Competitive Advantage
(Porter)

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The basis of performing above-average within an industry. Explanation of Competitive Advantage of Michael Porter.


  

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Competitive Advantage - Porter

According to the Competitive Advantage model of Porter, a competitive strategy takes offensive or defensive action to create a defendable position in an industry, in order to cope successfully with competitive forces and generate a superior Return on Investment. According to Michael Porter, the basis of above-average performance within an industry is sustainable competitive advantage.

 

2 basic types of Competitive Advantage

  1. Cost Leadership (low cost)
  2. Differentiation

Both can be more broadly approached or narrow, which results in the third viable competitive strategy:

  1. Focus

Competitive Advantage type 1: Cost Leadership

  • Achieving Cost Leadership means that a firm sets out to become the low cost producer in its industry.
  • A cost leader must achieve parity or at least proximity in the bases of differentiation, even though it relies on cost leadership for its competitive advantage.
  • If more than one company try to achieve Cost Leadership, this is usually disastrous.
  • Often achieved by economies of scale.

Competitive Advantage type 2: Differentiation

  • Achieving of Differentiation means that a firm seeks to be unique in its industry along some dimensions that are widely appreciated  by buyers.
  • A differentiator can not ignore its cost position. In all areas that do not affect its differentiation it should try to decrease cost; in the differentiation area the costs should at least be lower than the price premium it receives from the buyers.
  • Areas of differentiation can be: product, distribution, sales, marketing, service, image, etc.

Competitive Advantage type 3: Focus

  • Achieving Focus means that a firm sets out to be best in a segment or group of segments.
  • 2 variants: Cost Focus and Differentiation Focus.

Stuck in the middle

  • This is usually a recipe for below-average profitability compared to the industry.
  • Still, attractive profits are possible if and as long as the industry as a whole is very attractive.
  • Manifestation of lack of choice.
  • Especially dangerous for Focusers that have been successful, and then start neglecting their focus. They must seek other Focus niches. Rather then compromise their focus strategy.

Overview of the Book "Competitive Strategy"

  • In Part I, Porter discusses the structural analysis of industries (with the five forces), the three generic competitive strategies (overall Cost Leadership, Focus, and Differentiation), offering an excellent framework for competitor analysis, competitive moves, strategy toward buyers and suppliers, structural analysis within industries (strategic groups, strategic mapping, mobility barriers), and industry evolution (life cycle, evolutionary processes).
  • In Part II, Porter discusses competitive strategy within various generic industry environments. Such as: fragmented industries (with no real market leader), emerging industries, mature industries, declining industries, and global industries.
  • In Part III, Porter discusses strategic decisions which businesses/firms can take. Such as: vertical integration (forward, backward, partnerships), capacity expansion, and entry into new industries/businesses.

Book: Michael E. Porter - Competitive Strategy -

Book: Michael E. Porter - Competitive Advantage -

 

