Competitive Advantage: Meaning, Importance, And Realization

Companies are constantly pressured as they continuously face issues with profitability, growth and sustainability to survive in today’s fiercely competitive business environment. The current dynamic business environment forces firms them to distinguish themselves apart from one another as well as the ability to quickly adapt and change to maintain relevancy or achieve desirable levels of profitability and growth (Thompson and Martin, 2010). Thus, it becomes increasingly important for businesses to formulate clear decision-making patterns relative to their own perception of the industry and where they lie within the industry, otherwise known as its strategy (Shafer, Smith and Linder, 2005). It can be seen through Porter (1980) that competitive advantage is the objective of strategy, the dependent variable as they believed that superior performance is correlated with competitive advantage, and achieving advantage will automatically result in higher performances.

The purpose of organizations creating strategy is essential in handling and coping with competition as Porter (1979) has concluded. Hence, the organization’s strategy must enforce differentiating factors that will distinguish them from their competitors in the battle to achieve continuous survival and growth. These factors are identified by recent literature as competitive advantage. This essay will focus primarily on three key ideas, defining competitive advantage, why managers seek to achieve it, and how companies could realize it. This essay will also compare and contrast Michael Porter’s original competitive advantage framework with other research that has been done in the field of strategic management. Some of these research perspectives are, however at odds with Porter’s frameworks.

Competitive advantage can be simply defined as the position of superiority that allows an organization to outperform its competitors. A more precise definition proposed by Michael porter (1980), would be that competitive advantage exists when there is a match between the distinctive competencies of a firm and the factors critical for success within its industry that permits the firm to outperform competitors. This position of superiority arises due to an organization’s development of its core competencies that meet the business environment requirements better relative to other competitors.

Around thirty years ago, Michael Porter published the book, competitive advantage, in which he established a framework to guide corporate executives and management consultants in formulating a company’s strategy. Porter’s framework entails that a company’s strategy is a set of value activities and the company may perform their value activities differently in order to acquire competitive advantage over their competitors. Modern day competition has evolved beyond the traditional rivalry among competitors that operate within the same industry. The pursuit for relevancy, growth, and profit has now branched out to external factors such as customer and supplier behavior in the industry, potential entrants, and the availability of substitutes (Porter, 2008). In his competitive advantage model, a competitive strategy takes offensive or defensive action to create a formidable position in an industry, which is essential in successfully coping with the competitive forces and generating a superior return on investment.

Being different in the industry is expected to create a competitive advantage for the firm by being able to create and add value to its customers as said by Thompson and Martin (2010). Maritan and Peteraf (2011) emphasized the value creation property of competitive advantage, in that a firm that is able to create value for its customers or within an industry by implementing strategies that other competitors are not implementing or are not able to implement at that is said to have a competitive advantage. Many share a similar perspective, including Michael Porter (2008), as well as Sheehan and Foss (2009) that believes an organization’s competitive advantage is its attribute that has the potential to create value and appropriate more value than its rivals. It is important to understand that the forces that control competition are the main reason that managers develop strategies (Porter, 2008). This implies that managers should focus on constructing strategies that revolve around what their company does best than their rivals. In the words of Marcus (2005), this could be a source of competitive advantage for an organization. Thus, a thorough analysis of the factors that control the industry would explain why and how managers strategically position their firms to acquire competitive advantage in their business environment.

Factors with external influence that determine the competitive environment in a particular industry include but not limited to, laws and legislation, societal values, technological advancements, changes in demographics, and the general macroeconomic viewpoint (Thompson, Gamble and Strickland, 2006). Contrary to this, Porter (2008) believes that the forces that control competition within any industry are structurally similar if not the same. His five forces framework draws upon industrial organizational economics to derive five fundamental forces that determine the competitive intensity and therefore attractiveness of an industry (Porter, 1984). Michael Porter also discloses in his findings that each of the five forces do not necessarily affect different industry at the same degree. An analysis of Porter’s five forces models, which are purely external, can be viewed as the industry analysis for competitive advantage as Porter’s five forces are the determining factors that shape industry competitive as suggested by Marcus (2005). These forces are threat of new entrants, threat of substitute products or services, bargaining power of customers, bargaining power of suppliers and the intensity of competitive rivalry.

Markets that are more profitable as they yield higher returns become more attractive to new firms, and so this results in many new entrants that will eventually decrease profitability for all the firms in the industry as the market share is now divided (Porter, 1980. This threat can be eliminated by firms in the industry and by doing so will pressure the abnormal profit rate to trend towards zero, in other words perfect competition. Firms in the industry will then have to set strategies that impose high barriers of entry to make use of this force and provide a competitive advantage in the industry. Porter (2008) explains that a proper configuration of certain factors such as restrictive patents, government policy, and high capital requirements are able to provide and maintain such competitive advantages.

