Sustainable competitive advantage describes company assets, abilities, or attributes that are difficult to duplicate or exceed. The qualities of these attributes mean the company that possesses them can enjoy a superior and long-term position in its market or industry. In business theory, sustainable competitive advantage is associated with cost leadership, differentiation, or cost focus.
The business environment of today is extremely competitive, with technology and innovation allowing companies to be established with relative ease and attract consumers from all over the world.
One such example is the explosion in online retail businesses.
While these are undoubtedly popular and the industry evergreen, the challenge for a new organization is to avoid becoming a copycat business with little to differentiate itself.
Harvard Business School Professor Michael Porter wrote the definitive sustainable competitive advantage textbook in 1985.
Porter argued that for competitive advantage to be sustained, businesses must establish clear strategies, operations, and goals.
The values of the company and the corporate culture created must also be in alignment with said goals.
While he was writing the textbook, Porter researched hundreds of companies to identify what gave them a long-term competitive advantage.
In the following section, we’ll discuss the results of his research.
Three means of sustainable competitive advantage
According to Michael Porter, a competitive advantage in a given industry could be pursued in two key ways: low cost (cost leadership) or differentiation. A third generic strategy is a focus. According to Porter, a failure to do so would end up stuck in the middle scenario, where the company will not retain a long-term competitive advantage.
Cost leadership
According to Porter, there are three core strategies for competitive positioning: cost leadership, differentiation, and focus. Cost leadership is straightforward, as the player rolling this out will become the lost-cost producer in the industry.
Cost leadership means organizations consistently provide value at a lower price.
This means improving operational efficiency and, more often than not, paying workers less.
Some companies will offset low wages with less tangible benefits such as stock options, loyalty programs, or promotional offers. Others simply take advantage of a surplus of unskilled labor and set their own wages.
Walmart and Costco are two examples of the sustainable competitive advantages derived from cost leadership.
These two businesses in particular use economies of scale to drive prices down to a point where other companies cannot compete.
Differentiation
Product differentiation is a marketingstrategy used by a business to differentiate its products or services from the competition, thus enabling your business to gain a long-term advantage (an economic moat), thus building a viable business model.
In this case, the company differentiates itself by delivering better benefits than its competitors.
Differentiation can be facilitated by product quality or innovation, exemplary customer service, or rapid delivery time, among other things.
When department store Nordstrom became the first to allow item returns without question, it differentiated itself in the retail market. Jeweler Tiffany & Co. charges more for its products because its customers view its jewellery as higher quality than similar offerings.
Cost focus
A business using cost focus as a sustainable competitive advantage understands and services its target market better than anyone else.
This can be achieved via cost leadership or differentiation. But more to the point, the business focuses on serving a very specific target audience and serving them well.
Community banks and credit unions use this strategy by targeting small businesses or affluent individuals. They can give a level of personal attention that would be unsustainable for a large banking institution with millions of customers on its books. Importantly, this personal touch is what the target audience craves.
Other factors that increase sustainable competitive advantage
While Porter’s list of three traits is a good starting point, several other factors increase sustainable competitive advantage.
They include:
Branding
Building a brand requires a large investment of time and money that is simply not replicable in most cases.
Coca-Cola is one example of a company enjoying sustained dominance in the very competitive beverage industry.
Strategic assets
Companies with excellent research and development divisions tend to enjoy a sustainable competitive advantage.
As a result of their efforts, they may hold patents, trademarks, and secure contracts that cannot be replicated.
Geographic location
Otherwise known as anational competitive advantage. Chinese firms are competitive globally because the standard of living is low in China, meaning companies can pay their workers less.
The same can be said for Indian firms. In the United States, innovation is a national characteristic helping tech businesses dominate.
Case Studies
Cost Leadership in Airlines:
Strategy: Cost Leadership
Description: An airline that consistently offers lower fares than competitors through operational efficiency, lean cost management, and volume discounts on fuel and aircraft.
Example: Southwest Airlines is known for its cost leadership strategy, offering competitive fares by operating point-to-point routes and using a single aircraft type for simplified maintenance.
Product Differentiation in Smartphones:
Strategy: Differentiation
Description: A smartphone manufacturer sets itself apart through innovative features, superior build quality, and a unique user experience.