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Recent User Comments
Girish Ketkar - India Case studies in "Cost Leadership" "Are there any recent case studies to demonstrate how firms can compete on the basis of cost leadership?"    3
Masiye Mangwana - Malawi Porter's Generic strategies "Can Porter's competetive advantage work in utility companies where their product they sell is unique like water or electricity?"    0
 - Australia Overemphasis on Competition "Porter has undermined society with his emphasis on competition. Co-operation should be the driver of business and progressive companies are seeing this and ditching competition and Porter."    7
Geert van der Horst - Netherlands Life Cycle Approach to Competitive Advantage "Rita Gunther McGrath and Ian C. MacMillan in MITSloan Management Review Vol 50 No 3 mention the term Transient Competitive Advantage. I looked up the term "transient" and it means "valid for a limited time". The authors see Competitive Advantage not as an ON/OFF phenomenon (in which you either have a competitive advantage or you don't) but as a wave following a kind of product life cycle, with following phases: Launch, Ramp up, Exploitation and Erosion.
During the wave your competitive advantage varies in strength: it is weak in the beginning (launch and ramp up) then strong (exploitation) and then declining again (erosion)."		    6
Edmond Liname - Lesotho Health/Fitness Club Industry Analysis "I am the Marketing consultant of a Health & fitness club in Maseru, the capital city of Lesotho. Within a radius of about 10 kilomitres, there are two more fitness clubs. I would like to get the guidelines on how to conduct my analysis as I want my club to remain the market leader!"    0
Best User Comments
 - NL Quotes Competitive Advantage "Do you know some deep, famous or funny quotes on Competitive Advantage? Quotations? Proverbs? Please share them as a reaction to this posting and mention the author. To get started, here's my favorite: 'Advantage is a better soldier than rashness.' - William Shakespeare 1564-1616, English dramatist"    58
Dave Coley - USA Stuck in the Middle? "Why is getting stuck in the middle (=mixing the 3 types of competitive advantage) so problematic? Could an intelligent mix of these 3 be preferable?"    14
Edwin - UK 4 Stages of Hypercompetition "D'Aveni argues sustainable competitive advantage is not really possible. He shows a mechanism that causes faster and faster erosion of competitive positions. D'Aveni's four stages of hypercompetition:
1) Advantage based on differentiation (quality) > gets eroded and price wars begin;
2) Advantage based on raising barriers to entry > gets eroded by outflanking and niching by more flexible competitors;
3) Advantage based on know-how > eventually gets eroded as technology moves on (Schumpeter);
4) Advantage based on deep pockets (mergers, acquisitions, market power) > eventually fails as pockets get emptied in the attempt to fend off aggressive competition."		    11
 - Ghana Porter's Generic Strategy "I believe that the idea being propounded by Porter can work to a very large extent. It can also promote the growth of many companies but I believe such research should be conducted on the African terrain to help emerging African businessmen especially those of us in the universities. The prices of the books makes it difficult for those of us in Africa to have access to them. I believe online access too should be provided in the African sub-region."    8
 - NL Not Generic Strategies...: "All the following categeories are NOT generic strategies according to Porter:
- Build / Hold / Harvest / Liquidate / Question Mark / Star / Cash Cows > all of these are RESULTS of a generic strategy.
- Acquisition / Vertical Integration > these are MEANS TO ACHIEVE a generic strategy.
- X% Market Share / Market Leadership > these are just EFFECTS of a generic strategy.
The only valid generic strategies to achieve a competitive advantage are: cost leadership, differentation and focus."		    7
John T. - Greece Knowledge Management more important than CA "An authentic -that means, in simple words: not easy to be copied- Competitive Advantage in the contemporary -that means: complex and continously changing- environment can be only achieved by the continuous Development of Knowledge in every organizational level. Hence the main duty of managers is to contribute to the creation of the proper conditions that allow this Knowledge to be developed. The willingness of managers to learn new things is the first, and most essential, step. Porter's Competitive Advantage Model is a simple theoretical construction, with little use. From the point of view that if every firm in an industry follows his model, then every kind of competition will disappear."    6
mbawmba - Jamaica Competitive Advantage "CA is distinct from Sustainable CA. The latter persists because it is hard to imitate. CA is a handle term for certain 'Key Activities'. These activities are performed better and more efficiently by a company which enables it to outdo it's competition. Porter has a name for these 'activities'. He calls them 'core competencies. Core competencies need not be unique or independent functions like sales or production. Usually they are an aggregate of some company activities. This 'core' of an enterprise enables it to produce and market profitably. Better than it's competitors !!"    5
 - netherlands competitive advantage in tough times "Does need to change, in tough times, imply that one has to do things different or different things? In times of tough business circumstances, the core of change mgt is best translated in a return to basics, to your USP’s: Make all co-workers aware of what you are best in; re-invent core competences; be critical on all activities that add no value for your customers: cut these costs; be sure that you provide a product, service that is unmistakable appreciated by your customers: provide clear above average price-performance; communicate without reserve your added values to all your business relations and your staff. This approach of change mgt in tough times, is core to CUSOE: improve customer satisfaction & operate excellent. It implies that smart and effective work are mainstream, that customer value = return on investment is leading, that operational excellence = efficient work processes and minimized defects result in both cost savings and a positive effect on satisfaction for employees. "    -1
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Copyright 2009 12manage - The Executive Fast Track. V10.4 - Last updated: 11/7/2009. All names tm by their owners.



