Sources of competitive advantage


The competitive advantage can emanate from any of the several functions that a firm performs making, production, R&D and personnel and any of the sub-functions under them. It means that for any firm, there is a multitude of sources of competitive advantage and competitive factors. The sources of competitive advantage listed as entities to be analyzed for carrying out strength-weakness appraisal. This is quite natural. The firm has to look for strengths and competitive advantages from the same array of sources. The additional task to be carried out in identifying the competitive advantage is to examine which of the strengths of the firm constitute a superior or distinctive strength relative to competition.

The above list of factors can be stretched and broken down even further and the firm can further zero in on the particular factor that gives its competitive advantage.

Any Competitive advantage finally manifests as either a cost advantage or a differentiation advantage:

Whatever the source from which a firm derives its competitive advantage, ultimately competitive advantage manifests itself as either as either a cost advantage or a differentiation advantage to the firm. To put it more elaborately, whether a competitive advantage emanates from production factors or marketing factors or some other factors, the benefit shows up in the form of either a cost advantage or a differentiation advantage. And that is precisely why competitive strategies too, finally fall under two broad categories—cost (price) based strategies and differentiation based strategies.

The second point is that both cost advantage and differentiation advantage can emanate from any of the competitive advantage factors. For example, a cost advantage may accrue via unique production facilities, efficient distribution, better technology, or ingenious raw material handling. A differentiation advantage too, can arise from any of these factors.

How Do Firms Appraise Their Competitive Advantage?

Firms have to systematically and periodically go through the exercise of identifying their competitive advantage and the factors that produce the advantage. It may be argued that firms will generally be aware of their competitive advantage and the factors that bring in the advantage. The point is that in an environment wherein ever so many changes are taking place and so many new forces of competition are coming up all the time, a firm can maintain its competitive edge only through continuous appraisal and monitoring.

The second point that needs to be emphasized in this regard is that both internal appraisal and industry and competition analysis are essential for appraising the firm’s position in competitive advantage. Firms use internal appraisal and industry-competition analysis as the tools for competitive advantage appraisal. In fact, the two tools together, constitute the groundwork, for strategy formulation.

Identifying the Competitive Advantage factors of the Firm:

The firm first locates its competitive advantage factors that is the factors in which it is particularly strong. Then, it checks out in which of these factors, it is stronger than its competitors. It is obvious that different firms may derive their competitive advantage from different competitive advantage factors.

For example, Hindustan Lever is particularly strong in marketing, and within that distribution is one sub-area wherein it has extraordinary competence. Hindustan Lever has a large distribution network that reaches out even to the remotest rural areas of India. It is a competency which many of its competitors in the soaps-detergents-shampoo business cannot match. Modi Xerox too, is quite strong in the marketing area, but within marketing, after-sales service has been its forte, supported by the claim: ‘Service within 24 hours’.

In the exercise of locating competitive advantage factors, the firm disaggregates each of the functions or factors into several sub-factors/entities. Through this route, the firm identifies the specific entities wherein its competitive advantage lies. In other words, it tries to zero in on the specific factors to which it can point out.

In locating its competitive advantage factors, the firm raises many basic questions about:

1. The functions the firm does well, compared to competitors

2. The specific aspects within these functions in which the firm is superior and excel in them

3. The superiority is substantial enough to form the nucleus of a competitive strategy for the firm

4. The functions where the firm is weak

5. Extent the weakness matters in the overall performance

6. The weakness can be made up by the strengths in other functions