COMPETITIVE ADVANTAGE

What is Competitive Advantage?

Competitive advantages are conditions that allow a company or country to produce a good or
service of equal value at a lower price or in a more desirable fashion. These conditions allow the
productive entity to generate more sales or superior margins compared to its market rivals.

Competitive advantages are attributed to a variety of factors including cost structure, branding,

the quality of product offerings, the distribution network, intellectual property, and customer
service.

Porter's Generic Competitive Strategies

A firm's relative position within its industry determines whether a firm's profitability is above or
below the industry average. The fundamental basis of above average profitability in the long run
is sustainable competitive advantage. There are two basic types of competitive advantage a firm
can possess: low cost or differentiation. The two basic types of competitive advantage combined
with the scope of activities for which a firm seeks to achieve them, lead to three generic
strategies for achieving above average performance in an industry: cost leadership,
differentiation, and focus. The focus strategy has two variants, cost focus and differentiation
focus.

In 1985, Harvard Business School professor Michael Porter wrote "Competitive

Advantage."1  It's the definitive business school textbook on the topic. He wrote it to help
companies to create a sustainable competitive advantage. Just because a company is the market
leader now, doesn't mean it will be forever. A company must create clear goals, strategies, and
operations to build sustainable competitive advantage. The corporate culture and values of the
employees must be in alignment with those goals. 

It's difficult to do all those things well. It's especially difficult to do them year in and year out.
Porter outlined the three primary ways companies achieve a sustainable advantage. They are cost
leadership, differentiation, and focus. Porter identified these strategies by researching hundreds
of companies.  

1. Cost Leadership

Cost leadership means companies provide reasonable value at a lower price. Firms do this by

continuously improving operational efficiency. That usually means paying their workers less.
Some compensate for lower wages by offering intangible benefits such as stock options,
benefits, or promotional opportunities. Others take advantage of unskilled labor surpluses. As
these businesses grow, they can benefit from economies of scale and buy in bulk. Walmart and
Costco are good examples of cost leadership. But sometimes they pay their workers less than
the cost of living. Higher minimum wage laws threaten their advantage.

In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of
cost advantage are varied and depend on the structure of the industry. They may include the
pursuit of economies of scale, proprietary technology, preferential access to raw materials and
other factors. A low cost producer must find and exploit all sources of cost advantage. if a firm
can achieve and sustain overall cost leadership, then it will be an above average performer in its
industry, provided it can command prices at or near the industry average.
 
2. Differentiation

Differentiation means companies deliver better benefits than anyone else. A firm can achieve
differentiation by providing a unique or high-quality product. Another method is to deliver it
faster. A third is to market in a way that reaches customers better.

A company with a differentiation strategy can charge a premium price. That means it usually has
a higher profit margin. Companies typically achieve differentiation with innovation, quality,
or customer service. Innovation means they meet the same needs in a new way. An excellent
example of this is Apple. The iPod was innovative because it allowed users to play whatever
music they wanted in any order. Quality means the firm provides the best product or service.
In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that
are widely valued by buyers. It selects one or more attributes that many buyers in an industry
perceive as important, and uniquely positions itself to meet those needs. It is rewarded for its
uniqueness with a premium price.
 
3. Focus

Focus means the company's leaders understand and service their target market better than
anyone else. Their either use cost leadership or differentiation to do that. The key to a successful
focus strategy is to choose a very specific target market. Often it's a tiny niche that larger
companies don't serve. For example, community banks use a focus strategy to gain sustainable
competitive advantage. They target local small businesses or high net worth individuals.
Their target audience enjoys the personal touch that big banks may not be able to
give. Customers are willing to pay a little more in fees for this service. These banks are using a
differentiation form of the focus strategy.

The generic strategy of focus rests on the choice of a narrow competitive scope within an
industry. The focuser selects a segment or group of segments in the industry and tailors its
strategy to serving them to the exclusion of others.

The focus strategy has two variants:

(a) In cost focus a firm seeks a cost advantage in its target segment, while 
(b) in differentiation focus a firm seeks differentiation in its target segment.