Example: Apple’s iPhone is an example of differentiation with its premium build, iOS ecosystem, and focus on user experience.
Cost Focus in Niche Retail:
Strategy: Cost Focus
Description: A specialty retail store that caters to a specific audience, offering personalized service and unique products.
Example: A high-end boutique offering handmade artisanal goods may focus on a niche market and build strong customer loyalty.
Cost Leadership in Cloud Computing:
Strategy: Cost Leadership
Description: A cloud services provider that offers scalable and reliable cloud infrastructure at a lower cost than competitors.
Example: Amazon Web Services (AWS) is known for its cost-effective cloud solutions, leveraging economies of scale to provide competitive pricing.
Differentiation in Streaming Services:
Strategy: Differentiation
Description: A streaming platform distinguishes itself by offering exclusive content, superior streaming quality, and personalized recommendations.
Example: Netflix differentiates itself through original content production, creating unique shows and movies not available elsewhere.
Cost Focus in E-commerce:
Strategy: Cost Focus
Description: An e-commerce startup that serves a niche market by offering competitively priced products with exceptional customer service.
Example: An online store specializing in eco-friendly products may target environmentally conscious consumers with competitive pricing and product quality.
Cost Leadership in Fast Food:
Strategy: Cost Leadership
Description: A fast-food chain maintains low prices and quick service through standardized processes and efficient supply chain management.
Example: McDonald’s is known for its cost leadership strategy, offering affordable and consistent fast food globally.
Product Differentiation in Luxury Automobiles:
Strategy: Differentiation
Description: Luxury car manufacturers set themselves apart by offering high-end features, advanced technology, and exceptional craftsmanship.
Example: Mercedes-Benz differentiates itself in the automobile industry with luxurious interiors, cutting-edge technology, and a reputation for quality.
Cost Focus in Local Farming:
Strategy: Cost Focus
Description: A local farm focuses on producing organic, locally sourced produce for a niche market that values freshness and sustainability.
Example: A family-owned organic farm may prioritize cost-effective farming practices to provide fresh produce to local markets.
Cost Leadership in Consumer Electronics:
Strategy: Cost Leadership
Description: An electronics manufacturer offers affordable devices with competitive features and global distribution.
Example: Xiaomi, a Chinese tech company, adopts a cost leadership strategy, providing high-quality smartphones and smart home devices at competitive prices.
Product Differentiation in Streaming Hardware:
Strategy: Differentiation
Description: A company specializing in streaming devices differentiates itself by offering innovative features, compatibility, and user-friendly interfaces.
Example: Roku stands out in the streaming hardware market by providing a wide range of streaming options and a simple, intuitive interface.
Cost Focus in Solar Energy:
Strategy: Cost Focus
Description: A solar panel manufacturer focuses on reducing production costs to make solar energy solutions more accessible to consumers.
Example: SolarCity (now part of Tesla) aimed to lower the cost of solar panels and installation to promote widespread adoption of solar energy.
Key takeaways
Sustainable competitive advantage describes company assets, abilities, or attributes that are difficult to duplicate or exceed.
Sustainable competitive advantage was mentioned in a definitive 1985 paper by Harvard Business School Professor Michael Porter. After researching hundreds of companies, he identified three categories: cost leadership, differentiation, and cost focus.
Sustainable competitive advantage can also occur because of high brand equity, strategic assets, and country-specific characteristics.
Key Highlights
Definition of Sustainable Competitive Advantage: It refers to the qualities or assets of a company that are hard to replicate or surpass, allowing the company to maintain a superior and long-lasting position in its market or industry. This advantage is often linked to strategies of cost leadership, differentiation, or cost focus.
Challenges in Today’s Business Environment: The modern business landscape is highly competitive due to technological advancements and global reach. New businesses, such as online retailers, face the challenge of standing out in a crowded market.
Michael Porter’s Contribution: Harvard Business School Professor Michael Porter’s 1985 work emphasized the importance of clear strategies, operations, and goals for sustaining competitive advantage. Company values and culture must align with these objectives.
Three Means of Sustainable Competitive Advantage:
Cost Leadership: Achieving the status of the lowest-cost producer in the industry by enhancing operational efficiency and reducing costs. Walmart and Costco are examples of companies that excel in this strategy.