The propensity for customers to consume other products is increased, as more and more alternatives are available to them. It is also more likely for consumers to choose other products or services that meet their needs at a cheaper cost and with higher quality because of technological advancements. Hence, managers should focus on strategies that create competitive advantage through technological advancements, lowering costs, and improving quality. According to Porter (2008), for most industries the intensity of competitive rivalry is the major determinant of the competitiveness of the industry. It can be used as measure of whether the industry is worth entering. Strong rivalries within an industry do not translate to it being an unprofitable industry.

The bargaining power of customers is also described as the market of outputs; the ability of customers to put company’s under pressure, which also reflects the customer’s sensitivity to changes in price (Porter, 1980). Firms are able to form strategies to reduce buyer power, such as implementing a loyalty program. The bargaining power of suppliers is also described by Porter (2008) as the market of inputs. These inputs include raw materials, components, labor, and services. All of which can be of a source of bargaining power to the supplier when there are few alternatives. Firms are then suggested to build strategies that improve supplier network through collaboration so they are able to create a competitive advantage.

The porter five forces model that determine competition in industries do not create competitive advantage directly, but can be used as a starting point that could lead to optimal strategies that bring about competitive advantage. Porter (2008) noted that the five forces model should be used at the ‘line-of-business” industry level, as it is not designed to be used at the industry group or industry sector level. Even though strategy consultants occasionally use this framework, other academics and strategists such as Stewart Neill, ABC, Somu Subramanian and Kevin P Coyne have challenged it, as there are three unrealistic assumptions that underlie these five forces. They are that “buyers, competitors and suppliers are unrelated and do not interact and collude, the source of value is structural advantage that would in turn create barriers to entry, and that uncertainty is low, allowing participants in a market to plan for and respond to competitive behavior” (Coyne and Subramaniam, 1996).

Porter (1980) states that the basis of achieving above-average levels of performance and growth within each industry is through sustainable competitive advantage. Thus, for firms to be able to realize competitive advantage, they have to achieve sustainable competitive advantage. Michael Porter’s theory of generic strategies provides three methods of creating sustainable competitive advantage; they are cost leadership, differentiation, and focus.

Cost leadership refers to cost advantage that occurs when firms are able to offer similar good and services at a lower cost when compared to other competitors. To succeed at offering the lowest prices while still being profitable with a high return on investment firms must be able to operate at a lower cost than its rivals. The differentiation strategy on the other hand stresses on having different products or services in a certain way in order to compete successfully. It is a strategy that is more appropriate where the target market is not price-sensitive, the market is competitive or saturated. It is most suitable for firms that have unique resources and capabilities that enable them to satisfy customer needs in a way that is hard to imitate by its competitors. Focus strategies work in conjunction with the previous two strategies, but it involves in adopting a narrow focus on that ideally focuses on a few target markets. This strategy is also called segmentation strategy or niche strategy (Porter, 1980).

Contemporary research have often question the use of these generic strategies as they lack specificity, flexibility and are limiting. Porter (1985) stressed that only one of these generic strategies should be implemented by a firm and argued that using multiple strategies will disrupt the entire focus of the organization resulting in the failure of achieving future goals. However Miller (1992) questions this theory and claims that there is a viable middle ground between strategies. This claim is supported by numerous contemporary research that has shown evidence of successful firms practicing a ‘‘hybrid strategy’’, a strategy where both low cost and differentiation strategies are adopted, that outperform firms adopting one generic strategy (Akan et al. 2006, p. 49).

A common strategy suggests that businesses should focus its resources on outperforming its competitors or getting rid of them. However, according to Porter (1985), this is a risky strategy. Organizations that have higher chances of outperforming its counterparts are those that can anticipate, read, adapt and take advantage of changes in the industry (Reeves, Love, and Tillmanns, 2012). Such a strategy can be seen in the implementation of the “Blue Ocean strategy” proposed by Kim and Mauborgne (2005). This strategy is one where a firm can sustain competitive advantage not by trying to outperform its competitors, but by being innovative and discovering new market share that will create new demand outside the existing market. Implementing this strategy into a firm’s overall strategy would mean that the firm is not only adapting to its market environment but continuously evolving ahead of its competition.

This essay concludes that analyzing and understanding the environment in which a firm operates is imperative in staying ahead of its competitors. The information it provides would allow strategists and managers in making qualitative evaluations on a strategic position a firm should take to achieve competitive advantage.

An important distinction for a firm that has acquired competitive advantage is if its rivals do not have the capacity to obtain the same position in both the long or short run. As said before by Porter (2008), analysis of the factors determining competition does not create competitive advantage by itself. However, firms through understanding and identifying the environment, taking advantage of opportunities, creating defenses against external threats, and being constantly innovative, can realize competitive advantage. Research has also suggested that finding the right configuration of strategies would provide higher chances of earning more desirable levels of growth and returns.