Competitive Advantage

 

COMPETITIVE ADVANTAGE

What is Competitive Advantage?

Competitive advantages are conditions that allow a company or country to produce a good or  service of equal value at a lower price or in a more desirable fashion. These conditions allow the  productive entity to generate more sales or superior margins compared to its market rivals. rivals. Competitive Compet itive advantages are attributed attributed to a variety variety of factors factors including including cost structure, structure, branding  branding,, the quality of product offerings, the distribution network , intellectual property, property, and customer  service.. service Porter's Generic Competitive Strategies

A firm's relative position within its industry determines whether a firm's profitability is above or   below the industry average. The fundamental basis of above average profitability in the long run is sustainable competitive advantage. There are two basic types of competitive advantage a firm can possess: low cost or differentiation. The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them, lead to three generic st stra rate tegi gies es for for ac achi hiev evin ing g ab abov ovee av aver erag agee pe perf rfor orma manc ncee in an in indu dust stry ry:: co cost st le lead ader ersh ship ip,, differentiation, and focus. The focus strategy has two variants, cost focus and differentiation focus. In

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Mich Michae aell

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Advantage."1   It's It's the defini definiti tive ve busine business ss school school textbo textbook ok on the topic. topic. He wrote wrote it to help help companies to create a sustainable competitive advantage. Just because a company is the market leader now, doesn't mean it will be forever. A company must create clear goals, strategies, and operations to build sustainable competitive advantage. The corporate culture and culture and values of the employees must be in alignment with those goals. It's difficult to do all those things well. It's especially difficult to do them year in and year out.

 

Porter outlined the three primary ways companies achieve a sustainable advantage. They are cost leadership,, differentiation, and focus. Porter identified these strategies by researching hundreds leadership of companies. 1. Cost Leadership Cost leadership leadership means companies provide reasonable value at a lower price. Firms do this by

continuously improving operational efficiency. That usually means paying their workers less. Somee compen Som compensat satee for lower wages wages by offeri offering ng int intang angibl iblee benefit benefitss such such as stock options options,  benefits, or promotional opportunities. Others take advantage of unskilled labor surpluses. As these businesses grow, they can benefit from economies of scale scale and  and buy in bulk. Walmart and Costco are good examples of cost leadership. But sometimes they pay their workers less than the cost of living. living. Higher minimum wage laws wage laws threaten their advantage.

In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of  cost advantage are varied and depend on the structure of the industry. They may include the  pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors. A low cost producer must find and exploit all sources of cost advantage. if a firm can achieve and sustain overall cost leadership, then it will be an above average performer in its industry, provided it can command prices p rices at or near the industry average.   2. Differentiation Differentiation  means companies deliver better benefits than anyone else. A firm can achieve

differentiation by providing a unique or high-quality product. Another method is to deliver it faster. A third is to market in a way that reaches customers better. A company with a differentiation strategy can charge a premium price. That means it usually has a higher higher profit  profit margin. margin. Compan Companies ies typica typicall lly y achiev achievee differentiation  differentiation with innovation, innovation, quality, quality, or customer service service.. Innovation means they meet the same needs in a new way. An excellent example of this is Apple. The iPod was innovative because it allowed users to play whatever  music they wanted in any order. Quality means the firm provides the best product or service.

 

In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry  perceive as important, and uniquely positions itself to meet those needs. It is rewarded for its uniqueness with a premium price.   3. Focus Focus means means the compan company's y's leader leaderss underst understand and and servic servicee their their tar target get market market better better than than

anyone else. Their either use cost leadership or differentiation to do that. The key to a successful focus strategy is to choose a very specific target market. Often it's a tiny niche that larger  companies don't serve. For example, community banks use banks use a focus strategy to gain sustainable compet com petiti itive ve advanta advantage. ge. They They target target local local small small businesses businesses or  or hi high gh ne nett wort worth h in indi divi vidu dual alss. Their target target audien audience ce  enjo enjoys ys the per perso sona nall touch ouch that hat bi big g banks   banks may not be able to give. Customers are willing to pay a little more in fees for this service. These banks are using a differentiation form of the focus strategy. The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others.

The focus strategy has two variants: (a) In cost focus a firm seeks a cost advantage in its target segment, while (b) in differentiation focus a firm seeks differentiation in its target segment.

