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Competitive Advantage

Competitive advantage is that which an organization does better than anyone else—something that is difficult or impossible to copy. People often think that a competitive advantage lies in the product an organization produces, but that is not necessarily the case. A competitive advantage could be from any or all of these factors:

· the product itself

· the organization's brand

· a particular protected technology, if it results in the consumer seeing the product or service as better as a result of the technology

· a method used to produce the product or service that results in a cost advantage over other producers

· exclusive access to a particular market or set of clients

The condition of being difficult or impossible to copy is unequivocally critical—if any competitors can copy your advantage, you will not have an advantage for long.

Not every firm has a true competitive advantage; a true competitive advantage becomes the organization’s primary basis for strategic direction. In other words, if the firm has a true competitive advantage in, say, its brand, it may be able to translate this brand into additional products or ventures. Of course, the firm must carefully protect its competitive advantage so as not to dilute it or expose it to copy.

A competitive advantage may last only a brief time, or it may last a long while. The firm often does not necessarily control the longevity of your competitive advantage. Consider the following issues for each of the sources of competitive advantage listed above:

· the product itself—If you have a competitive advantage from the product itself, you will keep that advantage only as long as the consumer finds your product as superior to other alternatives. If the consumer decides that a different product better meets their needs (and you cannot control this), you will lose your competitive advantage.

· the organization’s brand—There are many brands that have tried to leverage their competitive advantage and actually ended up diluting it and destroying any cachet the brand had with consumers. There are countless examples of companies that had a distinct brand that then decided to grow very fast and ended with a brand that consumers no longer cared as much about: Consider Abercrombie & Fitch, Coach, Gap, Michael Kors, and Apple.

· a particular protected technology—It is not the technology itself that gives you a competitive advantage, but the way the consumer feels about the product or service as a result of the technology being a part of it. If a competitor comes out with a different technology that results in their product better meeting the needs of the client, your technology may no longer offer a competitive advantage.

· a method to produce the product—There is little that keeps other companies from copying your methods, but there are instances when competing companies could not culturally copy a method. In such cases, the competitive advantage was more permanent than would otherwise be thought possible. Consider Walmart: If Walmart has a competitive advantage, it comes from the company’s supply chain and logistics such that competitors simply cannot offer the homogeneous products at a better price. Note that this is very consumer-centric: Walmart’s customers consider price as the most important attribute in their shopping. Target and Kmart have struggled for decades to match Walmart’s supply chain capacity, but they have been unable to duplicate Walmart’s success. There is nothing inherently secret or different about Walmart’s logistics; competitors simply have not been able to culturally and organizationally position themselves to match Walmart’s logistic success.

· exclusive access—As long as exclusive access is maintained, usually in the form of a contract, it will be difficult for others to enter. However, without careful relationship management (non-exploitation) during the term of the contract, the contract may not be renewed and that competitive advantage will be lost that quickly.

As you can see, maintaining true competitive advantage requires hard work. The organization must nurture and care for its competitive advantage very carefully in order to not lose it, yet it must also use that same competitive advantage as the basis for its strategic growth.

Strategy that does not center on a competitive advantage is usually short-lived. By definition, that means strategy that could be copied by competitors or is not fully aligned with the customer’s needs.

Building Blocks of Competitive Advantage: VRIN

To describe the characteristics of competitive advantage, Michael Porter uses the acronym VRIN: valuable, rare, inimitable, and nonsubstitutable. Porter suggests, in essence, that the firm's competitive advantage is truly a competitive advantage only if it is unique to the firm and can't be copied by competitors. Let’s look at each characteristic individually:

· valuable—What the firm thinks has value is unimportant; what really matters is only what the market and/or consumers think. A competitive advantage can be based only on something that the market and/or consumers think has value. For example, many suggest that Walmart's competitive advantage is that it has such strong control over its supply chain that it can offer very desirable prices for products. In other words, operating (overhead) costs are low enough that the consumer can receive a very attractive price for products. Here's the question: Do low prices have value to the consumer? Clearly, the answer is yes. The competitive advantage Walmart owns enables it to offer lower prices is therefore "valuable." Evidence suggests that in the United States, other large-scale retailers have been unable to develop the logistical expertise that Walmart owns. This is favorable, obviously, for Walmart, given consumers’ enjoyment of lower prices. A counterexample: If a wine company thinks its competitive advantage rests in the beauty of its label, it may be in for a rude awakening. While a beautiful label is important in the buying process, the contents of the bottle and quality are far more important; consumers may choose a bottle with an ugly label if they know the winery makes excellent products. Thus, thinking your label gives you a competitive advantage may not be a good building block for competitive advantage.

· rare—If the competitive advantage offers value to the client, that value also must be rare, meaning that other companies aren't doing the same thing. Many business owners, asked about their company’s competitive advantage, state that it is their "customer service." Great customer service is important to clients, but any competitor can offer great customer service relatively easily; it is not rare. An advantage is not an advantage if others do the same thing.

· inimitable—So you have a competitive advantage that is valuable and rare. But can competitors notice that competitive advantage and easily copy it? If so, it is not really a competitive advantage; others can quickly remove the advantage by copying it, and you are back to square one. When a company has an easily recognized brand, such as Coca-Cola, and that brand has positive consumer sentiment attached to it, this is a great competitive advantage, because it is valuable, rare, and inimitable. Other soft drinks companies have a very difficult time developing the same degree of advantage.

· nonsubstitutable—If the company or product doesn't have many substitutes, that is ideal. The more distinctive the product/service is in consumers’ minds, the stronger the degree of competitive advantage will be for the firm. In the case of Coca-Cola, the product isn't quite unique, which lessens Coca-Cola's competitive advantage.

If a firm truly has a competitive advantage that meets these criteria, then it is a sustainable competitive advantage on which to build forward-looking strategy. If, on the other hand, the firm doesn't have a true competitive advantage, it can consider strategies that will help it potentially build a competitive advantage based on these four building blocks. It can grow and build something it does well (but isn't yet a competitive advantage) in a way that will enhance its value, its rarity, its inimitability, and its heterogeneity.

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