Competitive Advantage Defined

Strategy toolbox

  • firm-level analysis
    • target segments
    • market size
    • mission statement, etc.
  • industry-level analysis
    • competitive adavantage analysis
    • value chain analysis
  • tips
    • competitive advantage analysis requires “zooming out” to industry-level analysis, looking at the forest as well as the trees

Industry & market

  • industry
    • many companies
    • companies that make similar products or services
  • market
    • many buyers
    • buyers of an industry’s products and services

Industry average profitability or “grades”

  • take the student performance as an example
    • competitive advantage and industry performance is measured just like grades in a classroom with low, high, and average performers
  • some basics
    • add up the total profit of companies in industry
      • profit of company = 1 + 2 + 3 + 4 + 5 = $15
    • divide the total profit by number of companies in industry
      • total profit = $15 / 5 = $3
    • for profit margin, calculate the total profit as a percentage of total industry revenue
      • total profit / total revenue of company 1 + 2 + 3 + 4 + 5

Porter’s competitive advantage

  • means
    • company with above average industry profitability -> the company would have a competitive advantage

Competitive Strategy and Value Chain Analysis

Value chain analysis

  • usage
    • analyze and develop a unique combination of activities in the value chain to implement a differentiation or low-cost strategy
  • contains
    • show the key activities that add value to a product in this industry by filling out the industry value chain template
    • include the typical activities that are performed in the value chain by many of the industry’s competitors since these highlight the dominant way companies have competed in the industry
    • find the price drivers, those activities that have a big impact on differentiation and the willingness of customers to pay a premium price
    • find the cost drivers, those activities that have a big impact on costs
    • develop a unique combination of activities and value proposition to achieve competitive advantage through differentiation or by lowering your cost basis
  • example - Dragon Bicycles
    • find key factors
    • step 1: road bike industry value chain
    • step 2: compare to well-known industry competitor and brandname
    • step 3: what are price drivers (green)
    • step 4: what are cost drivers (yellow)
    • step 5: develop a unique combination of activities and value props
    • result
    • analysis
      • Dragon Bicycles - value capture & no share profit margin
      • Trek Bicycles - value capture & split profir margin in industry value chain with retailers

Competitive positioning

  • high differentiation and relative low cost position
  • using AI
    • can help in personalization & increasing customer data stream and experience, i.e. customized fitting

Additional Reading