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6 Sources of Competitive Advantage

        posted by , April 29, 2013

If business has a fundamental law, it's the law of competitive advantage.

Competitive advantage is when your firm does (or has) something better than any other firm.

It's the law of the business jungle. If you have a competitive advantage you might be able to charge high prices and still enjoy superior sales. Alternatively, you might produce something at a lower cost than other firms. In this case you might be able to charge prices so low that the competition drop out of the market.

Definition: Competitive Advantage

Competitive advantage is a superior ability or resource that allows one firm to out compete all others in some area.

more: what's competitive advantage?

Competitive advantage is widely misunderstood. It shows up in every business plan as a synonym for "good".

Competitive advantage is often confused with pricing, cost, return on investment, margins, innovation, sustainability, brand and reputation. In other words, businesses tend to call anything they consider good to be a competitive advantage.

This is a cause and effect mix up. For example, reputation isn't a competitive advantage. It's the effect of competitive advantage. If you do something very well you may obtain a strong reputation. You can't map it the other way, you can't say that you have a strong reputation so you do things very well.

There are 6 sources of competitive advantage.

1. People

People are the driving force behind most competitive advantage. If your people are better at innovating, creating, producing and establishing relationships you may achieve competitive advantages.

Your competitors may be able to copy your products but they'll never be able to copy your people (although they might poach them). It's common for much of a firm's competitive advantage to be safely locked up in the tacit knowledge of its employees.

2. Organizational Culture & Structure

Organizational culture is the shared habits, behavior, beliefs, mission, norms and symbols of your organization.

You could have the best and brightest workforce on the planet — it's not going to matter if they have no common mission. If your people put all their energy into negative politics or resisting change you'll be ineffective.

An effective culture focuses the energies and abilities of your people on producing meaningful results.

3. Processes & Practices

If you have superior methods of producing results you may enjoy competitive advantages. Processes and practices can be difficult for competitors to replicate.

Example: Process Based Competitive Advantage

In 1855, inventor Henry Bessemer took out a patent on a process for the mass-production of steel. It became one of the most valuable patents in history. The process reduced the cost of producing steel from £40 per ton to £6 per ton.

Bessemer initially sold the patent. The purchaser couldn't get the process to work. The patent involved some elusive tacit knowledge that was difficult to express on paper.

Legal battles ensured. In the end, Bessemer ended up running his own steel mills. His company became one of the world's largest and most profitable firms.

4. Products & Intellectual Property

The design of your products can be a competitive advantage. However, this is typically easy for competitors to replicate. Intellectual property laws can protect your rights to product, technology and process designs.

5. Capital & Natural Resources

Capital and access to natural resources were traditionally the source of most competitive advantage. The importance of capital has declined over time. For example, capital is the primary competitive advantage in old industries such as transport. If you own a railway that has exclusive routes, it's difficult for the competition to build a route to compete. New industries such as information technology are less capital intensive.

6. Technology

Technology rose as a major factor in competitive advantage with the industrial revolution. At first, technology included industrial machinery, transportation technology, energy, office equipment and consumer products. In the 20th century information technology and biotechnology emerged as major factors.

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