Differentiation: Distinguishing a business by offering better benefits than competitors, which can be achieved through product quality, innovation, exceptional customer service, or unique features. Nordstrom and Tiffany & Co. are exemplars of differentiation.
Cost Focus: Concentrating on serving a specific target market exceptionally well, whether through cost leadership or differentiation. Community banks and credit unions cater to niche audiences effectively.
Branding: Building a strong brand requires significant investments of time and money that are hard to replicate, giving companies an enduring advantage.
Strategic Assets: Companies with strong research and development capabilities often hold patents, trademarks, and contracts that are difficult to replicate.
Geographic Location: National characteristics like lower labor costs (China, India) or a culture of innovation (United States) can provide competitive advantages to companies from those regions.
Key Takeaways:
Sustainable Competitive Advantage: Refers to unique attributes that are tough to duplicate, leading to market dominance.
Michael Porter: Outlined three main strategies for achieving competitive advantage: cost leadership, differentiation, and cost focus.
Additional Factors: Brand equity, strategic assets, and country-specific traits can also contribute to a sustained competitive advantage.
Means of Sustainable Competitive Advantage
Description
When to Use
Examples
Advantages
Drawbacks
Cost Leadership
Achieving a competitive advantage by becoming the lowest-cost producer in the industry, providing value at a lower price.
When efficiency and cost control are key priorities.
Walmart and Costco use economies of scale.
Cost savings, competitive pricing, market share.
May require sacrifices in quality and innovation.
Differentiation
Gaining a long-term advantage by offering unique products, services, or features that stand out from competitors.
When there’s room to create distinct value in the market.
The ADKAR model is a management tool designed to assist employees and businesses in transitioning through organizational change. To maximize the chances of employees embracing change, the ADKAR model was developed by author and engineer Jeff Hiatt in 2003. The model seeks to guide people through the change process and importantly, ensure that people do not revert to habitual ways of operating after some time has passed.
You can use the Ansoff Matrix as a strategic framework to understand what growthstrategy is more suited based on the market context. Developed by mathematician and business manager Igor Ansoff, it assumes a growthstrategy can be derived from whether the market is new or existing, and whether the product is new or existing.
The business model canvas is a framework proposed by Alexander Osterwalder and Yves Pigneur in Busines Model Generation enabling the design of business models through nine building blocks comprising: key partners, key activities, value propositions, customer relationships, customer segments, critical resources, channels, cost structure, and revenue streams.
The lean startup canvas is an adaptation by Ash Maurya of the business model canvas by Alexander Osterwalder, which adds a layer that focuses on problems, solutions, key metrics, unfair advantage based, and a unique value proposition. Thus, starting from mastering the problem rather than the solution.
The Blitzscaling business model canvas is a model based on the concept of Blitzscaling, which is a particular process of massive growth under uncertainty, and that prioritizes speed over efficiency and focuses on market domination to create a first-scaler advantage in a scenario of uncertainty.
A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is valueinnovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.
Business analysis is a research discipline that helps driving change within an organization by identifying the key elements and processes that drive value. Business analysis can also be used in Identifying new business opportunities or how to take advantage of existing business opportunities to grow your business in the marketplace.
In the 1970s, Bruce D. Henderson, founder of the Boston Consulting Group, came up with The Product Portfolio (aka BCG Matrix, or Growth-share Matrix), which would look at a successful business product portfolio based on potential growth and market shares. It divided products into four main categories: cash cows, pets (dogs), question marks, and stars.
First proposed by accounting academic Robert Kaplan, the balanced scorecard is a management system that allows an organization to focus on big-picture strategic goals. The four perspectives of the balanced scorecard include financial, customer, business process, and organizational capacity. From there, according to the balanced scorecard, it’s possible to have a holistic view of the business.
A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is valueinnovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.
A gap analysis helps an organization assess its alignment with strategic objectives to determine whether the current execution is in line with the company’s mission and long-term vision. Gap analyses then help reach a target performance by assisting organizations to use their resources better. A good gap analysis is a powerful tool to improve execution.
The GE McKinsey Matrix was developed in the 1970s after General Electric asked its consultant McKinsey to develop a portfolio management model. This matrix is a strategy tool that provides guidance on how a corporation should prioritize its investments among its business units, leading to three possible scenarios: invest, protect, harvest, and divest.
