Establishing a Competitive Advantage
Competitive advantage is a benefit for any company to strive to achieve. A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices (tutor2u, 2009). A company that has attained competitive advantage over others creates a unique selling point or USP and allows that company to gain a larger market share by being able to offer something different to competitors. Pfeffer defines 3 areas a company with competitive advantage must possess: - 1) Distinguishes them from their competitors, 2) provides positive economic benefits, and 3) is not readily duplicated. (Pfeffer, 1994). If a company is able to obtain all 3 of these aspects they will establish a competitive advantage over other business, although it is becoming much harder to find sources of competitive advantage in today’s current climate (Williams, 2007)
Porter identified 5 ways in which a business can help distinguish how and why it is valuable for companies to gain a competitive advantage over other companies. The five ways are:
Supplier Power- The greater the amount of supplier options available, will lead to less power over competitions and thus more control they have, the higher the prices will be. •
Threats of Substitutes- If a customer finds another business that they favor or if customers find additional ways of gaining the same outcome that are more useful to them. •
Buyer Power- the smaller amount, but more powerful buyers are able to control the market and decide the prices. •
Degrees of Rivalry- If there are rivals offer similar services then the ability would be restricted, yet if you have a USP then you will have an advantage in the industry. •
Barriers to Entry- If time and cost are not that of an issue and there is no opposition, then new firms will be entering the market therefore weakening your position. (Quick MBA Knowledge to Power Your Business, 2009)
Porter also indentified different strategies of establishing advantages’ over competitors. Porter identified these into three generic strategies: •
Cost leadership relates to when the same service is presented at a cheaper price than what competitors are offering. Therefore offering a cost advantage to customers. This strategy can lead to high returns for a company because it allows a business to lower prices, to equal or beat rival competitors and still gain a profit. Differentiation relates to when a company offers an improved service to customers, whilst matching the price to that of competitors. One of the most important types of differentiation is that of using people as a resource within the companies operation. Porter (1980) states that a differentiation strategy creates customer value through means such as innovative products, superior quality and technology, a differentiated brand image, good service, and so forth, which distinguish the firm from its rivals.
The last generic strategy can be broken down into two categories, cost and differentiation focus. Cost focus deal with a company using a similar more basic product to that of another company that is accepted by customers. Differentiation focus is where a business aims to differentiate within just one or a small number of target market segments (tutor2u, 2009). This allows a company to target a smaller number of clients.
Porter (1998, p. 17) does argue against the coincident of both cost leadership and differentiation being facilitated because they are fundamentally different approach to creating and sustaining competitive advantage. For the strategies to be successful requires different resources, strengths and organization arrangements. However others argue that cost leadership and differentiation are simultaneously achievable. Both are required to achieve to sustain...
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