Examples of competitive advantage. Get our Mastering Prioritization eBook Learn how to prioritize by making it a simple process, to build products that stand out. General FAQ When does a company achieve a sustainable competitive advantage?
A company achieves sustainable competitive advantage when it meets one or more of the following three criteria, as outlined by a professor at Harvard Business School in Cost leadership — offering reasonable value at a lower rate than competitors Differentiation — delivering better or unique products and service than others Focus — recognizing, understanding, and committing to a target market in a way no other company is.
What are some common strategies for achieving a competitive advantage? A business may be able to create a competitive advantage by charging a higher price than competitors. But hear us out… By setting a higher price point for products, a company can establish itself as a luxury brand and create an air of exclusivity. Advanced technology, patent-protected products or processes, superior personnel, and strong brand identity are all drivers of differential advantage. These factors support wide margins and large market shares.
Apple is famous for creating innovative products, such as the iPhone, and supporting its market leadership with savvy marketing campaigns to build an elite brand. Major drug companies can also market branded drugs at high price points because they are protected by patents. If a business can increase its market share through increased efficiency or productivity, it would have a competitive advantage over its competitors.
Lasting competitive advantages tend to be things competitors cannot easily replicate or imitate. Warren Buffet calls sustainable competitive advantages economic moats , which businesses can figuratively dig around themselves to entrench competitive advantages.
This can include strengthening one's brand, raising barriers to new entrants such as through regulations , and the defense of intellectual property. Competitive advantages that accrue from economies of scale typically refer to supply-side advantages, such as the purchasing power of a large restaurant or retail chain.
But advantages of scale also exist on the demand side—they are commonly referred to as network effects. This happens when a service becomes more valuable to all of its users as the service adds more users. The result can often be a winner-take-all dynamic in the industry. Comparative advantage mostly refers to international trade. Business Essentials. Tech Stocks.
Fundamental Analysis. Business Leaders. Company Profiles. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. By employing a broad vertical scope, a company can exploit the potential benefits of performing more activities internally rather than use outside suppliers.
By selecting a narrow scope, on the other hand, a company may be able to tailor the value chain to a particular target segment to achieve lower cost or differentiation. The competitive advantage of a narrow scope comes from customizing the value chain to best serve particular product varieties, buyers, or geographic regions. If the target segment has unusual needs, broad-scope competitors will not serve it well.
Information technology is permeating the value chain at every point, transforming the way value activities are performed and the nature of the linkages among them. It also is affecting competitive scope and reshaping the way products meet buyer needs. These basic effects explain why information technology has acquired strategic significance and is different from the many other technologies businesses use.
Every value activity has both a physical and an information-processing component. The physical component includes all the physical tasks required to perform the activity. The information-processing component encompasses the steps required to capture, manipulate, and channel the data necessary to perform the activity.
Every value activity creates and uses information of some kind. A logistics activity, for example, uses information like scheduling promises, transportation rates, and production plans to ensure timely and cost-effective delivery.
A service activity uses information about service requests to schedule calls and order parts, and generates information on product failures that a company can use to revise product designs and manufacturing methods.
Different activities require a different mix of the two components. For instance, metal stamping uses more physical processing than information processing; processing of insurance claims requires just the opposite balance.
For most of industrial history, technological progress principally affected the physical component of what businesses do. During the Industrial Revolution, companies achieved competitive advantage by substituting machines for human labor.
Information processing at that time was mostly the result of human effort. Now the pace of technological change is reversed. Information technology is advancing faster than technologies for physical processing. The costs of information storage, manipulation, and transmittal are falling rapidly and the boundaries of what is feasible in information processing are at the same time expanding.
During the Industrial Revolution, the railroad cut the travel time from Boston, Massachusetts, to Concord, New Hampshire, from five days to four hours, a factor of The cost of computer power relative to the cost of manual information processing is at least 8, times less expensive than the cost 30 years ago. Between and the time for one electronic operation fell by a factor of 80 million. Department of Defense studies show that the error rate in recording data through bar coding is 1 in 3,,, compared to 1 error in manual data entries.
This technological transformation is expanding the limits of what companies can do faster than managers can explore the opportunities. The information revolution affects all nine categories of value activity, from allowing computer-aided design in technology development to incorporating automation in warehouses see Exhibit III.
The new technology substitutes machines for human effort in information processing. Paper ledgers and rules of thumb have given way to computers. Initially, companies used information technology mainly for accounting and record-keeping functions. In these applications, the computers automated repetitive clerical functions such as order processing. Today information technology is spreading throughout the value chain and is performing optimization and control functions as well as more judgmental executive functions.