Both variants of the focus strategy rest on differences between a focuser's target segment and
other segments in the industry. The target segments must either have buyers with unusual needs
or else the production and delivery system that best serves the target segment must differ from
that of other industry segments. Cost focus exploits differences in cost behaviour in some
segments, while differentiation focus exploits the special needs of buyers in certain segments.
One way to analyze your competition – and understand your standing in your industry – is using
Porter's Five Forces model. Originally developed by Harvard Business School's Michael E.
Porter in 1979, the five forces model looks at five specific factors that determine whether or not a
business can be profitable in relation to other businesses in the industry. Using Porter's Five
Forces in conjunction with a SWOT analysis will help you understand where your company or
business fits in the industry landscape.

Porter's Five Forces Model

Porter's Five Forces of Competitive Position Analysis were developed in 1979 by Michael E
Porter of Harvard Business School as a simple framework for assessing and evaluating the
competitive strength and position of a business organisation.

This theory is based on the concept that there are five forces that determine the competitive
intensity and attractiveness of a market. Porter’s five forces help to identify where power lies in a
business situation. This is useful both in understanding the strength of an organisation’s current
competitive position, and the strength of a position that an organisation may look to move into.

Strategic analysts often use Porter’s five forces to understand whether new products or services
are potentially profitable. By understanding where power lies, the theory can also be used to
identify areas of strength, to improve weaknesses and to avoid mistakes.

Porter's Five Forces is considered a macro tool in business analytics – it looks at the industry's
economy as whole, while a SWOT analysis is a microanalytical tool, focusing on a specific
company's data and analysis.
"Understanding the competitive forces, and their underlying causes, reveals the roots of an
industry's current profitability while providing a framework for anticipating and influencing
competition (and profitability) over time," Porter wrote in a Harvard Business Review article. "A
healthy industry structure should be as much a competitive concern to strategists as their
company's own position."
Porter theorized that understanding both the competitive forces at play and the overall industry
structure are crucial for effective, strategic decision-making, and developing a compelling
competitive strategy for the future. “The Five Forces is a framework for understanding the
competitive forces at work in an industry and which drive the way economic value is divided
among industry actors”
The Five Forces can help explain these kind of phenomena as well as help:

 understand your industry of interest

 identify attractive vs less attractive industries/markets
 identify opportunities and risks
 how profits within an industry will be distributed
 extrapolate industry trends & anticipate changing trends

The Five Forces are:

1. Bargaining power of buyers

2. Bargaining power of suppliers
3. Threat of new entrants
4. Threat of substitutes
5. Rivalry among existing competitors
(1) Bargaining Power of Buyers

Where buyers are powerful profits are generally lower. Buyer power can lead to lower prices or
having to increase costs by adding features, services, quantity in order to sell. Where sellers have
too much power over buyers opportunities can emerge for others. This force examines the power
of the consumer, and their effect on pricing and quality. Consumers have power when they are
fewer in number but there are plentiful sellers and it's easy for consumers to switch. Conversely,
buying power is low when consumers purchase products in small amounts and the seller's
product is very different from that of its competitors.
Bargaining power can be exercised in different ways. Bargaining power can also be exercised
indirectly through purchase decisions of end customers, i.e buying from the lowest-priced
company, deferring the purchase for a prolonged period, buying pre-owned (e.g. car) or not
purchasing at all.

When you read the below remember we are not just talking about end-buyers. Apple is a seller to
the end customers but they are also a buyer of components, such as displays, graphic processing
units (GPUs), system on a chip (SoC).

Factors that influence buyer bargaining power:

(a) Supplier’s switching costs: 

Switching costs can affect both sides, suppliers and customers. Customer switch costs are more
prominent. Where suppliers face switching costs buyers have more leverage.

(b) Differentiation of products

Where products are not differentiated (i.e. all competing products have pretty much the same
value proposition), competition will be all about the price. Buyers will have the upper hand in
particular where there are many competing products.
(c) Buyer information availability:

The buyer may not have enough info to make good cost-benefit tradeoffs. Products can be
opaque or complex.This can lead to the company with the biggest marketing spend exert power
over the customer.

