Management - 12manage

Competitive Advantage
(Porter)

The basis of performing above-average within an industry. Explanation of Competitive Advantage of Michael Porter.

Competitive Advantage - PorterAccording to the Competitive Advantage model of Porter, a competitive strategy takes offensive or defensive action to create a defendable position in an industry, in order to cope successfully with competitive forces and generate a superior Return on Investment. According to Michael Porter, the basis of above-average performance within an industry is sustainable competitive advantage.

 

2 basic types of Competitive Advantage

  1. Cost Leadership (low cost)
  2. Differentiation

Both can be more broadly approached or narrow, which results in the third viable competitive strategy:

  1. Focus

Competitive Advantage type 1: Cost Leadership

  • Achieving Cost Leadership means that a firm sets out to become the low cost producer in its industry.
  • A cost leader must achieve parity or at least proximity in the bases of differentiation, even though it relies on cost leadership for its competitive advantage.
  • If more than one company try to achieve Cost Leadership, this is usually disastrous.
  • Often achieved by economies of scale.

Competitive Advantage type 2: Differentiation

  • Achieving of Differentiation means that a firm seeks to be unique in its industry along some dimensions that are widely appreciated  by buyers.
  • A differentiator can not ignore its cost position. In all areas that do not affect its differentiation it should try to decrease cost; in the differentiation area the costs should at least be lower than the price premium it receives from the buyers.
  • Areas of differentiation can be: product, distribution, sales, marketing, service, image, etc.

Competitive Advantage type 3: Focus

  • Achieving Focus means that a firm sets out to be best in a segment or group of segments.
  • 2 variants: Cost Focus and Differentiation Focus.

Stuck in the middle

  • This is usually a recipe for below-average profitability compared to the industry.
  • Still, attractive profits are possible if and as long as the industry as a whole is very attractive.
  • Manifestation of lack of choice.
  • Especially dangerous for Focusers that have been successful, and then start neglecting their focus. They must seek other Focus niches. Rather then compromise their focus strategy.

Overview of the Book "Competitive Strategy"

  • In Part I, Porter discusses the structural analysis of industries (with the five forces), the three generic competitive strategies (overall Cost Leadership, Focus, and Differentiation), offering an excellent framework for competitor analysis, competitive moves, strategy toward buyers and suppliers, structural analysis within industries (strategic groups, strategic mapping, mobility barriers), and industry evolution (life cycle, evolutionary processes).
  • In Part II, Porter discusses competitive strategy within various generic industry environments. Such as: fragmented industries (with no real market leader), emerging industries, mature industries, declining industries, and global industries.
  • In Part III, Porter discusses strategic decisions which businesses/firms can take. Such as: vertical integration (forward, backward, partnerships), capacity expansion, and entry into new industries/businesses.

Book: Michael E. Porter - Competitive Strategy -

Book: Michael E. Porter - Competitive Advantage -

 

Competitive Advantage Forum

Recent User Comments
 - Ghana Porter's Generic Strategy "I believe that the idea being propounded by Porter can work to a very large extent. It can also promote the growth of many companies but I believe such research should be conducted on the African terrain to help emerging African businessmen especially those of us in the universities. The prices of the books makes it difficult for those of us in Africa to have access to them. I believe online access too should be provided in the African sub-region."    3
Edwin - UK 4 Stages of Hypercompetition "D'Aveni argues sustainable competitive advantage is not really possible. He shows a mechanism that causes faster and faster erosion of competitive positions. D'Aveni's four stages of hypercompetition:
1) Advantage based on differentiation (quality) > gets eroded and price wars begin;
2) Advantage based on raising barriers to entry > gets eroded by outflanking and niching by more flexible competitors;
3) Advantage based on know-how > eventually gets eroded as technology moves on (Schumpeter);
4) Advantage based on deep pockets (mergers, acquisitions, market power) > eventually fails as pockets get emptied in the attempt to fend off aggressive competition."		    9
Dave Coley - USA Stuck in the Middle? "Why is getting stuck in the middle (=mixing the 3 types of competitive advantage) so problematic? Could an intelligent mix of these 3 be preferable?"    13
mbawmba - Jamaica Competitive Advantage "CA is distinct from Sustainable CA. The latter persists because it is hard to imitate. CA is a handle term for certain 'Key Activities'. These activities are performed better and more efficiently by a company which enables it to outdo it's competition. Porter has a name for these 'activities'. He calls them 'core competencies. Core competencies need not be unique or independent functions like sales or production. Usually they are an aggregate of some company activities. This 'core' of an enterprise enables it to produce and market profitably. Better than it's competitors !!"    -1
John T. - Greece Competitive Advantage "An authentic -that means, in simple words: not easy to be copied- Competitive Advantage in the contemporary -that means: complex and continously changing- environment can be only achieved by the continuous Development of Knowledge in every organizational level. Hence the main duty of managers is to contribute to the creation of the proper conditions that allow this Knowledge to be developed. The willingness of managers to learn new things is the first, and most essential, step. Porter's Competitive Advantage Model is a simple theoretical construction, with little use. From the point of view that if every firm in an industry follows his model, then every kind of competition will disappear."    6
Best User Comments
Editor - NL Quotes Competitive Advantage "Do you know some deep, famous or funny quotes on Competitive Advantage? Quotations? Proverbs? Please share them as a reaction to this posting and mention the author. To get started, here's my favorite: 'Advantage is a better soldier than rashness.' - William Shakespeare 1564-1616, English dramatist"    51

