Whenever I come across firms that have a competitive advantage (higher rates of profitability than rivals), I always want to know what’s at the root of that advantage. Usually it boils down to one of two things: sustainable differences from rivals in cost or price.
Higher rates of return can be obtained through these essential differences. A firm that is a cost leader will have higher margins, and be able to expand share through lower pricing. A firm who is a benefit leader will have offerings that command a price premium, generating higher returns per unit of sale and attracting marginal customers through differentiated value.
Creating sustainable cost or price differences from rivals is at the core of strategy. It is also the reason why some firms endure over time – these firms have developed the capacity to maintain a unique advantage through differentiation over rivals. How a firm creates and maintains that differentiation is the essence of business strategy and the basis of competitive advantage.