is able to generate profits above the industry average. Should this ability endure over the time the company is said to have a sustainable competitive advantage.
According to Porter there are two basic types of competitive advantage: cost advantage and differentiation advantage. While this two-fold division comprehends most of the competitive advantage cases, a deeper analysis could be made, breaking down the factors that enable a company to achieve either a cost or a differentiation advantage.
Differentiation, for instance, can be achieve through innovative products, through a better customer service and so on. Cost leadership, similarly, can be achieved through economies of scale, better relationship with suppliers and the like.
In this series of posts I will cover the various sources of competitive advantage and how companies can leverage them to achieve better results on the market. Stay tuned!
RSS Feed
Email Subscription
http://subbaiyer.wordpress.com/tag/business/competition/
While Porter’s work is revolutionary, it doesn’t completely explain competitive advantage and competitive factors. remember Porter’s theory has been disproved time and again, in various industries and contexts, more in the high tech world.
Porter (with all due respects to him) saw this primarily from an economics standpoint, and hence his view is limiting.
Subbaraman,
I agree when you say that “Porter’s theory has been disproved time and again”, but you have to be careful about what theories you talk about, since Porter had many of them.
If you consider his theory about strategy formulation for instance, he defended that stratigic planning must be carried before entering a certain industry and it must be based on analysis and models. Henry Mintzberg proved that this method is very innefective in many industries, creating a new school of thought.
That said, Porter’s theory about competitive advantage is one of his most solid theories (in fact by your comment it is not clear to me what is your criticism about that theory). Appart from cost advanatge and differentiation advantage he also added a third via called “focus” strategy when companies have an advantage by service niche markets. Now, can you name a couple of sources of competitive advantage that do no fall inside one of those 3 categories?
[…] Competitive Advantage: Economies of Scale The first part of this series (click here to read) explained that there are basically two types of competitive advantage: cost advantage and differentiation advantage. For the next few posts we will cover all the sources that can create a cost advantage for a company. […]
hi
i am divikiran,, i am a student of ERP recently i have started my research on Michael Porter’s work. can any buddy guide me to get best material to read which can explain me right from the beginning and with all his mechanism.
thinking you
Divikiran Ravela