A competitive advantage is an attribute that gives a business organization the capability to outcompete or outperform its competitors. In other words, it corresponds to the leverage an organization has over its counterparts. There are different ways to gain or develop this capability or leverage. Of course, it is first important to understand the major sources of competitive advantage.
The sources of competitive advantage
1. Intellectual Property Rights
Control and ownership of specific types of intellectual property can give an organization an advantage in the marketplace. Remember that there are laws that prevent individuals or other organizations from acquiring and using resources, capabilities, identities, and information that fall under the category of intellectual property. These laws are collectively referred to as intellectual property rights. Consider the following:
• Patents: A patent is a set of exclusive rights to a particular invention. Securing a patent gives an organization the right to exclude others from acquiring and using the invention it owns, such as a patented technology, product, or process. An owner of a patent can sue another party for using a similar invention. In the United States, for example, a pharmaceutical company can develop its own drug for a particular medicine and secure a patent for such to prevent its competitors from making and selling a similar drug.
• Trade Secrets: Organizations employ practices and processes, as well as use formula, design, pattern or methods, and instrument to manufacture goods or deliver services. Most of the time, these are kept confidential, especially if they confer an economic value. These are trade secrets, and they are protected under relevant intellectual property laws, particularly through non-disclosure agreements and non-compete clause with employees and contractors.
• Trademark and Trade Dress: The company name, brand name, logo, and symbol used by an organization, as well as the distinctive visual appearance of its products and their corresponding packaging are protected by intellectual property laws. Take note that trademark and trade dress can give an organization an advantage through brand reputation, recall, and differentiation.
• Copyright: Any work of authorship fixed in a tangible medium of expression is protected by applicable copyright laws. Examples include books, articles, and songs, as well as the source code of a software or application. As a source of competitive advantage, for example, organizations involved in media and publishing, as well technology companies have the exclusive right to reproduce, distribute and sell, and display in public their copyrighted properties.
From the aforementioned, intellectual property rights are a source of competitive advantage because of the exclusivity they provide. There are many instances in which organizations assert such rights to prevent their competitors from profiting from their intellectual property, such as the “red sole trademark case” of Christian Louboutin S.A. against Yves Saint Laurent SAS or the infringement lawsuit of Apple Inc. against Samsung Electronics Co.
2. Technology and Innovation
The development and use of technological products or innovative solutions can improve the performance of an organization in numerous ways. When these technologies or innovations are unique to an organization, they become a source of competitive advantage. Take note of the following examples:
• Information Technology and Information Systems: Organizations that use information technology and information systems in their operations are more advantageous than those that are not. Fundamentally, IT can improve processes through automation of tasks while information systems can aid in decision-making. A better IT and IS infrastructure and capabilities result in better organizational efficiency.
• Automation and Process Improvement: A particular attention should be directed toward the benefits from automation and technology-driven process improvements. Both can result in the economies of scale, thus allowing an organization to gain advantage through reduced time and cost used in operation, specifically in the manufacturing of goods or the delivery of services. The use of the moving assembly line process at Ford Motor Company during the 1900s allowed the company to outperform other automakers through faster and large-scale production.
• Research and Development Capability: The capacity of an organization to make and introduce new and feasible products or services can also bring forth specific competitive advantages. For example, the introduction of the iPod media players and the iPhone smartphone from Apple revolutionized the music recording industry and mobile phone markets in the world, thus giving the company an unprecedented reputation, as well as a first-to-market advantage.
It is interesting to note that there are overlaps between technology and intellectual property. Technology-based processes can be protected either by laws relevant to either patent or trade dress. Furthermore, novel technological products developed by an organization are eligible for patents. Nonetheless, technology and innovation can be a source of competitive advantage, especially if they promote operational efficiency by reducing time and cost, or if they result in the creation of new products with achievable economic value.
3. Marketing Strategy and Tactics
Specific elements of a marketing strategy and the corresponding marketing tactics can also serve as sources of competitive advantage, mainly by enabling an organization to maximize its reach to its potential customers. Below are some examples:
• Pricing Strategy: Depending on the capability of an organization, a particular type of pricing strategy can give it an edge over its competitors. Penetrative pricing, as supplemented by cost advantage, allows an organization to enter a new market by selling similar goods or services at a lower price. Chinese smartphone manufacturers such as have demonstrated this fact. On the other hand, brands with an established favorable reputation can maintain their premium prices than untested counterparts, thus possibly giving them higher profit margins while maintaining their premium image. This is true for manufacturers of luxury fashion houses and retail companies. Both penetrative and premium pricing strategies are examples of pricing advantage.
• Differentiation and Positioning: Products that offer unique and original features or benefits can outcompete their counterparts, especially if their differentiating characteristics are protected by relevant intellectual property laws, and if they exhibit clear brand positioning. Differentiation and positioning can lead to specific advantages. One is a first-to-market advantage that adheres to the principle of Blue Ocean Strategy due to the creation of an uncontested market space. Another is targeted marketing that gives a good or service a niche within an established market space.