Both variants of the focus strategy rest on differences between a focuser's target segment and other segments in the industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments. Cost focus exploits differences in cost behaviour in some segments, while differentiation focus exploits the special needs of buyers in certain segments. One way to analyze your competition – and understand your standing in your industry – is using Porter's Five Forces model. Originally developed by Harvard Business School's Michael E. Porter in 1979, the five forces model looks at five specific factors that determine whether or not a

 

 business can be profitable in relation to other businesses in the industry. Using Porter's Five Forces in conjunction with a SWOT analysis will analysis will help you understand where your company or   business fits in the industry landscape. landscape.

Por ter 's Fi Porter Five ve Force Fo rcess Model Mo del Porter's Five Forces of Competitive Position Analysis were developed in 1979 by Michael E

Porter of Harvard Business School as a simple framework for assessing and evaluating the competitive strength and position of a business organisation. This theory is based on the concept that there are five forces that determine the competitive intensity and attractiveness of a market. Porter’s five forces help to identify where power lies in a  business situation. This is useful both in understanding u nderstanding the strength of an organisation’s current competitive position, and the strength of a position po sition that an organisation may look to move into. Strategic analysts often use Porter’s five forces to understand whether new products or services are potentially profitable. By understanding where power lies, the theory can also be used to identify areas of strength, to improve weaknesses and to avoid mistakes.

Porter's Five Forces is considered a macro tool in business analytics – it looks at the industry's economy as whole, while a SWOT analysis is a microanalytical tool, focusing on a specific company's data and analysis. "Understanding the competitive forces, and their underlying causes, reveals the roots of an industry's current profitability while providing a framework for anticipating and influencing competition (and profitability) over time," Porter wrote in a Harvard Business Review article. article . "A health hea lthy y indust industry ry struct structure ure should should be as much much a compet competiti itive ve concer concern n to str strate ategis gists ts as their  their  company's own position." Porterr theorized Porte theorized that understandin understanding g both the competitiv competitivee forces forces at play and the overall industry str struct ucture ure are crucia cruciall for effect effective ive,, str strate ategic gic decisi decision-m on-maki aking, ng, and develo developin ping g a compel compelli ling ng competitive strategy for the future. “The Five Forces is a framework for understanding the competitive forces at work in an industry and which drive the way economic value is divided among industry actors”

 

The Five Forces can help explain these kind of phenomena as well as help:

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understand your industry of interest

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identify attractive vs less attractive industries/markets

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identify opportunities and risks

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how profits within an industry will be distributed

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extrapolate industry trends & anticipate changing trends

The Five Forces are: 1.

Bargaining power of buyers

2.

Bargaining power of suppliers

3.

Threat of new entrants

4.

Threat of substitutes

5.

Rivalry among existing competitors

 

 (1) Bargaining Power of Buyers

Where buyers are powerful profits are generally lower. Buyer power  can   can lead to lower prices or  having to increase costs by adding features, services, quantity in order to sell. Where sellers have too much power over buyers opportunities can emerge for others. This force examines the power  of the consumer, and their effect on pricing and quality. Consumers have power when they are fewer in number but there are plentiful sellers and it's easy for consumers to switch. Conversely,  buying power is low when consumers purchase products in small amounts and the seller's  product is very different from that of its competitors. competitors. Bargaining power can be exercised in different ways. Bargaining power can also be exercised indir ind irect ectly ly throug through h purcha purchase se decisi decisions ons of end custom customers ers,, i.e buying buying from from the lowest lowest-pr -price iced d company, deferring the purchase for a prolonged period, buying pre-owned (e.g. car) or not  purchasing at all.

When you read the below remember we are not just talking about end-buyers. Apple is a seller to the end customers but they are also a buyer of components, such as displays, graphic processing units (GPUs), system on a chip (SoC).

Factors that influence buyer bargaining power:

(a) Supplier’s switching costs:

Switching costs can affect both sides, suppliers and customers. Customer switch costs are more  prominent. Where suppliers face switching costs buyers have more leverage. (b) Differentiation of products

Where products are not differentiated (i.e. all competing products have pretty much the same value proposition), competition will be all about the price. Buyers will have the upper hand in  particular where there are many competing products.