(d) Power of distribution channels:

Large retailers, such as Amazon, Walmart) have enormous power over their suppliers. Apple
opened their own stores (online and brick-and-mortar) to reduce their retailer’s power. They now
dictate the terms (prices and maximum discounts) that normal retailers have to sign up to if they
want to sell Apple products

(f) Bargaining leverage, particularly in industries with high fixed costs

Industries with high fixed costs (e.g. hotels, airlines) need to maximise revenue to contribute to
their high fixed costs. This erodes their bargaining power esp if the industry has over-capacities
and little differentiation

Some other factors are:

 Buyer price sensitivity (or demand elasticity)

 Fragmentation of suppliers
 Discretionary vs staples

(2) Bargaining Power of Suppliers

Where suppliers are powerful they may make a larger profit margin than the company that
integrates the inputs of several supplier to sell to the end customer. This force analyzes how
much power a business's supplier has and how much control it has over the potential to raise its
prices, which, in turn, lowers a business's profitability. It also assesses the number of suppliers of
raw materials and other resources that are available. The fewer supplier there are, the more
power they have. Businesses are in a better position when there are multiple suppliers.
Important factors that give suppliers bargaining/pricing power:
 Customer’s switching barriers
 Patent and industry standards
 Brand equity
 Limited competition
 Supplier vs buyer concentration
 Strength of distribution channels
 Organisation of labourAfter sales:
 Other factors:

 Dependency on the product

 services/goods with inelastic demand 
 Buyer is not price sensitive, e.g. luxury products, recreational drugs
 Goods/services not frequently purchased or low share of wallet (herbs, salt, etc)
 Loyalty programs

(3) Threat of New Entrants

This force considers how easy or difficult it is for competitors to join the marketplace. The easier
it is for a new competitor to gain entry, the greater the risk is of an established business's market
share being depleted. Barriers to entry include absolute cost advantages, access to inputs,
economies of scale and strong brand identity.
A company that makes above industry-average profits will face the risk of new entrants that may
either imitate bluntly or come up with similar (or even somewhat better) value proposals. This
threat alone can keep a lid on the achievable profits. New entrants will add new capacity, thus
supply, to the market which will reduce prices (at least in the medium term). The pace at which
competition can form depends on a number of factors listed below.

(a) Barriers to entry: 

Barriers to entry are economic costs that entrants pay which incumbents do not have to pay
(nor had to pay). This is an important concept in economics, strategy and competition law.
Having to work around patents or established (exclusive or restrictive) supplier or distribution
 agreements are just a few factors. Things like high start-up capital, learning curves, etc are not
seen as barriers to entry from the theoretical definition of this term. From a practical
perspective, they do play a role. You can easily imagine that late movers may find it much
more difficult to raise capital when there are already a few strong established players. Michael
Porter points out the importance of exit barriers in combination with barriers to entry.

These markets combine the attributes:

 “Markets with high entry barriers have few players and thus high profit margins.
 Markets with low entry barriers have lots of players and thus low profit margins.
 Markets with high exit barriers are unstable and not self-regulated, so the profit margins
fluctuate very much over time.
 Markets with a low exit barrier are stable and self-regulated, so the profit margins do not
fluctuate much over time.

(b) Economies of scale: as scale goes up unit costs go down. This is another micro economic
concept that holds true for most firms. Thus, incumbents can achieve higher profits as they have
already achieved lower unit costs whereas new entrants have to get to the scale where their unit
costs are comparable. Up to that point, they may not be able to have as low prices or have lower
profits (thus less cash for further growth)

(c) Industry profitability: The higher industry-profits relative to other industries or the higher
the profits of the incumbent relative to the industry, the higher are incentives for new entrants
(and capital more accessible) and vice versa

(d)Powers of incumbents: here are some dimensions which I have already explained where
incumbents may already be ahead (which may deter entrants):

