Competitive advantage is all that allows a company to outperform its competitors.
It is this different from the key success factor that is common to all firms on the market.
Google gives Apple, Coca-Cola, Ikea, Ryanair and Zara as examples of companies with a competitive advantage.
Competitive advantage is sustainable when its owner is able to maintain it; its competitors are then tempted to imitate, or establish a new competitive advantage that makes obsolete the one that prevailed at one time.
The concept of competitive advantage is sometimes extended to a country. Economists, however, prefer the notion of absolute advantage, which does not convey the misleading idea of direct competition between nations or regions.
In the best case, the advantage goes to give the person who holds a dominant position in a market, a market power. This leadership gives it a high efficiency and profitability, according to the principle of "winner takes all".
Competitive advantage can create a secure income that normally results from a distinctive competence or core competency.
As part of the development of its strategy to optimize its present and prepare for the future, a company must seek to use the most of its competitive advantages, and develop sustainable competitive advantages for sustainable differentiation from its competitors.
In recent years, some strategists have shown that companies with competitive advantages are rather those who have adopted growth strategies adjacency.
To be effective, the competitive advantage must be:
- unique (or original);
- difficult to imitate;
- significantly higher;
- adaptable to various situations.
- a known brand inspires confidence;
- a patent granting exclusive rights to the use of a particular technique;
- specific know-how mastered in the company;
- the ability to attract the most talented candidates for recruitment;
- privileged access to a highly efficient distribution network or present with referred clients;
To last, competitive advantage must:
- accept lower margins or reduce costs relative to the competition or focus on certain segments;
- make it difficult imitation (by the complexity, ambiguity or implementation in culture) or non-transferable resources;
- reinvest margins to ensure differentiation (called hybrid strategy);
- impose a standard owner, not being a follower and defend by communicating its position.
Competitive advantage and competition
Some fear that a competitive advantage too sharp and too sustainable promotes dominance, monopolies and oligopolies which restrict competition and end up weighing on the consumer.
However, an advantage of that kind is ever granted, and may be particularly threatened by resource base flow, technological breakthroughs, economic and political shocks, changes in consumer habits, and changes in legal, often to restore competition (anti-trust laws).
Moreover, even if a group of individuals, territory, country, has a sustainable competitive advantage, or even several sustainable competitive advantages in various fields, the theory of comparative advantage shows that all parties (to say both those with the benefits and that those who do not have) find almost always an advantage to trade with each other, so that the existence of competitive advantages can not justify the introduction of protectionist measures to safeguard the interests of consumers.
Competitive advantage and innovation
Companies gain a competitive advantage through innovation. They cover innovation in its broadest sense, including both new and innovative methods technologies.
- Companies achieve competitive advantage through acts of innovation. They approach innovation in its broadest sense, including both new technologies and new ways of doing things. They perceive a new basis for competing or find better means for competing in old ways. Innovation can be manifested in a new product design, a new production process, a new marketing approach, or a new way of conducting training. Much innovation is mundane and incremental, depending more on a cumulation of small insights and advances than on a single, major technological breakthrough. It often involves ideas that are not even “new”—ideas that have been around, but never vigorously pursued. It always involves investments in skill and knowledge, as well as in physical assets and brand reputations.
- Michael Porter, 1990, « The Competitive Advantage of Nations », HBR, March-April, p. 75.