The Basis of Competitive Advantage

Competitive advantage – achieving higher rates of profit than the competition – comes from one thing: creating a relative difference in price or cost from rivals.

A relative difference in price means a firm can price higher than the competition by offering unique value that is prized by customers and which commands a price premium. A relative difference in cost means a firm enjoys a cost advantage over rivals and can price lower to gain share, or maintain price parity and enjoy a higher margin.

The key goal of competitive¬†strategy is to enable one of these two relative advantages for a firm. The source of these two advantages is to be found in the firm’s value chain – the extended set of activities or processes it uses to create and deliver value to customers.

Enabling either of these two advantages is neither easy nor quick. Perhaps that is why most firms prefer to resort to tactical approaches to value chain improvement which tend to be focused mainly on reducing costs and preserving margin.

A key question to ask yourself is this: how different is my firm’s value chain from competitors? If it is not different, it is not likely you are creating different value than competitors. “Different” means more than just operating differently. It means choosing different activities which create unique value. This unique value, in turn, commands either a higher price or creates a cost advantage, both of which are resistant to replication by rivals.

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