Know Competitive Advantage and Its Application in Business
One of the business challenges faced by companies is how to achieve competitive advantage or sustainable competitive advantage compared to products and competitors. Let's look at the meaning of competitive advantage and its effect on the company.
What is Competitive Advantage?
Competitive advantage is a position that benefits a company with the aim of getting more advantages than competitors. In achieving and maintaining a competitive advantage, a company must be able to show a greater comparison or difference in value from competitors and convey this information to the intended target market.
For example, if a company advertises by showing a lower price for a product or service that a competitor also has, that company likely has a competitive advantage. The same is true if the advertised product or service costs more, but offers unique features that customers are willing to pay for.
Porter's Technique for Analyzing Competitors
Michael Porter, a professor from Harvard Business School, looks at successful businesses and creates a framework for how leaders can think strategically to beat the competition.
Porter suggests that companies analyze and understand competition through five important criteria which Porter calls the Five Forces. Once that is achieved, it is recommended the use of three generic strategies to assist leadership in making the best choice about the type of competitive advantage to pursue. Porter states that the attractiveness of a market segment is determined by five competitive forces:
1. Threat of new entrants - The ease with which new competitors enter an already created market.
2. Competition among existing competitors - The number of competitors offering the same product or service at nearly the same price.
3. Threat of substitute products or services - Opportunities for customers to switch to products or services from other companies.
4. Buyer power - Buyer's ability to lower prices
5. Power of suppliers or suppliers - Ease of suppliers to increase prices
The initial three forces are also known as horizontal competition. Variables in horizontal competition include the possible threat of new entrants, competition among old competitors, and the threat of substitute products or services.
The last two forces are also referred to as vertical horizontal competition which depends on the supply chain, raw material prices, labor costs, and customer relationships with products, brands or companies.
Porter's Technique for Creating Superior Performance
Once the profit potential in the market has been established, the next step to gain a competitive advantage is to decide whether to use the low-key approach or the differentiation approach. The next three strategies or elements are part of the framework for defining to whom products and services should be marketed.
1. Cost Leadership Strategy - Should the price offer of goods or services be lower than competitors?
2. Differentiation Strategy - Should the goods or services offered have unique features or benefits that attract customers so much that they are willing to pay above-average prices.
3. Focus Strategy - Should the product or service target a niche market that competitors are ignoring or not serving?
Porter also sees a long-term competitive strategy, sustainable and sustaining that creating a sustainable competitive advantage not only helps improve the company's image but also affects its valuation and future earnings potential.
Creating a Sustainable Competitive Advantage
Sustainable competitive advantage refers to the goal of maintaining a favorable position in the long term, which can help improve the company's image in the market, its value, and its future earnings potential.
Strategic management expert Jay B. Barney took Porter's ideas and developed them, adding elements to maintain a competitive advantage over time. Barney suggested that a company should not only look at external influences when analyzing competitive situations, companies should also look within or internally to achieve a sustainable competitive advantage.
Barney writes that previous frameworks, including Porter's, were based on the erroneous assumption that all firms in the same industry share the same attributes. In fact, each company has its own differences and uniqueness, so according to Barney, the company should show it and take advantage of it to gain a competitive advantage.
Resource-Based View (RBV) and Valuable, Rare, Inimitable, and Non-Substituable (VRIN)
Barney proposes using a framework known as the Resource-Based View (RBV). This competitive advantage framework emphasizes the company's core competencies, the combination of skills and resources that make the company unique compared to existing competition with competitors.
According to Barney, in order for a resource to have the potential as a source of sustainable competitive advantage, the resource must be valuable, rare, cannot be imitated, and cannot be replaced (VRIN). Barney categorizes resources as tangible or intangible.
Some examples of tangible or tangible resources are technology that other competitors can buy to gain a competitive advantage. Meanwhile, intangible resources include brand recognition or a positive image. It cannot be bought and is the main source of sustainable competitive advantage.
Improving the core competencies of a company can be started by identifying the main resources of a company. After that, use the VRIN framework to determine whether the resource is strong enough to provide a sustainable competitive advantage.
These are some of the frameworks for gaining competitive advantage for the company. This can provide long term benefits. Achieving a competitive advantage is not only a matter of looking for differences or comparing, but also exploring the uniqueness of the resources you have.
Innovations made by the company are needed to maintain continuity to be able to get to know the product. To deal with dynamic situations, business executives need to equip themselves with strategic business analysis skills.
Through the Strategic Business Analysis program, company executives will have the ability to analyze various factors that lead to understanding, translation, and characterization of strategic issues that determine the company's survival in order to succeed in the business competition arena.