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.
Table of Contents
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
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.
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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.
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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.
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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.
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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.
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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.
