What is competitive advantage? | Definition from TechTarget (2024)

Porter's techniques for analyzing competitors

In his 1980 book, Competitive Strategy: Techniques for Analyzing Industries and Competitors, Porter maintains that the attractiveness of a market segment is determined by five competitive forces:

1. Threat of new entrants - How easy is it for a new competitor to enter the market?

2. Rivalry among existing competitors - How many competitors offer a similar product at a similar price?

3. Threat of substitute products or services - What is the likelihood a customer will switch to a similar product?

4. Power of buyers - How easy is it for buyers to drive prices down?

5. Power of suppliers - How easy it is for suppliers to drive prices up?

The first three forces are sometimes referred to as horizontal competition. Variables in horizontal competition include the possibility of new competitors entering the market, the rivalry among existing competitors and the threat posed by substitute products or services. The last two forces are sometimes referred to as vertical competition. Vertical competition is dependent upon supply chain, the price of raw materials, the cost of labor and the customer's relationship with a product, brand or company.

Porter's techniques for creating superior performance

In his 1985 book, Competitive Advantage: Creating and Sustaining Superior Performance, Porter proposed that once the potential for profitability in a market has been established, the next step toward gaining a competitive advantage is to decide whether to use a low-cost approach or a differentiation approach. And once this too has been decided, a third element that Porter calls focus needs to be nailed down; this part of the framework identifies who the product or service should be marketed to.

1. Cost leadership strategy - Should the product or service be offered at a lower price than the competitors'?

2. Differentiation strategy - Should the product or service have unique features or benefits that are so appealing that customers are willing to pay a premium price?

3. Focus strategy - Should the product or service target niche markets that are overlooked or underserved by competitors?

Porter also looked at competitive strategies from a long-term, sustainable angle and maintained that creating a sustainable competitive advantage not only helps boost a company's image in the marketplace, it also affects valuation and the potential for future earnings.

How to create a sustainable competitive advantage

Sustainable competitive advantage refers to maintaining a favorable position over the long term, which can help boost a company's image in the marketplace, its valuation and its future earning potential.

Strategic management expert Jay B. Barney published an article in 1991 that took Porter's ideas and expanded upon them, adding an element for sustaining a competitive advantage over time. Barney's article, entitled "Firm Resources and Sustained Competitive Advantage," suggested that instead of just looking at outside influences when analyzing the competitive landscape, companies should also look inward to achieve sustainable competitive advantage.

Barney wrote that previous frameworks, including Porter's, were based on the incorrect assumption that all companies within the same industry shared the same attributes. It is each company's differences, Barney pointed out, that should be exploited to gain a competitive advantage.

Resource-Based View (RBV) and VRIN

Barney proposed using a framework called the Resource-Based View (RBV). This competitive advantage framework places emphasis on a company's core competencies, the combination of skills and resources that make a company unique compared to the competition.

Barney maintained that for resources to hold potential as sources of sustainable competitive advantage, they should be valuable, rare, inimitable and non-substitutable (VRIN). Barney categorized resources as either being tangible or intangible. Tangible resources, such as technology, can be bought by other competitors to gain a competitive advantage. Intangible resources, such as positive brand recognition, however, cannot be bought and are the main source of sustainable competitive advantage.

Valuable - Does the resource have greater value, in terms of costs and benefits, than similar resources in competing companies?

Rare - Is the resource scarce when compared to the relative demand for its use or what it produces?

Inimitable - Can the resource be imitated or copied easily?

Non-substitutable - How difficult is it to replace the resource with a substitute?

To leverage their core competencies, companies can start by identifying their key resources and then use the VRIN framework to determine if the resource is robust enough to provide sustainable competitive advantage.