MGT Notes

The purpose of this post is to explain in some detail what competitive advantage is and how it fits into the definition of strategy.

Reference: Strategic Management (5e) – Frank T. Rothaermel (Pg 10)

A competitive advantage is the superior performance achieved by an entity relative to other entities in the same industry or to some industry benchmark (for example, stock market valuation).

A sustained competitive advantage occurs when an entity maintains a competitive advantage over a prolonged period of time.

A competitive disadvantage is when an entity under performs its rivals.

Competitive parity occurs when an entity performs at the same level as its competitors.

The formulation of a good strategy consists of choosing a combination of value and cost: either consumers value the offering more highly than competitors OR it is of the same value but offered at lower cost. This combination of value and cost is called Strategic positioning. By definition, it requires tradeoffs (ex. Cost leadership vs differentiation).

The combination of product differentiation, cost and customer service is known as an entity’s strategic profile and it defines its unique strategic position. The proper combination of these leads to a clear strategic profile. The rewards of a good strategic profile are profitability and market share.

A strategic profile usually fills a need in the market. The consequences of filling this need leads to creation of shareholder value and making money.

The difference between value creation and cost is the competitive advantage of a firm.

Choosing the right strategy is also about what not to do, since an entity’s resources are limited.

What strategy is not about:

* Strategy is not about grandiose statements, since they provide little managerial guidance and lead to goal conflicts and confusion. It also fails to address economic fundamentals. An effective vision and mission statement lead to a good strategy formulation.

* Strategy is not about ignoring the prevailing competitive challenge an industry faces. Its important to clearly identify and state the competitive challenge.

* Strategy is not about tactical tools (alone), such as internet strategy, alliance strategy etc. These are necessary but not sufficient. A strategy is an entity’s overall efforts to gain and sustain competitive advantage.