• Established Branding: Brand reputation and brand recall can translate to favorable public perception. Organizations with highly favorable brands can secure the interest of their consumers from their competitors as long as they can maintain a positive perception. Also, favorable reputation corresponds to trust and reliability that in turn, can promote and sustain brand loyalty. Established branding is essentially a barrier to entry for new market entrants or emerging competitors. Note that trademark and trade dress laws protect certain elements of branding.
• Distribution: The movement of goods or delivery of services to consumers is an important marketing consideration. Some organizations have achieved a competitive advantage through their distribution strategy. For example, a food manufacturer with an exclusive arrangement with a large chain of supermarkets prevents its competitors from accessing an expansive distribution channel. Furthermore, the extensive presence of a consumer electronics company in different geographic markets can translate to extensive sales and after-sales support, thus outperforming other manufacturers with minimal presence. Efficient distribution channels can also lead to cost advantage.
4. Stakeholder Relationship
The theory of stakeholder integrates a market-based view and a resource-based view while adding social and political dimensions to the strategic management of an organization. It states that an organization exists not only to satisfy its owners and consumers but also to promote the interest of different parties or entities affected by its operation. Hence, building and maintaining strong relationships with stakeholders can serve as a source of competitive advantage. Consider the following examples:
• Employee Hiring and Retention: A workforce composed of competent professionals is critical to achieving organizational goals and objectives. Organizations with solid hiring and retention practices can outperform others in terms of attracting and retaining professionals in the labor market. Specific strategies for gaining advantage through the workforce include offering competitive salary and benefits packages, providing professional development training or sponsorship, and other activities or programs aimed at boosting and sustaining motivation.
• Procurement Strategy: Exclusive agreements between an organization and its suppliers can prevent competitors from building a similar supply chain. Note that a sound procurement strategy produces advantages similar to a distribution strategy. These advantages include exclusivity and cost leadership. Examples include an exclusive agreement between a technology company and different manufacturers of electronic components, or between a food manufacturer and suppliers of agricultural products.
• Ecosystems and Complements: Other organizations produce goods or provide services to complement the products of another organization. For example, through the introduction of the iOS and the popularity of iPhone, Apple has created an ecosystem composed of software developers. The established reputation of iPhone and the regular interactions of Apple with software developers have made iOS one of the major mobile operating systems through a robust app ecosystem, thus outcompeting other mobile OS such as Symbian and Windows Mobile.
• Social Responsibility: Some argues that the only responsibility of organizations centers on promoting the interest of its owners or shareholders. However, the socioeconomic model of corporate social responsibility explains that the competitiveness of an organization and the health of the community in which it operates are mutually exclusive. Organizations with CSR policies and programs can create win-win situations by enhancing their brand and helping them avert potential social backlash.
5. Management and Organizational Strategies
• Geographic Lead: Location can also give an organization a lead over its competitors. Consider China as an example. Technology companies in the U.S. such as Google and Apple Inc. are having a hard time entering the Chinese market due to legal and sociocultural restrictions. Hence, Chinese companies have more advantage than foreign companies in terms of reaching the local market due to proximity and the favorability of legal and sociocultural predispositions. In a different scenario, a reputable organization with an extensive geographic presence can enjoy advantages stemming from access to resources, a broader market reach, and better industry relationships. Note that access to natural or human resources also corresponds to geographic advantage.
• Vertical Integration: Vertical integration is an organizational structure in which an organization owns and controls other firms or subsidiaries that form part of its entire value chain. Note that vertical integration is a motivation for merger and acquisition. The advantages arising from vertical integration can include supply and distribution exclusivity, as well as direct control over the ecosystem of complementary products. For instance, that Alphabet Inc. owns and controls other producers or providers of complementary products such as the Google Search, Google AdSense, and the Android platform, among others, to access opportunities from different facets of the technology industry and sector while maintaining market dominance.
• Access to Financing: Different types of financing or numerous schemes for raising capital can correspond to a competitive advantage. For example, a publicly-traded company can have an edge over a privately-held competitor because of access to financing through equity that can be used to expand its operation or develop new products for new markets. Organizations with good financial standing are also more likely to secure financing through debt than counterparts experiencing financial difficulties.
Takeaway: Understanding the sources of competitive advantage
It is important to mention the fact that the concept of competitive advantage has similarities or overlaps with concepts such as the economies of scales or the barriers to entry. Both economies of scale and barriers to entry are general sources of competitive advantage. For example, a patent can serve as a source of competitive advantage and also an example of a barrier to entry. Automation also brings forth a competitive advantage by promoting an economy of scale.
Nonetheless, determining or developing the sources of competitive advantage of a particular organization requires a thorough analysis of its internal and external environments, perhaps through the use of analytical tools such as the SWOT matrix, the Five Forces Model, or the VRIO framework, among others.