 

(c) Buyer information availability:

The buyer may not have enough info to make good cost-benefit tradeoffs. Products can be opaque or complex.This complex.This can lead to the company with the biggest marketing marketing spend exert power  over the customer. (d) Power of distribution channels:

Large retailers, such as Amazon, Walmart) have enormous power over their suppliers. Apple opened their own stores (online and brick-and-mortar) to reduce their retailer’s power. They now dictate the terms (prices and maximum discounts) that normal retailers have to sign up to if they want to sell Apple products (f) Bargaining leverage, particularly partic ularly in industries indus tries with high hig h fixed costs co sts

Industries with high fixed costs (e.g. hotels, airlines) need to maximise revenue to contribute to their high fixed costs. This erodes their bargaining power esp if the industry has over-capacities and little differentiation Some other factors are: 

Buyer price sensitivity (or demand elasticity) elasticity)

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Fragmentation of suppliers

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Discretionary vs staples

(2) Bargaining Power of Suppliers

Where suppliers are powerful they may make a larger profit margin than the company that integrates the inputs of several supplier to sell to the end customer. This force analyzes how much power a business's supplier has and how much control it has over the potential to raise its  prices, which, in turn, lowers a business's profitability. It also assesses the number of suppliers of  raw materials and other resources that are available. The fewer supplier there are, the more  power they have. Businesses are in a better position when there are multiple suppliers. Important factors that give suppliers bargaining/pricing power:

 

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Customer’s switching barriers

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Patent and industry standards

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Brand equity

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Limited competition

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Supplier vs buyer concentration Strength of distribution channels

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Organisation of labourAfter sales:

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Other Oth er facto fa ctors: rs:

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Dependency on the product

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services/goods with inelastic demand  demand 

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Buyer is not price sensitive, e.g. luxury products, recreational drugs

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Goods/services not frequently purchased or low share of wallet (herbs, salt, etc)

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Loyalty programs

(3) Threat of New Entrants

This force considers how easy or difficult it is for competitors to join the marketplace. The easier  it is for a new competitor to gain entry, the greater the risk is of an established business's market share sha re being being deplete depleted. d. Barrie Barriers rs to entry entry includ includee absolu absolute te cost cost advanta advantages ges,, acc access ess to inputs inputs,, economies of scale and strong brand identity. A company that makes above industry-average profits will face the risk of new entrants that may either imitate either imitate bluntly or come up with similar similar (or even somewhat somewhat better) value proposals. This threat alone can keep a lid on the achievable profits. New entrants will add new capacity, thus supply, to the market which will reduce prices (at least in the medium term). The pace at which competition can form depends on a number of factors listed below.

(a) Barriers to entry: 

Barriers to entry are economic costs that entrants pay which incumbents do not have to pay (nor had to pay). This is an important concept in economics, strategy and competition law. Having to work around patents or established (exclusive or restrictive) supplier or distribution

 

agreements are just a few factors. Things like high start-up capital, learning curves, etc are not seen seen as ba barr rrie iers rs to en entr try y from from the the theor theoret etic ical al defini definitio tion n of thi thiss ter term m. Fr From om a pr prac acti tical cal  perspective, they do play a role. You can easily imagine that late movers may find it much more difficult to raise capital when there are already a few strong established players. Michael Porter points out the importance of exit barriers in combination with barriers to entry. These markets combine the attributes: attributes: 

“Markets with high entry barriers have few players and thus high profit margins.

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Markets with low entry barriers have lots of players and thus low profit margins.

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Markets with high exit barriers are unstable and not self-regulated, so the profit margins fluctuate very much over time.

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Markets with a low exit barrier are stable and self-regulated, so the profit margins do not fluctuate much over time.