 Network effects
 Customer switching costs
 Brand equity
 Patents
 Customer loyalty
  Product differentiation

(e) Expected retaliatory actions

As incumbents are further down the unit cost curve and likely more cashed up they can reduce
prices when new competition emerges to make it hard for them (though there are limits posed by
competition law in many countries). There can be all sorts of other retaliatory action

(f) After sales markets

Many maintenance and asset management plans for capital assets (major plant components,
generators, turbines, engines, vehicles or even cars) require access to the data and the ability
(intellectual property) to analyse and interpret it in value-adding ways. Even where the data is
documented, the IP to analyse often resides with the OEM who either has their own service arm
or licensed (for a fee/royalties) service vendors

(4) Threat of Substitute Products or Services

Let’s first clarify what a substitute is. It is almost the same the same product from a different
company. Buying petrol from a different brand petrol station is not a substitute. Using a train to
commute to work is a substitute for using a car (on the transport dimension/industry). This force
studies how easy it is for consumers to switch from a business's product or service to that of a
competitor. It examines the number of competitors, how their prices and quality compare to the
business being examined, and how much of a profit those competitors are earning, which would
determine if they can lower their costs even more. The threat of substitutes is informed by
switching costs, both immediate and long-term, as well as consumers' inclination to change.
Substitutes satisfy the same basic/economic need (or utility) using a different technology (in a
narrower viewpoint coming from the same industry). Clayton Christensen’s concept of “getting
the job done” extends this definition. E.g. there are many things that compete for your
recreational time which may be suitable to substitute each other. In this case, the substitutes may
be coming from an entirely different industry.
Factors affecting the threat of substitutes:

 Price-performance comparison
 Buyer’s switching costs 
 Purchase factors 
 Product differentiation
 Number of substitute products 

(5) Rivalry Among Existing Competitors

This force examines how intense the competition is in the marketplace. It considers the number
of existing competitors and what each one can do. Rivalry competition is high when there are
just a few businesses selling a product or service, when the industry is growing and when
consumers can easily switch to a competitor's offering for little cost. When rivalry competition is
high, advertising and price wars ensue, which can hurt a business's bottom line.
Not all industries are equal. Some are much more competitive than others. Prof Porter has
identified the settings that frequently lead to fierce competition.

Ingredients of highly competitive industries are:

 Many competitors of similar size 

 Slow aggregate industry growth 
 High fixed costs
 High exit barriers 
 Highly committed players
 Competitors having different goals or ways of measuring success.
Competitive Advantages in eCommerce

7 Strategies for Competitive Advantages in eCommerce

eCommerce has changed the face of business. If you have an eCommerce business, you need to
know your weapons.  You need to nourish it properly to reap the benefits.

Anything sells on the internet but you do need to make sure that you are promoting your brand or
business in the right way. There is so much competition that businesses with zero marketing will
not make the cut.

You have to be aggressive and you have to be ahead of others. Even if you have a fancy
eCommerce website design in which you poured a lot of money, it will not do any good if you
cannot generate traffic for your website. For generating traffic, you need to know the ins and outs
of the eCommerce industry and make a plan accordingly.

You need to apply strategies for competitive advantages in eCommerce so that your business
gets popular in no time.

You need to build strategies for if you want your business to thrive. Here are a few strategies
which you can try;

1. Pick a specific niche & target audience

People are becoming more and more dependent on technology and exploring more possibilities
of the internet. As a result, they are getting used to online shopping instead of physically getting
up and going to a shop.

This made their life easier as it should have, especially for people who tend to be busy with their
jobs and household chores. This includes people who have a 9 to 5 job, moms, double shifters,
startup entrepreneurs, and elderly people who don’t feel like going out for small things. And
also, teenagers are already into doing things online.

As you can see, the demographic is huge and so is your potential customer. So, it’s natural to
expect people of all age, race, religion, and location to be your customer.  This is where many
eCommerce store owners make their mistake – at least the ones who fail.

