Which company has the advantage? Neither one. Because advantage is rooted in differences in the asymmetries among rivals, there is an uncountable number of asymmetries in real rivalry. It is the leader’s job to identify which asymmetries are critical and can turn into important advantages. This discussion is based on Richard Rumelt’s book, “Good Strategy/ Bad Strategy.”
Here is an example. A startup had created a fabric for clothes and was excited about it, even thinking it had the possibility of being an IPO. Their venture capital firm was not so sure. They agreed they had an excellent new product and have proved their technology, But building a textile company or clothing company was a different game. They should look at selling the company.
No one has an advantage in everything. Teams, organizations, and even nations have advantages in certain kinds of rivalry under particular conditions. The secret to using advantage is understanding this characteristic. You must press where you have advantages and sidestep situations in which you do not. You must exploit your rivals’ weaknesses and avoid leading with your own.
Competitive advantage in business
The term competitive advantage became a term of art in business strategy with Michael Porter’s insightful book title. Warren Buffett has said he evaluates a company they are looking for sustainable competitive advantage.
The basic definition of competitive advantage is straightforward. If your business can produce at a lower cost than competitors or deliver more perceived value than competitors, or a mix of the two, you have a competitive advantage. Subtlety arrives when you realize that costs vary with product and application and that buyers differ in their locations, knowledge, tastes, and other characteristics.
Most advantages will extend only so far. For instance, Whole Foods has an advantage over Albertson supermarkets only for particular products. And only among grocery shoppers with good incomes place a high value on organic or natural foods.
Sustaining an advantage is even more difficult. For an advantage to be sustainable, your competitor must not be able to duplicate it. Or, more precisely, they must not be able to reproduce the resources underlying it, such as a patent.
More common isolating mechanisms include reputations, commercial and social relationships, net worth effects, economies of scale, plus knowledge and skill gained through experience.
For example, Apple‘s iPhone business is protected by Apple and iPhone brand names, by the company‘s reputation, by the complementary iTunes service, and by the network effects of its customer group, especially for iPhone applications.
These resources were crafted by Apple and put in place as part of a program for building sustainable competitive advantage. These resources are scarce because competitors find it difficult to create comparable resources at a reasonable cost.
Interesting advantages
How do some serial entrepreneurs create a competitive advantage time after time? The answer, according to Rumelt, was by providing more value than you avoid, and you avoid being a commodity. A serial entrepreneur and friend of Rumelt told him that he only invested in “interesting companies.” And that an interesting company is when you can see ways to increase value.
Some advantages are more interesting than others.
There is a difference between competitive advantage and financial gain. Many people have assumed that they are the same thing, but they are not. For example, if you had a machine that made silver, it would give you value. But, there is no way for the owner to engineer an increase in its overall value.
The machine cannot make pure silver more efficient and can not differentiate the product. One small producer cannot pump up the global demand for silver. You can not increase the value of a silver machine by buying an engineer to design a new device, just like you can not hire an engineer to increase a treasury bond.
Competitive and advantage is interesting when one has insights into ways to increase its value. That means there must be things you can do, on your own, to increase its value. The truth is that the connection between competitive advantage and wealth is dynamic. Wealth increases when competitive advantage increases or when the demand for the resources underlying it increases.
Increasing value requires a strategy on at least one of the following three different fronts.
1. A continuously deepening advantage and strengthening the isolating mechanisms to block replication and imitation by competitors,
2. Broadening the extent of advantages
3. Creating higher demand for advantaged products or services.
Deepening your advantage
Start by defining advantage in terms of surplus, the gap between buyer value and cost. Deepening an advantage means widening this gap by either increasing importance to buyers, reducing costs, or both.
First, management may mistakenly believe an improvement is a natural process or that it can be accomplished by pressure or incentives alone –It can not. For example, a bricklayer can double his capacity by moving the bricks up to chest high to use them directly.
Today’s approach to information flows in business processes is sometimes called reengineering or business process transformation. Whatever it’s called, the underlying principle is that improvements come from re-examining the details of how work is done, not just from cost controls or incentives.
The same issues that arise in improving work processes also occur in enhancing products, except observing buyers is more complicated than examining one’s systems. Companies excel at product development and improvement and carefully study buyers’ attitudes, decisions, and feelings. They develop an extraordinary empathy for customers and anticipate problems before they occur.
The reason firms fail to engage in the process of improvement when isolating mechanisms surrounding important methods are weak. Companies in such situations hope to catch a free ride on the progress of others.
Therefore, to benefit from investments in improvement, improvements must be protected or embedded in a sufficiently unique business that its methods are of little value or use to rivals.
Broadening the extent of the advantage
Extending an existing competitive advantage brings it into new fields and new competition. For example, cell phone banking is a growing phenomenon, especially in foreign countries. eBay holds the necessary skills and payment systems in bedded in its PayPal business. If eBay could build on these to create a competitive advantage in cell phone payment systems, it would be extending a competitive advantage.
Extending a competitive advantage requires looking away from products, buyers, and competitors and looking instead to add unique skills and resources that underlie a competitive edge — in other words, build on your strengths.
The idea that some corporate resources can put to good use in other products or markets is possibly the most fundamental corporate strategy. The truth is undeniable, yet it is also the source of countless errors if it engages in diversifying into products and processes they do not know. The basis for productive extensions often resides within complex pools of knowledge and know-how.
Extensions based on customer beliefs such as brand names, relationships, and reputation may be diluted or damaged by careless extension. Value can sometimes be created by extending these resources, but a failure in the new arena can rebound to damage the core. Disney is an excellent example of this, and they can pull people into the theater just by the company name.
The brand’s value comes from guaranteeing specific characteristics of the product. But those characteristics are not easy to define. What exactly is a Disney film? How far can the brain be stretched without losing value?
Creating higher demand
A competitive advantage becomes more valuable when the number of buyers grows and when the quantity demanded by each buyer increases. Technically it is the excellent resources underlying the advantage that increase in value. The higher demand will increase long-term profit only if a business already possesses scarce resources that create a stable competitive advantage. Engineering higher demand for the services of scarce resources is the most basic of business strategies.
Conclusion
The basic definition of competitive advantage is straightforward. If your business can produce at a lower cost than competitors or deliver more perceived value than competitors, or a mix of the two, you have a competitive advantage. But, It is challenging to have the advantage in everything – team, technology, etc. You want to exploit it where you have it and avoid areas where you don’t have it.
Sustaining a competitive advantage is even more challenging. You need an isolating mechanism like a patent.
There is also a difference between competitive advantage and financial gain. The connection between competitive advantage and wealth is dynamic. Wealth increases when competitive advantage increases or when the demand for the resources underlying it increases.
Increasing value requires a strategy for progress on at least one of three different fronts. One, deepening your advantage by either increasing importance to buyers, reducing costs, or both. Two, broadening the ext
A competitive advantage becomes more valuable when the number of buyers grows and when the quantity demanded by each buyer increases. Two, bringing your advantage into new fields and against new competition. Three, A competitive advantage becomes more valuable when the number of buyers grows and when the quantity demanded by each buyer increases.
What advantages do you have over your competitors? How are you going to maintain that advantage? Use your creativity and problem-solving skills to design new advantages.
