Competitive Advantage Defined

how YOU doing?Competitive advantage is the ‘edge’ a firm realizes against its rivals. There is a combination of activities that allow an organization to to manifest itself in the marketplace in the first place; it is how an organization executes these activities that are the determining factor in achieving advantage over rivals. Traditionally, these activities have been mapped across a value chain to show their inter-relationships and their contributions to the overall advantage (or disadvantage) to the firm. This value chain approach was developed and popularized by Michael E. Porter of the Harvard Business School in his groundbreaking work titled “Competitive Strategy“, published in 1980.

The activities that support the creation, production, sales, and delivery of a product or service are the fundamental constructs of competitive advantage. The term operational effectiveness is Porter’s way of describing how an organization performs these activities better (read as: faster, cheaper, higher quality, etc.) than market rivals. As we have discussed in presentations across the US, it was through operational effectiveness that Japanese companies, most notably the auto makers, dominated the US in the 1970s and 1980s. They used practices many of us are already familiar with, such as  Total Quality Management (TQM) and Six Sigma. Make no mistake, companies can gain tremendous advantages from operational effectiveness, but from a competitive standpoint, the best practices developed in this vein can be, and often are, easily emulated by rivals.

As the market begins to shift, adopting the same or similar best practices, the competitive advantage is eroded. Porter refers to this phenomena as the productivity frontier. The productivity frontier is a function of the application of the best technology, skills, and management techniques available to the organization and is the high water mark of value attained through this method.

As more and more companies adopt these operational effectiveness and efficiency measures, they become less and less differentiated. The marketplace then is essentially rebalanced, favoring no single player and reducing the past gains to simply a barrier to entry in the market.

As Porter sees it, the only way to achieve sustainable competitive advantage, is to do different things or to do the same things, but in a different fashion than your competitors.

What are you choosing to do differently?

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Competitive Advantage Defined

One Response

  1. Great article I used it with my honors U.S. History classes today.

    Chase November 3, 2010 at 2:08 pm #

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