Sustainable Global Competitive Advantage02/09/2022 1 By indiafreenotes
Sustainable competitive advantages are a set of assets, characteristics, or capabilities that allow an organization to meet its customer needs better than its competition can. Sustainable competitive advantages are difficult to duplicate or replicate.
At its most basic level, there are three key types of sustainable competitive advantage.
- Cost advantage: The business competes on price.
- Value advantage: The business provides a differentiated offering that is perceived to be of superior value.
- Focus advantage: The business focuses on a specific market niche, with a tailored offering designed specifically for that segment of the market.
Types and Examples of Sustainable Competitive Advantages
Low Cost Provider/ Low pricing
Economies of scale and efficient operations can help a company keep competition out by being the low cost provider. Being the low cost provider can be a significant barrier to entry. In addition, low pricing done consistently can build brand loyalty be a huge competitive advantage (i.e. Wal-Mart).
Market or Pricing Power
A company that has the ability to increase prices without losing market share is said to have pricing power. Companies that have pricing power are usually taking advantage of high barriers to entry or have earned the dominant position in their market.
It takes a large investment in time and money to build a brand. It takes very little to destroy it. A good brand is invaluable because it causes customers to prefer the brand over competitors. Being the market leader and having a great corporate reputation can be part of a powerful brand and a competitive advantage (i.e. Coca-Cola (KO).
Patents, trademarks, copy rights, domain names, and long term contracts would be examples of strategic assets that provide sustainable competitive advantages. Companies with excellent research and development might have valuable strategic assets (i.e. International Business Machines (IBM).
Barriers to Entry
Cost advantages of an existing company over a new company is the most common barrier to entry. High investment costs (i.e. AT&T (T)) and government regulations are common impediments to companies trying to enter new markets. High barriers to entry sometimes create monopolies or near monopolies (i.e. utility companies).
Adapting Product Line
A product that never changes is ripe for competition. A product line that can evolve allows for improved or complementary follow up products that keeps customers coming back for the “new” and improved version (i.e. Apple iPhone) and possibly some accessories to go with it.
A unique product or service builds customer loyalty and is less likely to lose market share to a competitor than an advantage based on cost. The quality, number of models, flexibility in ordering (i.e. custom orders), and customer service are all aspects that can positively differentiate a product or service.
Strong Balance Sheet / Cash
Companies with low debt and/or lots of cash have the flexibility to make opportune investments and never have a problem with access to working capital, liquidity, or solvency (i.e. Johnson & Johnson (JNJ).The balance sheet is the foundation of the company.
Outstanding Management / People
There is always the intangible of outstanding management. This is hard to quantify, but there are winners and losers. Winners seem to make the right decisions at the right time. Winners somehow motivate and get the most out of their employees, particularly when facing challenges. Management that has been successful for a number of years is a competitive advantage.
Steps to developing a sustainable competitive advantage
- Understand the market and its segments. Look for those niches that aren’t well serviced by competitors and can be profitably targeted and sold to.
- Develop an understanding of what customers really want and establish a value proposition that grabs their attention.
- Work out the key things that you need to do really well to support and deliver the value proposition. For example, service levels, quality, branding, pricing, et cetera.
- Understand what your strengths and core competencies are and how you can use these in innovative ways to provide value to your chosen market.
- Design your business model to support and deliver the value proposition.
At the end of this process, you will have a very clearly defined statement of:
- Who you will be selling to (customers and market segments);
- Why they will buy from you and not your competitors (the value proposition); and
- The key things you need to excel at to be able to consistently deliver your value proposition.