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  § Brian (USA) Hypercompetition "competition is good. Kill the weak, eat the slow, and may the best idea and execution win. it got us from horse and buggy to Prius. from Kitty Hawk to Airbus. The more competition, the better the products, the greater the value creation, the better the worldwide standard of living. Competition has driven white collar jobs to India, China, Brazil, mexico, Eastern Europe and Africa. those economies are now burgeoning. Fight for your share!"

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  § Gary Hawkins (UK) Mixed strategy = unprofitable "If a firm does not dedicate itself to one of the 3 strategies by Porter, it will almost certainly suffer from poor profitability. Why? Because it will loose both the (many) customers who demand the lowest possible prices and the (fewer but very profitable) customers who are prepared to pay a premium price for the best offering in the market. Furthermore, the corporate structure, culture, reputation, marketing efforts, motivation systems, etc of firms with a mixed strategy are likely to be unfocused and ineffective."
  § Magnus (Sweden) Multiple business units "Porter mentioned that is is possible that firms create multiple seperate business units and can then realize multiple strategies."
  § Jane (USA) Three-circle analysis "As it happens I am just reading an interesting short article in the HBR (Nov 2007) from professors Urbany and Davis on competitive advantage. They developed a tool they call the "Three-circle analysis". It is an exercise being conducted by the executive team. Draw three overlapping circles. The first circle represents the consensus of the team about the CUSTOMER NEEDS. The second circle represents the team's view of how the customers perceive the COMPANY'S OFFERINGS. The third circle represents how the customers view the COMPETITOR'S OFFERINGS. Now the team can discuss all the various sections of the drawing. If the overlap between what the firm is offering and what are the customer's needs and what is not being offered by the competition is small, the firm might be stuck in the middle. Urbany and Davis found that this section is often miniscule in the eyes of the customer. Thus lots of firms are stuck in the middle."
  § David (New Zealand) Stuck in the middle is not so bad "From experience I think that practically 'stuck in the middle' is not nearly as bad in reality as it may seem from a scholarship angle. Lots of customers may opt for the 'middle quote' but there again service and attention to customer may need to be a competitive advantage."
  § C J Jacobs (Netherlands) Stuck in the middle and environment "A common theme of current strategic thinking is the relationship between an organisation’s resources and capabilities as well as the way these are positioned to interact with its environment. So essentially, this ‘fit’ between the organisation and its environment plays an important role and is relative to its success. However, both the environment and the organisation are dynamic and in order to sustain a ‘fit’ the organisation needs to adopt an iterative approach. The process of determining a ‘fit’ does not imply an averaging process, whereby organisations employ the same models and frameworks suggested by the management guru’s. ‘Sameness’ in thinking and analysis tend to produce the same conclusions and result in homogenised strategies which have a short horizon. The two issues mentioned may explain why organisations tend to end up ‘stuck in the middle’. Quote by Henderson, 1989, pp 139 – 143) “Your most dangerous competitors are those that are most like you”."

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  § John Chamberlin (England) Competitive Advantage Quote "How about Ries & Trout's, 'The Law of Leadership' - 'It's better to be first than it is to be better'. (Ries, A. & Trout, J., (1994) The 22 Immutable Laws of Marketing, London, Harper Collins, p. 2)""
  § Thomas Gilsfeldt (Denmark) Quotes Competitive Advantage "If you don't have a competitive advantage, don't compete - Jack Welch"

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