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.
Understanding sustainable competitive advantage
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
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.
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.
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.
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.
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.
Otherwise known as a national 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.
- 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.
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