Competitive advantage is the holy grail of business strategy. It is often useful to replace the word “strategy” with the words “competitive advantage” to sharpen your thinking, the two are that closely linked.
The term was popularised by Michael Porter in his classic books “Competitive Advantage” and “Competitive Strategy”
In general, there are two types of competitive advantage:
1) Resource/asset based advantages
These are the “Maginot line” of competitive advantage, assets and resources that can be pointed at and sold.
- Brand equity
- Low cost production sites
- Global distribution network
Resource/asset based advantages don’t just spring into being, they are created over time by capability advantages.
2) Capability advantages
These are the internal processes of the company that the company does better than anyy other company. They are the dynamic version of competitive advantage, building up assets and resources over time as the advantaged processes work.
- Global brand management
- Continuous improvement processes in manufacturing
- Distributor partner management
Notice that these capability advantages map directly on to the asset-based advantages – every resource/asset the company has has been created by an advantaged process.
Capability-based advantages tend to be more important, because they represent the rate of change in competitive advantage, rather than just a snapshot picture that asset-based competitive advantages give.
This ties back to Jack Welsh’s great quote:
“If the rate of change on the outside exceeds the rate of change on the inside, the end is near.”
When is it useful?
A diagnostic of competitive advantage is a foundation for any strategy, since the best opportunities will always be ones where your company starts with an advantage.
Apple has many asset-based advantages – it holds many patents and its brand is among the most valuable in the world. However, its critical advantaged capability is its product development process, enabling to blend hardware and software with great design flair to create electronic products that everyone aspires to.
McKinsey has some asset-based advantages – its extensive alumni network a reputation in the business world. However, its most important competitive advantages come from its capabilities in people recruiting and development, problem solving and relationship management.
Aramco, the Saudi Arabian State oil company has many capabilities. However, its primary competitive advantage is its ownership of assets – low cost oil fields. When you can extract oil out of the ground at an operating cost of $5 per barrel, it is hard not to be very profitable!