The McKinsey 7-S Model was developed in the late 1970s by Robert Waterman and Thomas Peters, who were consultants at McKinsey & Company. Waterman and Peters created seven key internal elements that inform a business of how well positioned it is to achieve its goals, based on three hard elements and four soft elements.
McKinsey’s Seven Degrees of Freedom for Growth is a strategy tool. Developed by partners at McKinsey and Company, the tool helps businesses understand which opportunities will contribute to expansion, and therefore it helps to prioritize those initiatives.
The McKinsey Horizon Model helps a business focus on innovation and growth. The model is a strategy framework divided into three broad categories, otherwise known as horizons. Thus, the framework is sometimes referred to as McKinsey’s Three Horizons of Growth.
Porter’s Five Forces is a model that helps organizations to gain a better understanding of their industries and competition. Published for the first time by Professor Michael Porter in his book “Competitive Strategy” in the 1980s. The model breaks down industries and markets by analyzing them through five forces.
According to Michael Porter, a competitive advantage, in a given industry could be pursued in two key ways: low cost (cost leadership), or differentiation. A third generic strategy is focus. According to Porter a failure to do so would end up stuck in the middle scenario, where the company will not retain a long-term competitive advantage.
In his 1985 book Competitive Advantage, Porter explains that a value chain is a collection of processes that a company performs to create value for its consumers. As a result, he asserts that value chain analysis is directly linked to competitive advantage. Porter’s Value Chain Model is a strategic management tool developed by Harvard Business School professor Michael Porter. The tool analyses a company’s value chain – defined as the combination of processes that the company uses to make money.
Porter’s Diamond Model is a diamond-shaped framework that explains why specific industries in a nation become internationally competitive while those in other nations do not. The model was first published in Michael Porter’s 1990 book The Competitive Advantage of Nations. This framework looks at the firm strategy, structure/rivalry, factor conditions, demand conditions, related and supporting industries.
A SWOT Analysis is a framework used for evaluating the business‘s Strengths, Weaknesses, Opportunities, and Threats. It can aid in identifying the problematic areas of your business so that you can maximize your opportunities. It will also alert you to the challenges your organization might face in the future.
Businesses use scenario planning to make assumptions on future events and how their respective business environments may change in response to those future events. Therefore, scenario planning identifies specific uncertainties – or different realities and how they might affect future business operations. Scenario planning attempts at better strategic decision making by avoiding two pitfalls: underprediction, and overprediction.
The STEEPLE analysis is a variation of the STEEP analysis. Where the step analysis comprises socio-cultural, technological, economic, environmental/ecological, and political factors as the base of the analysis. The STEEPLE analysis adds other two factors such as Legal and Ethical.
A SWOT Analysis is a framework used for evaluating the business’s Strengths, Weaknesses, Opportunities, and Threats. It can aid in identifying the problematic areas of your business so that you can maximize your opportunities. It will also alert you to the challenges your organization might face in the future.
A Blockchain Business Model according to the FourWeekMBA framework is made of four main components: Value Model (Core Philosophy, Core Values and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics/incentives through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.
A transitional business model is used by companies to enter a market (usually a niche) to gain initial traction and prove the idea is sound. The transitional business model helps the company secure the needed capital while having a reality check. It helps shape the long-term vision and a scalable business model.
The minimum viable audience (MVA) represents the smallest possible audience that can sustain your business as you get it started from a microniche (the smallest subset of a market). The main aspect of the MVA is to zoom into existing markets to find those people which needs are unmet by existing players.
Business scaling is the process of transformation of a business as the product is validated by wider and wider market segments. Business scaling is about creating traction for a product that fits a small market segment. As the product is validated it becomes critical to build a viable business model. And as the product is offered at wider and wider market segments, it’s important to align product, business model, and organizational design, to enable wider and wider scale.
The market expansion consists in providing a product or service to a broader portion of an existing market or perhaps expanding that market. Or yet, market expansions can be about creating a whole new market. At each step, as a result, a company scales together with the market covered.
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).
In the FourWeekMBA Revenue Streams Matrix, revenue streams are classified according to the kind of interactions the business has with its key customers. The first dimension is the “Frequency” of interaction with the key customer. As the second dimension, there is the “Ownership” of the interaction with the key customer.
Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall business model.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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