Competitive advantage: What is the best way to create it?

Estefany P. Sánchez Méndez

It is well known that competition in any kind of industry is constant and it is growing

more intense and fierce. Consequently, since a successful firm does not simply participate in an

attractive industry, it also strives to generate more economic profits than the typical firm in its

industry, it must be aware of developing competitive strategies. The literature shows that

industrial actors are becoming more professional, use outsourcing strategies and often globalize

their approaches to become more competitive; but it also points out that technological changes,

the competition globalization and deregulation are revolutionizing markets (Céspedes, 1994;

D’aveni, 1994; Lovelock, 1996). For this reason, companies should create competitive advantage

since it is known that the larger is a firm’s added value, the greater is its potential for profit and

because it will also allow them to become a superior performer in its market that not only has an

attractive position, but also a unique and hard to imitate strategy and resources.

The purpose of this essay is to show the literature review about competitive advantage,

showing how to create it. But as it exists many ways of doing so, this essay will determine what

is the best way to create competitive advantage? As a hypothesis, competitive advantage cannot

be created just by one way, rather there exist a number of options; however, to create the best

one, companies have to assess its own conditions and capabilities so as to find it.

In order to support the hypothesis, this essay will show first, the concepts of competitive

advantage. Then, the importance of having it will be displayed. After focusing on what it is

needed to be consider before deciding the way of create it, this essay will present and assess the

ways of how to create competitive advantage. And then, according to those ways it will pointed

out what is the best one to create it, so finally the conclusion will be stated.

Competitive advantage means that the total value of the company should be higher than

the competition and in that way, the firm should cover three basic aspects: (1) increase customer

benefits; (2) reduce the firm’s cost; or (3) discover innovative transactions. (Porter, 1985).

According to Matthyssens and Vandenbempt (1998) competitive advantage is related to the

added value concept, which happens when the network of customers, suppliers, and

complementors in which a company operates is better off with it than without it, meaning that the

firm offers something that is as unique as valuable in the marketplace. Furthermore, competitive

advantage is when a product or brand has a superior and strategic attribute which is different

from its rivals in a competitive market, namely it is in which a company is better than its

competitors and thus is able to offer a higher value to its customers (Pfeffer, 1995). It is also

about doing different things than the competitors on a day-to-day basis, and can be measured by

the customer willingness to pay. Or as Barney (1997) argued, competitive advantage is about

offering products which have a higher added value as well as having processes and a customer

service that cannot be duplicated or imitated by competitors. Competitive advantage, thus

becomes the art of nurturing, accumulating and deploying rent-yielding resources, rather than a

sole focus on erecting entry barriers or deceiving one’s product-market competitors (Foss, 1996,

p. 1).

Some authors stated that, consciously develop it, is essential to any company that wants to

stand out from the competition and attract more customers (Black & Boal, 1994). Moreover,

Porter (1996) affirmed that having a competitive advantage is key to the organizations since it

aids to profitability increment, due to a better market positioning as well as other factors that

might be the company’s resources and the way of using those by the company’s managers.

First of all, to create it, the industry analysis must be taken into consideration for several

reasons: (a) companies that generate competitive advantages typically do so by devising

strategies that neutralize the unattractive features of their industries and exploit the attractive

ones; (b) industry conditions has a strong influence on whether competitive advantages are even

possible; (c) market leaders tend to face a tension among managing industry structure and

pursuing and advantage within that structure, for instance, considering the new capacity on

industry supply-demand conditions. (Ghermawat & Rivkin, 1999).

On the other hand, McGahan and Porter (1997); Powell (1996) argued that before the firm

starts to create a competitive advantage, it must consider some crucial conditions, where it must

assess not only the industry and the competitive conditions but, the company’s resources and

competitive capabilities, its market position, its strengths and weaknesses as well as its

opportunities.

Knowing and analyzing all the conditions and features above mentioned, the firms now

are able to choose and think, within the different options that they have, how to create the desired

competitive advantage, more importantly, they have the chance to recognize, according to the

above conditions analysis, what would be the best way to create it according to its own capability

and position. Hence, as Peteraf (1993); Day and Wensley (1988) stated, competitive advantage is

created when a firm wide the wedge between customer willingness to pay and supplier

opportunity cost, and it can do so in two basic ways: (1) with a differentiation strategy, which

means raising customer’s willingness to pay for tis products without incurring a proportional

increase in supplier opportunity cost, or maybe just with a slight increase on it. Here firms should

be aware of creating customer loyalty, which is attained by product excellent quality, high

customer cost of brand changing, complementors offered, it is worth mentioning here as an

example the Cirque du Soleil; (2) with a low-cost strategy, that is about figuring out a way to

decrease supplier opportunity cost without sacrificing commensurate willingness to pay, or just in

an slight amount. Companies should consider in which type of economy it is moving and how

that would affect to the cost strategy that means consider whether it is an economy of scale,

scope, area, or a rapidly changing one, an example of this is Southwest Airlines, Easy Jet.