(b) Economies of scale: as scale goes up unit costs go down. This is another micro economic

concept that holds true for most firms. Thus, incumbents can achieve higher profits as they have already achieved lower unit costs whereas new entrants have to get to the scale where scale where their unit costs are comparable. Up to that point, they may not be able to have as low prices or have lower   profits (thus less cash for further further growth) industry-profits fits relative relative to other industries industries or the higher  (c) Industry Industry profitability: profitability: The higher industry-pro the profits of the incumbent relative to the industry, the higher are incentives for new entrants (and capital more accessible) and vice versa v ersa (d)Powers of incumbents:  here are some dimensions which I have already explained where

incumbents may already be ahead (which may deter entrants): 

Network effects

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Customer switching costs

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Brand equity

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Patents

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Customer loyalty

 

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Product differentiation

(e) Expected retaliatory actions

As incumbents are further down the unit cost curve and likely more cashed up they can reduce  prices when new competition emerges to make it hard for them (though there are limits posed by competition law in many countries). There can be all sorts of other retaliatory action (f) After sales markets

Many maintenance and asset management plans for capital assets (major plant components, generators, turbines, engines, vehicles or even cars) require access to the data and the ability (intellectual property) to analyse and interpret it in value-adding ways. Even where the data is documented, the IP to analyse often resides with the OEM who either has their own service arm or licensed (for a fee/royalties) service vendors (4) Threat of Substitute Products or Services

Let’s first clarify what a substitute is. It is almost the same the same product from a different company. Buying petrol from a different brand petrol station is not a substitute. Using a train to commute to work is a substitute for using a car (on the transport dimension/industry). This force studies how easy it is for consumers to switch from a business's product or service to that of a competitor. It examines the number of competitors, how their prices and quality compare to the  business being examined, and how much of a profit those competitors are earning, which would determine if they can lower their costs even more. The threat of substitutes is informed by switching costs, both immediate and long-term, as well as consumers' inclination to change. Substitutes satisfy the same basic/economic need (or utility) utility) using a different technology (in a narrower viewpoint coming from the same industry). Clayton Christensen’s concept of “ getting thee job th job done done” ex exte tends nds this this de defi fini niti tion. on. E.g. E.g. ther theree ar aree many many th thin ings gs th that at co comp mpet etee fo forr yo your  ur  recreational time which may be suitable to substitute each other. In this case, the substitutes may  be coming from an entirely different industry.

 

Factors Facto rs affectin aff ecting g the threat threa t of substit sub stitutes utes::

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Price-performance comparison

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Buyer’s switching costs

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Purchase factors

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Product differentiation  Number of substitute products

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(5) Rivalry Among Existing Competitors

This force examines how intense the competition is in the marketplace. It considers the number  of existing competitors and what each one can do. Rivalry competition is high when there are  just a few businesses selling a product or service, when the industry is growing and when consumers can easily switch to a competitor's offering for little cost. When rivalry competition is high, advertising and price wars ensue, which can hurt a business's bottom line.  Not all industries are equal. Some are much more competitive than others. Prof Porter has identified the settings that frequently lead to fierce competition.

Ingredients of highly competitive industries are:

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Many competitors of similar size Slow aggregate industry growth

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High fixed costs

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High exit barriers

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Highly committed players

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Competitors having different goals or ways of measuring success.

 

Competitive Advantages in eCommerce 7 Strategies for Competitive Advantages in eCommerce

eCommerce has changed the face of business. If you have an eCommerce business, you need to know your weapons. You need to nourish it properly to reap the benefits benefits.. Anything sells on the internet but you do need to make sure that you are promoting your brand or   business in the right way. There is so much competition that businesses with zero marketing will not make the cut. You have to be aggressive and you have to be ahead of others. Even if you have a fancy eCommerce website design in which you poured a lot of money, it will not do any good if you cannot generate traffic for your website. For generating traffic, you need to know the ins and outs of the eCommerce industry and make a plan accordingly. You need to apply strategies for competitive advantages in eCommerce  so that your business gets popular in no time. You need to build strategies for if you want your business to thrive. Here are a few strategies which you can try; 1. Pick a specific niche & target audience

People are becoming more and more dependent dependent on technology technology and exploring exploring more possibilit possibilities ies of the internet. As a result, they are getting used to online shopping instead of physically getting up and going to a shop. This made their life easier as it should have, especially for people who tend to be busy with their   jobs and household chores. This includes people p eople who have a 9 to 5 job, moms, double shifters,

 

startup entrepreneurs, and elderly people who don’t feel like going out for small things. And also, teenagers are already into doing things online. As you can see, the demographic is huge and so is your potential customer. So, it’s natural to expect people of all age, race, religion, and location to be your customer. This is where many eCommerce store owners make their mistake – at least the ones who fail.

