Sustainable Competitive Advantage (B)
What brings sustainable competitive advantage to the company? How can company influence costs and value delivered? What is the Competitive Advantage Matrix?
Posted: Jun 2008
The main goal of effective logistics and supply chain management is providing of Sustainable Competitive Advantage. The foundations for success in the marketplace are numerous, but a simple model is based around the triangular linkage of the company, its customers and its competitors – three-way relationship, while leveraging the effect of the experience curve.
The source of sustainable competitive advantage is found firstly in the ability of the organization to differentiate itself, in the eyes of the customer, from its competition and secondly by operating at a lower cost and hence at greater profit.
Seeking a sustainable competitive advantage has become the concern of every manager who is alert to the realities of the marketplace. It is no longer acceptable to assume that good products will sell themselves, neither is it advisable to imagine that success today will carry forward into tomorrow, without assuring sustainable competitive advantage.
At its most elemental, commercial success derives from either a cost advantage or a value advantage or, ideally, both. This means that successful companies either have a cost advantage or they have a value advantage, or a combination of the two, in order to reach the sustainable competitive advantage. Cost advantage gives a lower cost profile and the value advantage gives the product or offering a differential "plus" over competitive offerings.
Cost advantage as component of Sustainable Competitive Advantage
In many industries there will typically be one competitor who will be the low-cost producer and often that competitor will have the greatest sales volume in the sector. There is substantial evidence to suggest that "big is beautiful" when it comes to cost advantage as part of sustainable competitive advantage. This is partly due to economies of scale, which enable fixed costs to be spread over a greater volume, but more particularly to the impact of the "experience curve".
The experience curve is a phenomenon with its roots in the earlier notion of the "learning curve". Researchers in the Second World War discovered that it was possible to identify and predict improvements in the rate of output of workers as they became more skilled in the processes and tasks on which they were working. The relationship of learning curve described below:
Traditionally it has been suggested that the main route to cost reduction was by gaining greater sales volume and there can be no doubt about the close linkage between relative market share and relative costs. However, it must also be recognized that logistics and supply chain management can provide a many ways to increase efficiency and productivity therefore contribute significantly to reduced unit and overall sustainable competitive advantage.
Value advantage as component of Sustainable Competitive Advantage
For a long time it has understood that customers don't buy products, they buy "benefits". Put another way, the product is purchased not for itself but for the promise of what it will "deliver". Unless the product or service we offer can be distinguished in some way from its competitors there is a strong likelihood that the marketplace will view it as a "commodity" and so the sale will tend to go to the cheapest supplier. Therefore it is important to look for additional functionalities of a product that will bring sustainable competitive advantage.
What are the means by which such value differentiation and sustainable competitive advantage may be gained? Essentially the development of a strategy based upon added values will normally require a more segmented approach to the market.
When a company scrutinizes markets closely it frequently finds that there are distinct "value segments". In other words, different groups of customers within the total market attach different importance to different benefits. The importance of such benefit segmentation lies in the fact that often there are substantial opportunities for creating differentiated appeals for specific segments.
The one way of getting the competitive edge and sustainable competitive advantage is through technology breakthroughs. The other way of getting sustainable competitive advantage is by focusing upon service as a means of gaining a competitive edge. The service can be seen in many forms including delivery service, after-sales services, financial packages, technical support etc.
Depending on the value they bring to their customers and their cost efficiency, the companies are grouped in one of four quadrants of logistic and competitive advantage matrix:
For companies who find themselves in the bottom left hand corner of competitive advantage matrix the world is an uncomfortable place, concerning sustainable competitive advantage. Their products are indistinguishable from their competitors' offerings and they have no cost advantage. These are typical commodity market situations and ultimately the only strategy is either to move to the right of the matrix, i.e. to cost leadership, or upwards towards service leadership. Often the cost leadership route is simply not available.
Cost leadership strategies have traditionally been based upon the economies of scale, gained through sales volume. This is why market share is considered to be so important in many industries for achieving a sustainable competitive advantage. However, if volume is to be the basis for cost leadership then it is preferable for that volume to be gained early in the market life cycle. The "learning curve" concept demonstrates the value of early market share gains – the higher your share relative to your competitors the lower your costs should be. This cost advantage can be used strategically to assume a position of price leader and, if appropriate, to make it impossible for higher-cost competitors to survive.
However, an increasingly powerful route to achieving a cost advantage, therefore sustainable competitive advantage, through logistics and supply chain management. In many industries, logistics costs represent such a significant proportion of total costs that it is possible to make major cost reductions through fundamentally re-engineering logistics processes, in order to achieve sustainable competitive advantage.
The other way out of the "commodity" quadrant of the competitive advantage matrix is to seek a strategy of sustainable competitive advantage of differentiation through service excellence. We have already commented on the fact that markets have become more “service-sensitive". Customers in all industries are seeking greater responsiveness and reliability from suppliers; they are looking for reduced lead times, just-in-time delivery and value-added services that enable them to do a better job of serving their customers and achieving sustainable competitive advantage.
To summarize, those competitive edge organizations that will be the leaders in the markets of the future will be those that have sought and achieved the twin peaks of excellence: they have gained both cost leadership and service leadership, in order to reach sustainable competitive advantage.
The underlying sustainable competitive advantage philosophy behind the logistics and supply chain concept is that of planning and co-ordinating the materials flow from source to user as an integrated system rather than, as was so often the case in the past, managing the goods flow as a series of independent activities. Thus under this approach the goal is to link the marketplace, the distribution network, the manufacturing process and the procurement activity in such a way that customers are serviced at higher levels and yet at lower cost. In other words the goal is to achieve sustainable competitive advantage through both cost reduction, service enhancement and effect of the experience curve.