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Competitive Advantage

  • Feb 1, 2021

Competitive Advantage

Competitive advantage is the leverage a Business or a Nation has over its competitors.

A competitive advantage may include access to natural resources (such as high-grade ores) or a low-cost power source; highly skilled labour or cheaper labour costs; geographic location; high entry barriers; access to new technology; and brand image recognition.

A competitive advantage is the attribute that allows an organization to outperform its competitors by offering consumers greater value, either by means of lower prices (cost leadership) or by providing greater benefits and service that justifies higher prices.

These factors allow the productive entity to generate more sales or superior margins compared to its market rivals.

Michael Porter is an American academic known for his theories on economics, business strategy, and social causes. He defined the two ways an organization can achieve competitive advantage over its rivals:

comparative advantage & differential advantage.

  • Competitive advantage is what makes an entity's products or services more desirable to customers than that of its rivals.
  • Competitive advantages can be broken down into comparative advantages and differential advantages.
  • Comparative advantage is a company's ability to produce something more efficiently than a rival, which leads to greater profit margins.
  • Differential advantage is when a company's products are seen as both unique and higher quality, relative to those of a competitor.

In Porter's view, strategic management should be concerned with building and sustaining competitive advantage.

The more sustainable the competitive advantage, the more difficult it is for competitors to neutralize the advantage.

Porter Comparative Advantage Differential Advantage

While you may launch into the market with a totally novel idea, it may be only a short time before rivals catch up. You may need to revisit what your competitive advantage can be and employ strategies to ensure the business can grow.

business growth strategies

There are four basic growth strategies that can be employed to expand a business:

market penetration, product development, market expansion & diversification.

Ansoff Matrix

The Ansoff Matrix, also called the Product/Market Expansion Grid or “G”, is a tool used by firms to analyse and plan their strategies for future growth and also analyses the risk associated with each strategy

The matrix is named after Russian American, Igor Ansoff, an applied mathematician and business manager, who created the concept.

Each alternative poses differing levels of risk for an organization:

1. Market Penetration: Focuses on increasing sales of existing products to an existing market.

2. Product Development: Focuses on introducing new products to an existing market.

3. Market Development: Focuses on entering a new market using existing products.

4. Diversification: Focuses on entering a new market with the introduction of new products.

Market Penetration can be executed by:

1. Decreasing prices to attract new customers

2. Increasing promotion and distribution efforts

3. Acquiring a competitor in the same marketplace

This is the least risky growth option.

Product Development can be implemented by:

1. Investing in Research and Development (R&D) to develop new products to cater to the existing market

2. Acquiring a competitor’s product and merging resources to create a new product that better meets the need of the existing market

3. Forming strategic partnerships with other firms to gain access to each partner’s distribution channels or brand
This consists of one quadrant move so is riskier than Market Penetration and a similar risk to Market Development.

Market Development may involve:

1. Catering to a different customer segment

2. Entering into a new domestic market (expanding regionally)

3. Entering into a foreign market (expanding internationally)

Diversification can take two different forms:

1. Related diversification: There are potential synergies to be realized between the existing business and the new product/market.

e.g. a leather shoe producer starts a line of leather wallets, belts and accessories which are related to the existing product.

2. Unrelated diversification: There are no potential synergies to be realized between the existing business and the new product/market by starting up or acquiring businesses outside the company’s current products and markets.

e.g. a leather shoe producer starts manufacturing men's aftershave which is an unrelated diversification strategy

(adapted from https://courses.corporatefinanceinstitute.com/courses/corporate-business-strategy-course)

Of the four strategies, market penetration is the least risky, while diversification is the riskiest because it consists of two quadrant moves.

Success in business requires building and sustaining a competitive advantage through strategic management decisions combined with the implementation of appropriate business growth strategies.

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