Competitive Advantage is a classic, highly influential work in the field of strategy. The book is as relevant today as it was when it was first published. Below are some of the key concepts reviewed in the book.
Companies achieve an advantage based cost leadership, differentiation, or focus:
- Cost Leadership: The cost leader is the firm that provides a product for the lowest cost
- Differentiation: A differentiated product is a product that is superior the competitors’ products
- Focus: A focused strategy is a niche strategy. Large companies can overlook small niches, creating opportunities for others. A firm can focus on a narrow segment of a larger market, assuming they can better service the segment. Customers in the focused segments have tailored requirements.
Firms that are not the leader in any of these areas are stuck in the middle and typically lose to cost and differentiation leaders.
An effective strategy includes considerations relevant to the competitive landscape in the industry. There are five underlying factors that affect an industry’s profitability:
- Threat of new entrants
- Bargaining power of suppliers
- Bargaining power of buyers
- Threat of substitute products or services
- Rivalry among existing competitors
Don’t make the mistake of competing directly with an industry leader. They will retaliate and because of their advantages they will generally win.
A value chain is the firm’s activities or processes. Activities can be categories into two categories: primary and support. Primary activities include those processes that provide direct value to the customer. Support activities are intended to enable the primary activities to be carried out effectively.
It is crucial to determine what area to lead in, to understand your firm’s value chain, to ensure that there is alignment and synergy among the various business units – in an effort to maximize the firm’s capacity to achieve the business strategy.