General Electric, for instance, uses a data base that includes the accumulated experience and often intuitive knowledge of its appliance service engineers to provide support to customers by phone. Information technology is generating more data as a company performs its activities and is permitting it to collect or capture information that was not available before.
Such technology also makes room for a more comprehensive analysis and use of the expanded data. The number of variables that a company can analyze or control has grown dramatically. Hunt-Wesson, for example, developed a computer model to aid it in studying distribution-center expansion and relocation issues. The model enabled the company to evaluate many more different variables, scenarios, and alternative strategies than had been possible before.
Information technology is also transforming the physical processing component of activities. Computer-controlled machine tools are faster, more accurate, and more flexible in manufacturing than the older, manually operated machines.
Schlumberger has developed an electronic device permitting engineers to measure the angle of a drill bit, the temperature of a rock, and other variables while drilling oil wells. The result: drilling time is reduced and some well-logging steps are eliminated.
On the West Coast, some fishermen now use weather satellite data on ocean temperatures to identify promising fishing grounds. The technology is creating new linkages between activities, and companies can now coordinate their actions more closely with those of their buyers and suppliers.
The company makes it so easy for clients to order, receive, and prepare invoices that the customers, in return, are willing to place larger orders. At the same time, McKesson has streamlined its order processing.
Finally, the new technology has a powerful effect on competitive scope. Information systems allow companies to coordinate value activities in far-flung geographic locations. For example, Boeing engineers work on designs on-line with foreign suppliers. Information technology is also creating many new interrelationships among businesses, expanding the scope of industries in which a company must compete to achieve competitive advantage.
So pervasive is the impact of information technology that it confronts executives with a tough problem: too much information.
This problem creates new uses of information technology to store and analyze the flood of information available to executives. Most products have always had both a physical and an information component.
The latter, broadly defined, is everything that the buyer needs to know to obtain the product and use it to achieve the desired result. That is, a product includes information about its characteristics and how it should be used and supported. For example, convenient, accessible information on maintenance and service procedures is an important buyer criterion in consumer appliances. The new technology, however, makes it feasible to supply far more information along with the physical product.
The new technology is also making it increasingly possible to offer products with no physical component at all. Many products also process information in their normal functioning. A dishwasher, for example, requires a control system that directs the various components of the unit through the washing cycle and displays the process to the user.
Electronic control of the automobile, for example, is becoming more visible in dashboard displays, talking dashboards, diagnostic messages, and the like. There is an unmistakable trend toward expanding the information content in products.
There are no longer mature industries; rather, there are mature ways of doing business. Although a trend toward information intensity in companies and products is evident, the role and importance of the technology differs in each industry. Banking and insurance, for example, have always been information intensive.
Such industries were naturally among the first and most enthusiastic users of data processing. On the other hand, physical processing will continue to dominate in industries that produce, say, cement, despite increased information processing in such businesses.
Exhibit IV, which relates information intensity in the value chain to information content in the product, illuminates the differences in the role and intensity of information among various industries. The banking and newspaper industries have a high information-technology content in both product and process.
The oil-refining industry has a high use of information in the refining process but a relatively low information content in the product dimension. Because of the falling cost and growing capacity of the new technology, many industries seem to be moving toward a higher information content in both product and process.
It should be emphasized that technology will continue to improve rapidly. The cost of hardware will continue to drop, and managers will continue to distribute the technology among even the lower levels of the company. The applications of information technology that companies are using today are only a beginning.
Information technology is not only transforming products and processes but also the nature of competition itself.
Despite the growing use of information technology, industries will always differ in their position in Exhibit IV and their pace of change. After surveying a wide range of industries, we find that information technology is changing the rules of competition in three ways. First, advances in information technology are changing the industry structure.
Second, information technology is an increasingly important lever that companies can use to create competitive advantage.
Finally, the information revolution is spawning completely new businesses. These three effects are critical for understanding the impact of information technology on a particular industry and for formulating effective strategic responses. The structure of an industry is embodied in five competitive forces that collectively determine industry profitability: the power of buyers, the power of suppliers, the threat of new entrants, the threat of substitute products, and the rivalry among existing competitors see Exhibit V.
Thinking about how your business can benefit your customers will help you to pinpoint your competitive advantage. A strong competitive advantage:. After you have highlighted your competitive advantage, the best way to tell your customers about it is to create your unique selling proposition.
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Your competitive advantage Your competitive advantage is what sets your business apart from your competition. How to identify your competitive advantage To identify your competitive advantage, you need to understand your competitors and your customers. Ask yourself: Why do customers buy from us? Why do customers buy from our competitors and not us?
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