What Is Competitive Advantage?

The reference text is "Competitive Advantage: Creating and Sustaining Superior Performance" by Michael Porter, published by Free Press in New York in 1985. For Porter, the advantage grows out of the value a firm creates for its buyers beyond the cost of creating it. He defines value plainly: it is what buyers are willing to pay.

Porter did not coin the phrase. It already appears in the title of a Journal of Marketing article from October 1976 and in one by Stephen South in the Journal of Business Strategy in 1981. His publisher credits the book with making the phrase commonplace, which is the seller's own assessment. This glossary does not name a first author.

The misreading is that anything a company does well is already an advantage. Porter rules this out in his first chapter: a firm can have countless strengths and weaknesses, and each one counts only through its effect on relative cost or differentiation. That excludes three common cases.

The first is what the customer does not value. An excellent internal process that neither lowers cost nor changes what customers will pay gives no advantage.

The second is what everyone else does too. Porter sets this out in "What Is Strategy?" (Harvard Business Review, November-December 1996). Operational effectiveness means performing similar activities better than rivals. Strategic positioning means performing different activities, or similar ones in different ways. The first is necessary, but best practices spread quickly: they raise the bar for everyone and put no one ahead. The same applies to cost. Porter warns that reducing costs is not the same as achieving a cost advantage.

The third is what gets copied soon. Two concepts need separating here. Jay Barney, in the Journal of Management in 1991, calls it a competitive advantage when a firm implements a value-creating strategy that no current or potential competitor is implementing at the same time. He calls it sustained when those other firms also cannot duplicate its benefits. An easily copied advantage exists until someone copies it, but it is a poor thing to build on. For Barney, what decides whether it is sustained is whether duplication is possible, and calendar time does not count. He places Porter among those who define it by duration.

Porter separates two basic types of advantage, and they should not be blurred: - Cost leadership: the company sets out to be the low-cost producer in its industry. Sources include scale, proprietary technology and access to raw materials. It does not mean selling at the lowest price: a firm with the lowest cost that charges near the industry average earns more than the others. Nor can it ignore differentiation. If the product does not seem comparable, the discount it has to offer can wipe out the cost gain. The logic usually requires a single leader, because several contenders end up in a hard fight for share. - Differentiation: the company aims to be unique in something many buyers value, and earns a higher price for it. This pays only if the premium exceeds the extra cost of being different. There can be several winners in one industry, as long as each stands out on a different attribute.

Focus is not a third type of advantage. It is a third strategy: applying cost or differentiation to a narrow segment that broad competitors serve poorly. Porter had already set out these generic strategies in "Competitive Strategy" (1980), and the 1985 book starts from that framework and explains how to put them into practice.

A firm that tries for everything is, in his phrase, "stuck in the middle", with no advantage at all. Porter allows three exceptions in which cost and differentiation can go together: when competitors are stuck in the middle too, when cost depends heavily on market share or on links between industries, and when the firm alone has a major innovation. He treats these as situations that tend to end once a capable rival picks a route.

Having strengths says little. The useful question is whether any of them passes these four checks.

First, name the advantage in one sentence with a specific rival beside it: cheaper than whom, or different from whom and in what? If no name fits the sentence, it is still an aspiration.

Second, locate where it comes from. According to Porter, differences in cost and price between companies arise from the specific activities each one performs. The value chain is the tool he built for this: it divides the company into activities and shows which ones generate cost or differentiation.

Third, do the sums. On cost, check whether the lead holds against rivals who are also cutting. On differentiation, compare the premium customers accept with what the difference costs to maintain.

Fourth, test whether it can be copied. Barney gives four criteria for a resource to sustain an advantage: - Valuable: it exploits opportunities or neutralises threats in the environment. - Rare among current and potential competitors. - Imperfectly imitable. - Without strategically equivalent substitutes that are valuable but neither rare nor imperfectly imitable.

Porter adds two points. No barrier to imitation is insurmountable, so investment has to continue. And, from 1996, a set of activities that fit together is harder to copy than a single function. His example is Southwest Airlines, with 15-minute gate turnarounds, a standard fleet of 737s, and no meals or assigned seats. Continental Airlines tried to match it on some routes with Continental Lite while remaining a full-service airline. According to Porter it lost hundreds of millions of dollars, because the two positions required incompatible things. These details date from 1996 and do not describe those companies today.

An invented example: an online coffee shop advertises 24-hour delivery. Its three rivals can book the same courier the following week, so this is not a sustained advantage. If it also roasts to order next to the warehouse, with low minimum orders and a subscription designed around that rhythm, a rival would have to change several activities at once. That is closer to what Porter describes, provided customers pay more for that coffee.

For Porter, sustainable competitive advantage is the basis of above-average performance in the long run. Profitability depends on two things: how attractive the industry is, which Porter's five forces analyse, and the company's position within it, which is the subject of this entry. His argument rests on cases and theory, so this entry cannot confirm that firms stuck in the middle always earn less.

The concept also helps decide what not to do. In 1996 Porter argues that strategy is largely a matter of choosing what to leave out. Back in 1985 he wrote that being all things to all people often leaves a firm with no advantage at all.

Three nearby terms answer different questions: - The value proposition is what a company promises a group of customers. The advantage is what lets it deliver that better or at lower cost than others. A strong promise can be written with no advantage behind it. - Brand positioning is the place a brand holds in the audience's mind. Porter's strategic positioning is about activities, and he warns that without them a position is only a slogan. A brand can sit well in people's minds with no advantage holding it up. - The value chain is a method of analysis: it shows where to look for the advantage.

• Write the advantage in one sentence, with a specific competitor and the reason the customer pays for it.
• Decide whether it rests on cost or differentiation, and in what scope of the market.
• Keep costs close to rivals if you differentiate, and quality comparable if you compete on cost.
• Separate what you need in order to keep competing from what actually sets the company apart.
• Ask what a rival would have to change to copy it, and how long that would take.
• Review it when a competitor matches the offer or customers stop paying for it.

• Calling any strength an advantage.
• Presenting as an advantage what the whole industry already does, such as best practices or common certifications.
• Confusing the lowest cost with the lowest price.
• Going for cost leadership when a larger rival is chasing the same goal.
• Differentiating on something customers do not pay for, or that costs more than the premium brings in.
• Wanting both at once without checking Porter's exceptions.
• Mistaking the promise in a value proposition for the ability to keep it.