There are several advantages of targeting towards a specific group of people or sticking with a
specific niche. First of all, advertising gets easy. Secondly, you get more product ideas when you
have a specific audience in mind. You know what features you should add and what should be
modified. If you tried to direct your products to everyone, you’ll have to listen to everyone’s
opinions and feedback, which is impossible, mainly because different age or gender of people
will have different preferences. That’s why it’s important to pick a specific niche and a specific
audience.

2. Personalize your website

Since you got your niche selected, it’s time to personalize your website based on your niche and
your target audience.

Design your website in a way that your target audience finds value every time they visit. So,
put contents on the webpage only if it is relevant. Use images where necessary but don’t
overdo it. Remember that they came to your website for information about your products, not
for stock images.

You must ensure navigating through your site is easy. If your visitors can’t find the information
that they came here for, there’s no reason for having a website.

This ease-of-use also comes with device compatibility. If a website is not compatible with a
certain device that your visitor is accessing your website with, the person might not find the
contents in places where you’d want them to find. That’s why it is important that your website is
compatible with all devices including mobile, PC, tablet, etc.
Another thing that you should consider is storing your customers buying and payment habits.
Your customers’ habits tell a lot about your performance and how you should approach from
here.

Use data like this to create personalized experience for each customer. And don’t worry, there
are plenty of tools that let you integrate this information to your site and help you create a
personalized experience for each individual visiting your page.

3. Prepare the right content

Whatever your niche may be, one thing that is true for every niche is content really matters.
Content is king and the quality of contents, relevancy is also important.

Also, implementing SEO friendly keywords is important for your website. Otherwise, your
contents won’t be able to bring traffic to your sites. So, remember these three things when
producing content for your site. Quality, relevancy, and SEO optimization.

4. Go beyond your website – Use different channels to showcase your brand

Internet not only brought people closer. It brought everything in your reach so that you don’t
miss out on any opportunities. One of such opportunities that an eCommerce store owner should
not miss is utilizing social media and other channels to promote and showcase the brand.

Today, a brand is not confined within the website URL. People interact with companies all the
time, though their website, video contents on YouTube, social platforms etc. In fact, the
engagement in social platforms for most companies is way more than their engagement on the
site. So, it is understandable why brands are getting more and more involved with their target
audience outside their website.

These social media and platforms like Facebook, Instagram, Twitter, and video content sharing
platform YouTube, etc. are also a way to advertise the brands. As a matter of fact, this type of
advertisement is way more efficient than the traditional paper ads or television ads.
When brands put their advertisements and promotional banners in newspapers or TV, their
message reaches to the masses in general. But that should not be the goal, the goal should be
targeting a very specific group and advertising for them.

The advertisement tools and policies are so matured on these platforms that targeting a
specific audience is as easy as opening a soda bottle. You just need the tool and, in this case, the
tool is the advertisement models of these platforms.

All you’ll need to do is select the filters that reflect your target audience and the ads will do the
rest.

5. Create new partnerships

Collaboration and partnerships are important. Don’t back out from partnership offers that benefit
you at the right time.

6. Interact with your customers

Your business might be virtual but your customers are real. You might be operating your whole
business from a bunch of laptops but your customers are paying real money for it. It is important
to hear from your customers. Listen to what they have to say. If they do not like something,
improve on it. Give them what they desire or want to buy. Do not just keep on throwing makeup
and accessories because your target audience is women. If your niche target is stay-at-home
mothers, you might benefit from displaying furniture on your website.

7. Use social media as your weapon

Social media is the most powerful platform today. You will get to identify all your potential
customers by peeking into their personal lives. You will get to see their interests and habits. You
should invest a lot in social media. You can even direct people from social media directly to your
website. Think of Facebook, if one of your posts is appealing to someone, he or she might share
it. In this way, your post gets more generic views. Well, that’s the beauty of social media!
Conclusion
To stay and win in the market you need to build an eCommerce website which appeals to your
target group. Your business is nothing without your customers. Invest in their wants and you will
surely succeed. By following all the above-mentioned strategies; you will surely see results for
your eCommerce business. Success might not come overnight, but eventually, you will get there.