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Why some companies enjoy a prolonged competitive advantage?

Competitive Advantage

Competitive advantage is the most important reason why some companies are more successful than others.These companies possess a differentiation that other companies do not have which is the reason for their success.
When we do a competitive analysis, there is a focus on the firm service offerings and how they are stacked against other companies.Basically we are comparing the operating drivers which are responsible for generating higher operating revenues or margins against other companies.For instance in an IT service industry, competitive analysis is mainly focused on the benchmarking companies against their service offerings, their customer segments and in the markets they operate.Based on that, a recommendation is provided.
This type of analysis generally does not provide the right diagnosis for why some companies perform well in a similar market and have a competitive edge against others.In a competitive industry, no company can continue to have a sustained competitive edge.Studies has shown that competitive advantage for a company in under similar market conditions does not last for more than 5 years.This is because competitive advantage is a function of market and firm performance.As markets become more saturated and with more choices available to customers, leaders cannot have a continuous competitive advantage and would need to move to other high growing markets.
For instance, IKEA is one company that continues to have competitive advantage against other retailers.The secret sause for its success is its ability to customize its retail stores and products offerings locally.In addition, the firm strategic planning expertise in identifying the right location and geo for launching its stores gives a huge competitive advantage against others. For instance, when IKEA expanded to US, then it had even customized the shapes and size of the glasses to the US market.The glasses were huge in size as against the normal size that is preferred in Europe.
To understand a firms competitive advantage, one needs to identify its profit drivers where the firm does better than its competitors in a customer segment or market or in a product subset. An IT service company may have a huge lead in a particular market like it could be a leader in engineering services space in Europe.Firms need to analyze what makes them better than competitors in a specific segment.On detailed analysis, firms would realize that its differentiation does not lie in operating drivers like pricing or portfolio of service offerings, but something intangible like better strategy or understanding of market.
These intangibles cannot be quantified and measured.This could be the reason why companies have a higher competitive edge for a longer period because its competitors are not able to replicate it.
This shows that companies that have a higher competitive advantage had similar operating resources and services offerings as its competitors, but excelled in few key intangible areas:
Strategic planning
M&A Capability
Design and Technology
Better ability to Forecast
Let us take few case studies to substantiate this:

Competitive advantage case 1 – Apple edge in Smartphone segment

  1. Apple is one company which was able to differentiate against its competitors, thus giving a huge edge in the early phase of the smartphone markets when it displaced Nokia and BlackBerry.
  2. At present, Apple is no longer a market leader and its growth in smartphones segment has declined.This is because Smartphones industry has matured which has led to the entry of Chinese players where differentiation is based on Price leadership.
  3. The reason why Apple had a huge edge was in its Design capability that it had even during the personal computing period.This capability was transferable and it was able to provide these capabilities even to Smartphones, iPods and tablets.This design capability is such a huge competitive advantage that even if Apple ventures into vehicle production and manufacturing, it would still have a huge competitive advantage against its competition.

Competitive advantage case 2 – Danaher Strategic Planning and M&A expertise

  1. Danaher is a holding company that owns business from multiple industries. The company business model is based on acquiring companies that are not performing well.Danaher acquires and turns around this company to make it profitable.
  2. Though this seems to be a strategy that even PE companies and other holding companies follow, Danaher success rate in turning around the low performing companies and make it profitable is very high.
  3. The success to this is Danaher Business System which is a list of codified practices documented that the new portfolio company management needs to follow.Though the portfolio company is given autonomy and independence to function, it needs to adhere to the best practices and would be evaluated against the metrics which is also included in DBS.
  4. This framework can be applied to companies of all industries.DBS framework in itself does not yield any profit but when this framework is applied to a business, then the entire value changes.

Conclusion

  1. A firm competitive advantage is not only a function of its operating drivers like product, price and markets that it operates in which is tangible and can be easily measured, but also function of intangibles like its strategic planning expertise, its Design or its M&A capability.
  2. Firms like Apple and IKEA that possess these intangibles tend to have a higher competitive advantage for a higher period as against its peers.These intangibles can be applied in any new businesses these companies intends to enter into which leads to higher profit drivers, thus giving these companies an huge competitive advantage.


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