Additionally, Barney (1991) established that although there are many ways to do so, there

exist 3 main approaches through which a company can develop competitive advantage more

effectively: (1) being the most cheaper, which implies to diminish as much as possible the

production and distribution costs as well as offering good quality, reliable and easy low-price

access products than the competency so as to gain a greater size of the pie, which is the market;

(2) offering the best product, which is about offering a higher value than the rivals with the most

innovative products that allows the firm to be the leader in its market, however, to do so it is

necessary not only to invest in generation of ideas and searching for new solutions’ resources but

to have the enough capacity of a rapid and efficient new products’ commercialization; (3)

adapting the customer’s offer, by focusing all the endeavors to satisfy better than any other

company the specific segments, instead of meet the entire market, which also involves pinpoint

the market as well as adjust the product or services to meet the customers’ needs in the segment.

Furthermore, according to Lado and Wilson (1994) superior value creation is the outcome

of a balanced and inspired management of the value drivers, which are the assets and unique

skills of a company. Nevertheless, there are another key factors needed to be consider, for

instance, the culture, organization and human resources management, since people are consider

as a critical factor of a firm’s success.

Then, there is an innovative way to create competitive advantage that is gaining world-

wide acceptance and was stated by Mollenkopf and Closs (2005) which consists in redefined the

value chain strategy of the company including reverse logistics activities, where the key factor to

succeed is cooperating with your trading partners as companies such as Kodak, HP, IBM, and

some others did and it seemed to work great for them. However, it is worth mentioning that this

way of creating competitive advantage is not applicable for all industries, but the effective use of

the reverse logistics system could increment profitability through the reduction of material

requirement, as well as improve the market share via an environmental image, consequently

having a better corporate image and increased levels of customer satisfaction, may also add value

to any company that decided to put this into practice. Or, as the case of IKEA which used as well

this way of creating competitive advantage by doing what they called business concept which

consists in offer a variety of home products, with accessible price for anyone as well as letting the

customer assemble their own furniture, so the company does not have to pay for the transport or

the assembly.

Finally, there exist some other ways to create competitive advantage obtained with the

help of governments and contractual aspects, such as subventions, patents, manufacturing or mid-

term and long-term contracts, all of which allows some firms to stands out from the competency,

but indeed, just as long as they are able to manage those contracts or governments deals. (Reed &

DeFillippi, 1990).

As it can be shown, the literature shows that there are a number of ways that organizations

can create a competitive advantage, but what is the best way? According to Rumelt, Schendel and

Teece, 1994; Porter, 1980 it is worth considering that developing it takes time, it is not

convenient trying to be the best in all the ways (low-cost, differentiation, and others), it is far

better to focus in just one way of creating competitive advantage, since generally companies that

do not do so, sadly do not attain to be the best in any aspect and it is easier to be overpassed by a

competitor which is focused in that just one aspect.

Finally, there must be taken into account, the analysis of the activities that the company is

able to perform such as: the ones associated with the product’s characteristics, like durability,

unique design; the ones associated with sales or delivery, like the ease of purchase, speed of

delivery, availability and terms of credit, quality of presale advice; the ones associated with post-

sale, such as customer training, consulting services spare parts, product warranties, repair service,

compatible products; the ones linked with advertising, packaging, and branding; or support

activities such as, hiring, training and compensation practices which can create a competitive

staff to manage the added value. But, more importantly, consider those activities’ effects on

relative cost and relative customer willingness to pay, since the firm can use this analysis, to

generate and evaluate options for creating competitive advantage. In doing so, the management

team have to disaggregate the company into parts, as well as craft a vision of an integrated whole.

(Slater, 1996; Bharadwaj, Varadarajan & Fahy, 1993).

As it was shown throughout the development of this essay, one of the main concerning

issues that a company have, is creating competitive advantage. To conclude, there can be said

that it could be created through a number of options such as low-cost strategy, either vertical or

horizontal differentiation, segmentation, redesigning the value chain strategy of the company and

some others. However, there is not just one way of creating the desired competitive advantage

that could work for any kind of company, rather, companies have to assess, individually, its own

performance, capabilities, resources, market position, and its ability to perform the types of

activities described previously according to its own reality, and consequently find its own best

way to create competitive advantage, that may be just one way such as low-cost-strategy, of a

combination of two of them, like low-cost strategy and redesign of the value chain, and so forth.

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