There are several advantages of targeting towards a specific group of people or sticking with a specific niche. First of all, advertising gets easy. Secondly, you get more product ideas when you have a specific audience in mind. You know what features you should add and what should be modified. If you tried to direct your products to everyone, you’ll have to listen to everyone’s opinions and feedback, which is impossible, mainly because different age or gender of people will have different preferences. That’s why it’s important to pick a specific niche and a specific audience. 2. Personalize your website

Since you got your niche selected, it’s time to personalize your website based on your niche and your target audience.  Design your website in a way that your target audience finds value every time they visit. So,  put contents on the webpage only if it is relevant. Use images where necessary but don’t  overdo it. Remember that they came to your website for information about your products, not   for stock images.

You must ensure navigating through your site is easy. If your visitors can’t find the information that they came here for, there’s no reason for having a website. This ease-of-use also comes with device compatibility. If a website is not compatible with a certain device that your visitor is accessing your website with, the person might not find the contents in places where you’d want them to find. That’s why it is important that your website is compatible with all devices including mobile, PC, tablet, etc.

 

Another thing that you should consider is storing your customers buying and payment habits. Your customers’ habits tell a lot about your performance and how you should approach from here. Use data like this to create personalized experience for each customer . And don’t worry, there are plenty of tools that let you integrate this information to your site and help you create a  personalized experience for each individual visiting your page. 3. Prepare the right content

Whatever Whate ver your niche may be, one thing that is true for every nich nichee is content really really matters. matters. Content is king and the quality of contents, contents, relevancy is also important. Also, implementing SEO friendly keywords is important for your website. Otherwise, your  contents won’t be able to bring traffic to your sites. So, remember these three things when  producing content for your site. Quality, relevancy, and SEO optimization. 4. Go beyond your website – Use different channels to showcase your brand

Internet not only brought people closer. It brought everything in your reach so that you don’t miss out on any opportunities. One of such opportunities that an eCommerce store owner should not miss is utilizing social media and other channels to promote and showcase the brand. Today, a brand is not confined within the website URL. People interact with companies all the ti time, me, though though their their website website,, video video content contentss on YouTube YouTube,, soc social ial platfo platforms rms etc. etc. In fact, fact, the engagement in social platforms for most companies is way more than their engagement on the site. So, it is understandable why brands are getting more and more involved with their target

audience outside their website. These social media and platforms like Facebook, Instagram, Twitter, and video content sharing  platform YouTube, Y ouTube, etc. are also a way to advertise the brands. As a matter of fact, this type of  advertisement is way more efficient than the traditional paper ads or television ads.

 

When brands put their advertisements and promotional banners in newspapers or TV, their  message reaches to the masses in general. But that should not be the goal, the goal should be targeting a very specific group and advertising for them. The advertisement tools and policies are so matured on these platforms that targeting a specific audience is as easy as opening a soda bottle . You just need the tool and, in this case, the

tool is the advertisement models of these platforms. All you’ll need to do is select the filters that reflect your target audience and the ads will do the rest. 5. Create new partnerships

Collaboration and partnerships are important. Don’t back out from partnership offers that benefit you at the right time. 6. Interact with your customers

Your business might be virtual but your customers are real. You might be operating your whole  business from a bunch of laptops but your customers are paying real money for it. It is important to hear from your customers. Listen to what they have to say. If they do not like something, improve on it. Give them what they desire or want to buy. Do not just keep on throwing makeup and accessories because your target audience is women. If your niche target is stay-at-home mothers, you might benefit from displaying furniture on your website. 7. Use social media as your weapon

Social media is the most powerful platform today. You will get to identify all your potential customers by peeking into their personal lives. You will get to see their interests and habits. You should invest a lot in social media. You can even direct people from social media directly to your  website. Think of Facebook, if one of your posts is appealing to someone, he or she might share it. In this way, your post gets more generic gen eric views. Well, that’s the beauty of social media!

 

Conclusion

To stay and win in the market you need to build an eCommerce website which appeals to your  target group. Your business is nothing without your customers. Invest in their wants and you will surely succeed. By following all the above-mentioned strategies; you will surely see results for  your eCommerce business. Success might not come overnight, but eventually, you will get there.