Sources of competitive advantage

A company has a market competitive advantage when it ouperforms its competitors.

Companies can achieve a sustainable competitive advantage by two means:

  1. By implementing a resource-based strategy resulting from the deployment or access of unique resources which allows improving effiency and effectiveness.

  2. By having a privileged market position where competitors have no incentives to access the marketdue to the impossibility of replicating existing competitors’ setup in a profitable way. This is the case when firms have committed during a long time to: expand their production capacity, brand proliferation strategies for their products, or investing in intangible properties.

Companies must clearly identify what is the real source of their above-normal results so they can take better decisions on how to exploit and protect their market advantage.

Resource based strategies

In order to get a competitive advantage from resources, they must be unique and have to be acquired at a price below their discounted net present value.

Sustaining a resource based competitive advantage depends on how difficult is for competitors to build a similar resource position. Different factors such as property rights to scarce resources, geographical location and information assymetries can help to protect this competitive advantage.

Privileged market position strategies

In this case, the advantage is the result of the impact of strategic commitments that have long-term impact and are difficult to reverse as in general involve important sunk costs.

There are different sources of privileged market positions:
Absolute cost advantages: consequence of long-term investments which allow reducing produciton costs.
Network externalities: benefit derived from the use of a product increases with the number of consumers purchasing compatible products.
Proliferation of product varieties: dominant firms can crowd a product space in order to gain market share at the expense of their rivals by producing several products adapted to specific product characteristics, locations or brands.

Further reading