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!

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