Competitive advantage is the favorable position an organization seeks in order to be more profitable than its rivals. To gain and maintain a competitive advantage, an organization must be able to demonstrate a greater comparative or differential value than its competitors and convey that information to its desired target market. For example, if a company advertises a product for a price that's lower than a similar product from a competitor, that company is likely to have a competitive advantage. The same is true if the advertised product costs more, but offers unique features that customers are willing to pay for. Show
In the 1980s, professor Michael Porter from the Harvard Business School looked at successful businesses and created a framework for how leaders could think strategically about beating the competition. Porter suggested that companies analyze five important criteria, which Porter called the Five Forces, to gain an understanding for the competitive landscape. Once that had been achieved, he recommended the use of three generic strategies to help leadership make the best choice about which type of competitive advantage they should pursue. Porter's Five Forces is an alternate model to SWOT (Strengths, Weaknesses, Opportunities, Threats) an analysis tool which is credited to Albert Humphrey at the Stanford Research Institute to help companies get a sense of their position within a competitive landscape. Porter taught his students at Harvard about SWOT analysis, but felt the tool had limitations because it placed too much focus on individual companies rather than on industries. Porter saw the need for a framework that also looked at the competitive landscape holistically, in the context of an entire industry. The simple framework that Porter developed for achieving a competitive advantage in the marketplace is still being taught in business schools today. Porter's techniques for analyzing competitorsIn his 1980 book, Competitive Strategy: Techniques for Analyzing Industries and Competitors, Porter maintains that the attractiveness of a market segment is determined by five competitive forces:
The first three forces are sometimes referred to as horizontal competition. Variables in horizontal competition include the possibility of new competitors entering the market, the rivalry among existing competitors and the threat posed by substitute products or services. The last two forces are sometimes referred to as vertical competition. Vertical competition is dependent upon supply chain, the price of raw materials, the cost of labor and the customer's relationship with a product, brand or company.  Porter's techniques for creating superior performanceIn his 1985 book, Competitive Advantage: Creating and Sustaining Superior Performance, Porter proposed that once the potential for profitability in a market has been established, the next step toward gaining a competitive advantage is to decide whether to use a low-cost approach or a differentiation approach. And once this too has been decided, a third element that Porter calls focus needs to be nailed down; this part of the framework identifies who the product or service should be marketed to.
Porter also looked at competitive strategies from a long-term, sustainable angle and maintained that creating a sustainable competitive advantage not only helps boost a company's image in the marketplace, it also affects valuation and the potential for future earnings. How to create a sustainable competitive advantageSustainable competitive advantage refers to maintaining a favorable position over the long term, which can help boost a company's image in the marketplace, its valuation and its future earning potential. Strategic management expert Jay B. Barney published an article in 1991 that took Porter's ideas and expanded upon them, adding an element for sustaining a competitive advantage over time. Barney's article, entitled "Firm Resources and Sustained Competitive Advantage," suggested that instead of just looking at outside influences when analyzing the competitive landscape, companies should also look inward to achieve sustainable competitive advantage. Barney wrote that previous frameworks, including Porter's, were based on the incorrect assumption that all companies within the same industry shared the same attributes. It is each company's differences, Barney pointed out, that should be exploited to gain a competitive advantage. Resource-Based View (RBV) and VRINBarney proposed using a framework called the Resource-Based View (RBV). This competitive advantage framework places emphasis on a company's core competencies, the combination of skills and resources that make a company unique compared to the competition. Barney maintained that for resources to hold potential as sources of sustainable competitive advantage, they should be valuable, rare, inimitable and non-substitutable (VRIN). Barney categorized resources as either being tangible or intangible. Tangible resources, such as technology, can be bought by other competitors to gain a competitive advantage. Intangible resources, such as positive brand recognition, however, cannot be bought and are the main source of sustainable competitive advantage. Valuable - Does the resource have greater value, in terms of costs and benefits, than similar resources in competing companies? Rare - Is the resource scarce when compared to the relative demand for its use or what it produces? Inimitable - Can the resource be imitated or copied easily? Non-substitutable - How difficult is it to replace the resource with a substitute? To leverage their core competencies, companies can start by identifying their key resources and then use the VRIN framework to determine if the resource is robust enough to provide sustainable competitive advantage. Why maintaining a competitive advantage is very important to the success of today's businesses?Having a competitive advantage can create greater value for a company and its shareholders because of certain strengths it has when compared to its competition. A consistent competitive advantage can help companies continue to be the market leaders in their industries.
Why competitive advantage is an important factor in business growth?Competitive advantages generate greater value for a firm and its shareholders because of certain strengths or conditions. The more sustainable the competitive advantage, the more difficult it is for competitors to neutralize the advantage.
What are the benefits of maintaining a competitive advantage?A clear competitive advantage:. Helps your organization increase certainty.. Allows you to focus resources (time, talent, and treasure) for maximum ROI.. Adds constancy and predictability to your revenue streams.. Helps you achieve organizational momentum.. Reduces unnecessary marketing, recruiting, and fundraising expenditures.. Why competitiveness is very important strategy in business?Competitive Strategy helps an organization to carve out a niche' of how they want to stay and operate in an industry and gain a competitive advantage over its rival competitors in the same industry.
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Maintaining a competitive advantage is very important to the success of todays businesses
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