  ● Humberto Ochoa (USA) Competition and Collaboration "It is a complex topic, competition can end the life of the weakest, competition gives birth to new players, it is the origin in many cases of the most innovative ideas and the reason for many jobs to temporarily disappear. It is still to be discovered who is right or wrong. Collaboration can build wealth too; but finding a healthy reason for it has not seeing many successes. I hope this can trigger additional thought."
  ●  (Germany) Competition and Cooperation "Porter hasn´t brought up the idea of competition - he describes a phenomena which is there obviously. And cooperation wouldn´t substitute competition but might lead to competitive advantage. In today´s turbulent times many companies are at the same time cooperating with and competing each other."
  ●  (Germany) Competition vs. collaboration "Collaboration may be a fine and useful avenue to pursue but when it comes down to the customer or consumer truly perceivable competitive advantage will generally make all the difference. Hence I would not support the thesis that competitive advantage has become the wrecking ball of our economies. Competitive advantage begets share which is generally advantageous in achieving or maintaining scale."
  ● S K "Bal" Palekar (India) Collaboration is a part of competition ! "Conflict is more fundamental. That's why no story - whether of a fairy or a hero or of a nation - is never complete unless there is some conflict leading to some destruction and then reconstruction. Even collaboration and alliances happen based on finding a common cause to fight against someone or something which is a common enemy."
  ●  (UK) More Competition Models "There are more models of competition than first appear or would seem apparent - the Harvard School Model or Structure-Conduct-Performance Model (S-C-P) is on balance the defining model when settling disputes about anti-competitive behaviour within a European Market context; This said the Post Chicago School Model would appear to be the going forward option for many advanced economies, analysis of other models like the Rhine Model hasn't, as far as i'm aware, yet taken place. I think Porter's contribution is to be welcomed but not at the expense of say the ValueNet Parts Co-opetition Model. Making sense of what is being discounted is as much an ideological problem as it is about economic orthodoxy. "
  ●  (UK) CA - begining to breakdown? "This kind of advantage when placed in the present global conditions of a deterioration in the benefits of larger companies - really does raise the question of whether advantages in the future are going to be won through localisation and demographic resilience and accountability. Furthermore - can such an advantage for businesses only be won at the cost to other businesses in the future? Must there be an inevitable winner/loser scenario in all growth potential outcomes?"

  ●  (Germany) Competition and Cooperation "Interesting these 4 phases, McGrath and MacMIllan mention as Transient Competitive Advantage."
  ● Goodnews Cadogan (South Africa) Life-cycle Approach to Competitive Advantage "I support the transient approach to competitive advantage. The foundations thereof lie both in the internal environment: the organization dynamics and product performance, as well as in the external environment: the relevance of the product to the customers' needs, as well as emergence of other competing products, and services. It can not be static in nature, unless you freeze these variables in time. Continuous observation of these dynamics, and responding to the changes, through organization renewal & product improvements are making the competitive advantage evolve with time and with changing conditions."


  ● John Chamberlin (England) Competitive Advantage Quote "How about Ries & Trout's, 'The Law of Leadership' - 'It's better to be first than it is to be better'. (Ries, A. & Trout, J., (1994) The 22 Immutable Laws of Marketing, London, Harper Collins, p. 2)""
  ● Thomas Gilsfeldt (Denmark) Quotes Competitive Advantage "If you don't have a competitive advantage, don't compete - Jack Welch"
  ● Gilbert (USA) Quotes by Porter on CA "Both questions are dynamic: industry attractiveness and competitive position change. - Michael E. Porter in Competitive Advantage, page 2.
Both industry attractiveness and competitive position can be shaped by a firm. - Michael E. Porter in Competitive Advantage, page 2."

