Competitive advantage 1

Published on March 30, 2022   8 min

Other Talks in the Series: Key Concepts: Introduction to Strategy

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Hello and welcome to this series of introductory talks on business strategy. My name is Robert Grant. I'm a professor of strategic management at Bocconi University in Milan, Italy. I'm also the author of Contemporary Strategy Analysis, a leading strategic management textbook used in business programmes throughout the world.
Competitive advantage plays a central role in business strategy. It is the critical link between strategy and a firm's performance in relation to its goals. It is through out-competing its rivals that a firm is able to attain its goals. However, every firm has a strategy, but not all firms achieve a competitive advantage. What determines whether a strategy is successful in achieving an advantage over competitors? The key characteristic of a successful strategy is that it aligns a firm's strengths in resources and capabilities with key success factors within the firm's industry environment. My goals for this talk are for you to understand what competitive advantage is, to appreciate how cost and differentiation are sources of competitive advantage. Finally, to recognize the dynamic character of competitive advantage. I will begin with the nature of competitive advantage, then we shall look at the sources of competitive advantage, namely cost and differentiation advantage. We will go on to consider the dynamic aspect of competitive advantage.
What is a competitive advantage? The notion of competitive advantage is straightforward. It is a firm's ability to outcompete its rivals. This is revealed in superior performance. But what performance measure do we use to identify and measure competitive advantage? Traditionally, competitive advantage is equated with superior profitability. A firm has a competitive advantage if it sustains a higher level of profitability than its rivals. However, this may be too narrow a measure. A firm may forgo profit to expand its market share. For example, Amazon. For its first 20 years of existence, Amazon made losses. Yet it would be difficult to argue that it did not have a competitive advantage in e-commerce. Or a firm may be a not-for-profit. Again, it would be difficult to argue that Wikipedia does not have a competitive advantage in online encyclopedias, despite the fact, of course, that Wikipedia does not make any profits. Hence, a broader definition of competitive advantage is the firm's ability to create more value than its rivals. This takes account of customers' willingness to pay rather than actual revenues.