PORTER'S SUSTAINABLE COMPETITIVE ADVANTAGE MODELWhen a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. The goal of much of business strategy is to achieve a sustainable competitive advantage. Michael Porter identified two basic types of competitive advantage:
A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, a competitive advantage enables the firm to create superior value for its customers and superior profits for itself. Cost and differentiation advantages are known as positional advantages since they describe the firm's position in the industry as a leader in either cost or differentiation. A resource-based view emphasizes that a firm utilizes its resources and capabilities to create a competitive advantage that ultimately results in superior value creation. The following diagram combines the resourcebased and positioning views to illustrate the concept of competitive advantage:  |
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Resources and Capabilities
According to the resource-based view, in order to develop a competitive advantage the firm must have
resources and capabilities that are superior to those of its competitors. Without this superiority, the
competitors simply could replicate what the firm was doing and any advantage quickly would disappear.
Resources are the firm-specific assets useful for creating a cost or differentiation advantage and that few
competitors can acquire easily. The following are some examples of such resources:
Capabilities refer to the firm's ability to utilize its resources effectively. An example of a capability is the
ability to bring a product to market faster than competitors. Such capabilities are embedded in the routines
of the organization, are not easily documented as procedures, and thus are difficult for competitors to
replicate.
The firm's resources and capabilities together form its distinctive competencies. These competencies enable
innovation, efficiency, quality, and customer responsiveness, all of which can be leveraged to create a cost
advantage or a differentiation advantage.
Cost Advantage and Differentiation Advantage
Competitive advantage is created by using resources and capabilities to achieve either a lower cost structure
or a differentiated product. A firm positions itself in its industry through its choice of low cost or
differentiation. This decision is a central component of the firm's competitive strategy.
Another important decision is how broad or narrow a market segment to target. Porter formed a matrix
using cost advantage, differentiation advantage, and a broad or narrow focus to identify a set of generic
strategies that the firm can pursue to create and sustain a competitive advantage.
Value Creation
The firm creates value by performing a series of activities that Porter identified as the value chain. In
addition to the firm's own value-creating activities, the firm operates in a value system of vertical activities
including those of upstream suppliers and downstream channel members.
To achieve a competitive advantage, the firm must perform one or more value creating activities in a way
that creates more overall value than do competitors do. Superior value is created through lower costs or
superior benefits to the consumer (differentiation).
According to the resource-based view, in order to develop a competitive advantage the firm must have
resources and capabilities that are superior to those of its competitors. Without this superiority, the
competitors simply could replicate what the firm was doing and any advantage quickly would disappear.
Resources are the firm-specific assets useful for creating a cost or differentiation advantage and that few
competitors can acquire easily. The following are some examples of such resources:
- Patents and trademarks
- Proprietary know-how
- Installed customer base
- Reputation of the firm
- Brand equity
Capabilities refer to the firm's ability to utilize its resources effectively. An example of a capability is the
ability to bring a product to market faster than competitors. Such capabilities are embedded in the routines
of the organization, are not easily documented as procedures, and thus are difficult for competitors to
replicate.
The firm's resources and capabilities together form its distinctive competencies. These competencies enable
innovation, efficiency, quality, and customer responsiveness, all of which can be leveraged to create a cost
advantage or a differentiation advantage.
Cost Advantage and Differentiation Advantage
Competitive advantage is created by using resources and capabilities to achieve either a lower cost structure
or a differentiated product. A firm positions itself in its industry through its choice of low cost or
differentiation. This decision is a central component of the firm's competitive strategy.
Another important decision is how broad or narrow a market segment to target. Porter formed a matrix
using cost advantage, differentiation advantage, and a broad or narrow focus to identify a set of generic
strategies that the firm can pursue to create and sustain a competitive advantage.
Value Creation
The firm creates value by performing a series of activities that Porter identified as the value chain. In
addition to the firm's own value-creating activities, the firm operates in a value system of vertical activities
including those of upstream suppliers and downstream channel members.
To achieve a competitive advantage, the firm must perform one or more value creating activities in a way
that creates more overall value than do competitors do. Superior value is created through lower costs or
superior benefits to the consumer (differentiation).
