Competitive advantage is always relative

In my work with companies, I often ask managers to talk about their firm’s competitive advantage. Almost always the typical answer goes something like this. We have great products, a great brand. We innovate constantly. Our products exude quality. And we provide excellent customer service. All of this may very well be true. However, not one bit of this answer says anything about the company’s competitive advantage. Competitive advantage is entirely a function of whether you are better, faster, and/or cheaper relative to your competitors. It has nothing to do with how good a company is or how great its products, services, or prices are in absolute terms. 

Think about the last time you went shopping for a new digital camera. Chances are that you would have considered alternatives such as Nikon, Olympus, Canon, Sony. These are all excellent brands. However, the brand image of these four companies is almost equally strong. Thus, in the competition among these four companies, a strong brand image is an equalizer. It’s a given and not the basis for competitive advantage because competitive advantage is a relative concept. It is also always market-specific. 

The same company with the same products and services may enjoy competitive advantage in one market but not in another. Take Japanese car companies such as Toyota, Nissan, Honda. All three make the most reliable cars in the world and rating agencies in US and Europe routinely note that the reliability of these car brands is significantly better than that of their American or European competitors. Thus, it would indeed be correct to say that Toyota, Nissan, and Honda do enjoy a competitive advantage on the dimension of reliability over the American and European brands. Now suppose you lived in Japan and found yourself in the market for a new car. When you look at the options in front of you, you would probably conclude that all of the Japanese brands offer equally high levels of reliability. 

Thus, you’d be looking for some other differentiating factor, not reliability, in deciding which make of car to buy. If Toyota wants to increase its market share in Japan, it’ll have to create competitive advantage on a dimension other than reliability. Here are some questions I would like you to think about. Number one, take the case of a product or service that your company buys from a supplier. Compare the supplier to its two biggest competitors. As a buyer, what competitive advantage does this supplier enjoy over the other two competitors? And where does this supplier suffer from a competitive disadvantage? 

Now number two, take your company and your two biggest competitors. In relative terms, does your company have a competitive advantage over these competitors? And if so, what? And in what areas does your company suffer from a competitive disadvantage? Be honest. To sum up, assuming that your company is not a monopoly, which is rarely if ever the case, how well you do depends not on how good your products and services are in absolute terms, but whether they are better and/or less expensive for the customer in relative terms. Further, you need to make sure that your relative advantage is ongoing, sustainable and not transitory.

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