1. Market share matters: The 80th share point isn’t as important as the 81st, but don’t let it drop to 79!
2. Understand and remember precisely what business you are in.
3. Whether it’s broke or not, fix it – make it better; whether it be products or the whole company.
4. Innovate or evaporate; particularly in technology driven businesses, nothing recedes like success.
5. Acquisition is essential to growth – the most successful purchases are in a niche that add a technology or a related market.
6. People make a difference.
7. There is no substitute for quality and no greater threat than failing to be cost competitive.

Taken from Strategic Management: Concepts and Cases

There are several factors contributing to economies of learning, including:

• employees learn to do their job more efficiently
• less wastes and defects on products
• better coordination of the different functions
• faster production process

There are several examples of industries where economies of learning play an important role, including the software industry and high-tech sectors. According to Robert Grant “Japanese companies dominated the world market for active-matrix flat screens primarily because of unassailable cost leadership resulting from experience-based learning. The complexity of flat screen manufacture and the fact that a single chip defect may render an entire screen useless mean that yield rate is the key to cost advantage, and learning is the basis of high yields.”

Economies of scale represent the classic source of cost advantage. It basically refers to a situation where a firm can decrease the average cost per unit by increasing the total output. Economies of scale is also equivalent to an increase returns to scale situation, meaning that if we increase the inputs by X% the outputs will consequently increase by more than X%.

Notice that economies of scale are present mainly in industries that operate with large fixed costs in the production process (i.e. Steel, automobiles and petrochemicals), and they are strongly connected to the degree of concentration in such industries.

There are 3 main factors creating economies of scale:

1. Specialization: Large companies are able to breakdown the production into smaller and separated tasks, employing the resources more efficiently. This efficiency comes both from the specialized workforce and from the specialized equipment and manufacturing processes.

2. Bargaining Power: As organizations grow they gain bargaining power with suppliers. If a certain company doubles the amount of raw materials it is buying every month it will very likely be able to negotiate better prices.

3. Indivisibility of Resources: Some resources are not divisible and can not be purchased or operated under certain thresholds. Research facilities and advertising campaigns, for instance, require a minimum size.

The business world is no different. In our fast paced economy change is the only certainty, and the faster companies are able to respond to such changes the higher their chances of success. The ability to respond and adapt quickly to market changes, in fact, is a source of competitive advantage.

In the first part of this series we mentioned that there are basically two types of competitive advantage: cost advantage and differentiation advantage. Some sources of competitive advantage will help a company to differentiate its products while others will reduce its costs. The ability to respond and adapt quickly to market changes, however, might push in both directions.

Wal-Mart is a good example of how a firm can use the responsiveness to change to reduce its costs. The retailer giant has a very efficient distribution and purchasing system, based on real-time data collected through its many point-of-sale terminals. Such information enables Wal-Mart to reduce drastically inventories and stockouts.

As we mentioned before the ability to respond quickly to market changes can also enable a company to develop a differentiation advantage. The fashion industry is extremely volatile, and predicting how the customers’ taste is going to change over the next season is very valuable. Zara, the Spanish apparel retailer, managed to differentiate its product line by responding faster to changes on the demand. Its extensive network of stores collect information in real-time about the request for different garments, colors and styles. The information is analyzed and within two weeks Zara has the new models being delivered to the stores.

As Charles Darwin once said: “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”

“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!