Competitive Advantage

Source:http://useconomy.about.com/od/glossary/g/Competitive-Advantage.htm

Michael Porter: The Guru of Competitive Advantage

In 1985, Harvard Business School professor Michael Porter wrote the definitive business school textbook on the topic, called Competitive Advantage. In it, he outlined the three major ways companies achieve sustainable advantage: cost leadership, differentiation and focus. Although these main strategies were developed by researching companies, they can be useful for everyone, from employees to countries, who is seeking to stand out.

Cost leadership means you provide reasonable value at a lower price. Companies do this by continuously improving operational efficiency. They usually pay their workers less, either by providing intangible benefits such as stock options, benefits or promotional opportunities, or by taking advantage of unskilled labor surpluses. As they get larger, they can take advantage of economies of scale, and buy in bulk. Good examples of companies with sustainable cost leadership advantage are Walmart and Costco. However, sometimes they pay below the cost of living. Their advantage can be threatened if they must comply with higher minimum wage laws.


Differentiation means you have a strong brand that clearly communicates how you deliver benefits much better than anyone else. A company can achieve differentiation by providing a unique or high-quality product, by delivering it faster, or by marketing it in a way that truly reaches customers better. Instead of being a cost leader, the company with a differentiation strategy can charge a premium price. That means they usually have higher profit margins.
Companies usually achieve differentiation with innovation, quality or customer service.

Innovation means you meet the same needs in a new way. A great example of this is Apple. The iPod is innovative because it allows you to play whatever music you want, in any order. 

Quality means you provide the best product or service, and so might be higher priced. Tiffany's is able to charge more because it's seen as the best. 

Customer service means going out of the way to delight the customer. Nordstrom's is known for this.


Focus means you understand and service your target market better than anyone else. You can use either a cost leadership or differentiation strategy, but you focus it on one specific target market. Often it's a tiny niche that isn't being served by larger companies. Community banks are an example of a segment that uses a focus strategy to gain sustainable competitive advantage. They target local, small businesses, or high net worth individuals. Their target audience enjoys the personal touch that big banks may not be able to give, and they are willing to pay a little more in fees for this service. These banks are using a differentiation form of the focus strategy.