  ● Gary Hawkins (UK) Mixed strategy = unprofitable "If a firm does not dedicate itself to one of the 3 strategies by Porter, it will almost certainly suffer from poor profitability. Why? Because it will loose both the (many) customers who demand the lowest possible prices and the (fewer but very profitable) customers who are prepared to pay a premium price for the best offering in the market. Furthermore, the corporate structure, culture, reputation, marketing efforts, motivation systems, etc of firms with a mixed strategy are likely to be unfocused and ineffective."
  ● Magnus (Sweden) Multiple business units "Porter mentioned that is is possible that firms create multiple seperate business units and can then realize multiple strategies."
  ● Jane (USA) Three-circle analysis "As it happens I am just reading an interesting short article in the HBR (Nov 2007) from professors Urbany and Davis on competitive advantage. They developed a tool they call the "Three-circle analysis". It is an exercise being conducted by the executive team. Draw three overlapping circles. The first circle represents the consensus of the team about the CUSTOMER NEEDS. The second circle represents the team's view of how the customers perceive the COMPANY'S OFFERINGS. The third circle represents how the customers view the COMPETITOR'S OFFERINGS. Now the team can discuss all the various sections of the drawing. If the overlap between what the firm is offering and what are the customer's needs and what is not being offered by the competition is small, the firm might be stuck in the middle. Urbany and Davis found that this section is often miniscule in the eyes of the customer. Thus lots of firms are stuck in the middle."
  ● David (New Zealand) Stuck in the middle is not so bad "From experience I think that practically 'stuck in the middle' is not nearly as bad in reality as it may seem from a scholarship angle. Lots of customers may opt for the 'middle quote' but there again service and attention to customer may need to be a competitive advantage."
  ● C J Jacobs (Netherlands) Stuck in the middle and environment "A common theme of current strategic thinking is the relationship between an organisation’s resources and capabilities as well as the way these are positioned to interact with its environment. So essentially, this ‘fit’ between the organisation and its environment plays an important role and is relative to its success. However, both the environment and the organisation are dynamic and in order to sustain a ‘fit’ the organisation needs to adopt an iterative approach. The process of determining a ‘fit’ does not imply an averaging process, whereby organisations employ the same models and frameworks suggested by the management guru’s. ‘Sameness’ in thinking and analysis tend to produce the same conclusions and result in homogenised strategies which have a short horizon. The two issues mentioned may explain why organisations tend to end up ‘stuck in the middle’. Quote by Henderson, 1989, pp 139 – 143) “Your most dangerous competitors are those that are most like you”."
  ●  (NL) Porter on Stuck in the Middle "In Competitive Advantage (p 17) Porter says: "A firm that is stuck in the middle will earn attractive profits only if the structure of the industry is very favorable, or if the firm is fortunate enough to have competitors that are also stuck in the middle"."

  ● Brian (USA) Hypercompetition "competition is good. Kill the weak, eat the slow, and may the best idea and execution win. it got us from horse and buggy to Prius. from Kitty Hawk to Airbus. The more competition, the better the products, the greater the value creation, the better the worldwide standard of living. Competition has driven white collar jobs to India, China, Brazil, mexico, Eastern Europe and Africa. those economies are now burgeoning. Fight for your share!"
  ● Buli (South Africa) Hypercompetition "Strategically choosing the right competitive advantage for your firm and mixing it with your integrated marketing communication will do wonders for you. Both should be based on your target market and your positioning within your sector. Competition is good as it allows you to better yourself, update yourself and keep you focused on set objectives."

  ●  (Gambia) Business & Management Educational Resources "I believe you Mochia John, Africa should now have an outlet for educational marketing resources like this at a reasonable price for the indigenes. Porters looks on business in a global context, which is applicable all over the world. Present day gurus need to broaden worldwide scope of availability and accessibility and drop the intellectual bomb world wide."


  ● R. Ntim-Adu (Ghana) Knowledge Mgt and Competitive Advantage "For as much as Porter'sCA proposition is important, KM is more important in the sense that whatever an organisation does, it depends on the quality of knowledge and its evolution that brings the necessary differentiation between organisations. Therefore human capital dev't shd be of essence in all that we do."
  ●  (France) Knowledge Mgmt, Competitive Advantage and Human involvment "When watchers take off from their analysis models and look at critical success factors in action, they have to admit that people motivation, willingness to share and learn, confidence in trying new things, ability to teamwork have a lot to do with CA emergence and duration. The "human factor" is, from my point of view, a major field to work in."