'Competitive Advantage' is a buzz word in today’s world which often being used in many business discussions. We hear many senior leader and executives claiming that their organization has competitive advantage but more often fails to describe what it actually means for them and their organization. And, this puzzles me a lot.
Competitive advantage is concrete and can be gauged. In fact, this is one of the most important factors in conjunction with ‘winning proposition’ which can define organization success. The most important question for organization and its leaders in attaining competitive advantage remains - What is more essential, offering unique benefits to customers or attaining superior operational effectiveness?
As it sounds, this is a tricky question. When asked, most of the professionals would point to both. That's not right, choosing one over another or both options will be an incomplete or incorrect answer. Competitive advantage is actually the difference between two! The 'difference' between unique customer benefits and operational effectiveness of the company is the competitive advantage which a company has over its competitors. The wider the difference between two, the better the competitive advantage organization has.
The simple way to measure competitive advantage is to know the cost and value factor. We know that cost can be compared with the competitors. It is usually benchmarked in the industry and compared using published data or by market analysis. Honestly, companies should do it more often. But how organizations can measure 'value' with that of competitors? How companies know they are bringing more value to the customer than their competitors.
Companies can assess ‘value’ as it is relative to volume and price. If company provides greater value than its competitors, it can either charge higher price or increase market share at comparable prices. In other words, both price & volume will come under pressure if company is losing value. Simply put, if a customer is willing to buy product/services, it implies that the customer places a higher value on the good than the market price.
So how can organization improve its competitive advantage? Analogy which I will refer here is ‘elastic’, one end being ‘value’ and another being ‘cost’. The broader you stretch the two ends, the more advantage companies have than their competitors. Most often companies attempt to compete on cost alone and constantly focus on reducing cost. But we know that superior operational effectiveness is a source of short-term competitive advantage, it does not always result in long-term profitable growth.
"If you compete on costs, it is to remain in game. Creating superior value is necessity for winning the game." - Willie Pieterson
Evidently, the key here is to know how and where to stretch the two ends of the elastic, a strategic decision which organizations' leader has to take to gain competitive advantage.
There are many interesting case studies produced on this subject and those come from various industries. One being, from airlines industry that how Virgin airlines and Singapore airlines are able to charge higher than its competitors and travelers pay because these airlines know exactly what their customers’ needs are and they provide higher value for the price what customers pay. Another one comes from automobile industry, the slow death of GM and its brand name. Case studies explains, how GM keeps fixing the value issue by reducing costs and that cycle kept running for years. By the time product improvements came, it was too late to rescue the company and its brand. The main point here is that if organization has value problem, often it is misunderstood that it can be fixed by reducing costs. Value problem needs to be fixed fast. Because simply in today's rapid changing environment, organizations can't afford to treat value problem with cost reductions.
To sum it up, it is a clarion call for organizations/companies to deep dive, think and address 'how much more value can they deliver to their customers than their competitors.' And, then craft their winning proposition.
References: Strategic Learning by Willie Pietersen