Competitive Advantage through Strategic Management

The concept of competitive advantage is embedded in the key components of the strategic management process. Strategic management is about gaining and sustaining a competitive advantage. From environmental scanning to vision statement to strategy formulation (strategic planning) and implementation—all these components have been successfully used to develop a competitive advantage. Business leaders make strategic decisions and some of these decisions address questions like: how should we compete? What determines our profit potential? How to outperform rivals?

Competitive advantage is the ability of a company that does something well compared to its competitors, earns above-average profits in its industry, and is the end result of successful strategy execution. If the above-average profits or above-average performance are sustained over the long-run, it is called sustainable competitive advantage. Thus, identifying and understanding your company’s competitive advantage is essential. Many successful companies have competitive advantages over their rivals but fail to articulate them. Some strategic factors, such as new technologies, imitation, new entrants, and the introduction of substitute products, can erode all your competitive advantage, thus preventing you from sustaining your competitive advantage. For this reason, your competitive advantage should be unique, valuable, and difficult for competitors to imitate. Besides cost reduction, you must constantly work to improve your competitive position and add value to your products or services.

A business strategy (competitive and/or cooperative) mainly focuses on improving a firm’s competitive position in an industry. Michael Porter, an authority on competitive strategy, proposes a lower cost and differentiation strategy to be successful and outperform competitors within an industry. These two strategies result in two basic types of competitive advantages: cost advantage and differential advantage.

The resource-based approach proposes a wider definition of competitive advantage, in which a firm uses its resources and capabilities to develop a competitive advantage that finally results in superior value creation. According to this approach, the sustainability of an advantage is determined by two characteristics: durability and imitability.

References and further Reading

1. T. L. Wheelen & J. D. Hunger, Strategic Management & Business Policy (NJ: Prentice-Hall, 2000).

2. M.E. Porter, Competitive Advantage (NY: The Free Press, 1998).

3. M.E. Porter, Competitive Strategy (NY: The Free Press, 1998).

4. J.B. Barney, Firm Resources and Sustainable Competitive Advantage, Journal of Management 17(1991).