What Is the Competitive Advantage Theory?

Competitive Advantage theory, economic theory, proposed by Harvard Business School Michael Porter. Porter's model of international competitive advantage (also known as the diamond model) includes four country-specific determinants and Two external forces. The four national determinants include factor conditions, demand conditions, related and supporting industries, company strategy, organization, and competition. The two external forces are random events and government.

Competitive advantage theory

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Author of Competitive Advantage Theory

Michael E. Porter is a well-known professor at the Harvard Business School and one of the few most influential management scientists in the world today. He was appointed chairman of the US President Reagan's Industrial Competition Committee in 1983, pioneering the theory of corporate competition strategy and sparking a heated discussion of competitiveness in the United States and the world. He is also an advisor to many business leaders and government officials around the world. He has won the Welz Economics Award, the Adam Smith Award, the McKinsey Award three times, and holds honorary doctorates from many universities. Porter has fourteen books, the most influential of which are "Interbrand Choice, Strategy and Bilateral Market Power" (1976), "Competitive Strategy" (1980), "Competitive Advantage" (1985), and "National Competitiveness" (1990), etc.

Competitive Advantage Theory Five Competitive Volumes Three General Strategies

Porter has made very important contributions to the theory of competitive strategy. The "five kinds of competitiveness"-a structured method of analyzing the industrial environment is his outstanding thought (see SWOT analysis); his more influential contribution is in the "competition In the book Strategy, three general strategies are explicitly proposed.

Porter believes that in the struggle against the five types of competitiveness, there are three types of successful strategic ideas. These three ideas are: 1. Total cost leading strategy; 2. Differentiation strategy; 3. Specialization strategy. Porter believes that the goal of these strategic types is to make the company's operations better in the industry. In some industries, this means that companies can achieve higher returns; in other industries, the success of a strategy may be It is only a necessary condition for enterprises to obtain some small profits in the absolute sense. Sometimes companies may chase more than one basic goal, but Porter believes that this is unlikely to happen. Because implementing any kind of strategy in a proper way usually requires all-out effort, and there must be an organizational arrangement to support this strategy. If a company has more than one basic goal, these resources will be dispersed.

1.Total cost leadership strategy

Cost leadership requires the firm establishment of high-efficiency production facilities, on the basis of experience, to go all out to reduce costs, grasp the control of costs and management expenses, and minimize the costs of research and development, services, sales, advertising, etc. cost. In order to achieve these goals, it is necessary to pay high attention to costs in terms of management. Although quality, service, and other aspects cannot be ignored, the whole strategy is to keep costs lower than competitors. The company's lower cost means that when other companies have lost profits in the competition, the company can still make a profit.

Winning a favorable position with the lowest total cost usually requires a high relative market share or other advantages, such as a good connection with the supply of raw materials, etc. It may also require the design of the product to facilitate manufacturing and maintain a wider related product The line is designed to diversify fixed costs and serve all major customer groups to build volume.

Total cost leadership is very attractive. Once the company has won such a position, the higher profit margins can be reinvested in new equipment and modern facilities to maintain cost leadership, and this reinvestment is often a prerequisite for maintaining low costs.

2. Differentiation strategy

Differentiation strategy is to differentiate products or services provided by the company, and to establish something unique in the whole industry. There are many ways to achieve a differentiated strategy: design brand image, technical uniqueness, performance characteristics, customer service, business network and other uniqueness. The ideal situation is that the company has its differentiating characteristics in several aspects. For example, track tractor companies are not only known for their commercial network and excellent spare parts supply services, but also for their high quality and durable product quality.

If the differentiation strategy is successfully implemented, it will become an active strategy to win high-level benefits in an industry, because it establishes a defense position to deal with five kinds of competitiveness, although the form of defense and cost leadership are different. Porter believes that pursuing a differentiation strategy sometimes contradicts campaigns for greater market share. Implementing a differentiated strategy often requires companies to be mentally prepared for the exclusivity of this strategy. This strategy cannot be balanced with increasing market share. There is always a high cost involved in the establishment of a company's differentiated strategy. Sometimes even if customers across the industry understand the unique advantages of the company, not all customers will be willing or able to pay the high requirements of the company price.

3.Specialization strategy

The specialization strategy is focused on a particular customer group, a segment of a product line, or a regional market. As with differentiated strategies, specialized strategies can take many forms. Although low-cost and differentiated strategies are to achieve their goals within the entire industry, the overall strategy of specialization is built around a center that serves a particular goal well. A functional approach takes this central idea into account. This strategy relies on the premise that the specialization of the company's business can serve a narrow strategic target with high efficiency and better results, thereby surpassing competitors who compete in a wider range. Porter believes that the result of this is that the company has either differentiated by meeting the needs of a particular object, or has achieved low cost in serving this object, or both. Such a company can make its profit potential exceed the prevailing level of the industry. These advantages protect companies from threats of all kinds of competitiveness.

But a strategy of specialization often means limiting the overall market share that can be obtained. The specialization strategy inevitably involves the relationship between profit margin and sales at the expense of each other.

Competitive strategy is to create an irreplaceable position for others

Whether companies or countries want to maintain unbeatable competitiveness, what exactly is competitiveness? The book "Competitive Strategies" published by Porter in 1980 was jointly valued by the academic and practical circles of American business management. At first glance, Porter's theory of competition strategy is complex, but in fact the context is clear. There are three main points in his doctrine: five-force analysis, enterprise value chain, and diamond system.

Five Force Analysis

In the book "Strategy for Competition" by Porter, he proposed the famous five-force analysis framework. He believes that there are five factors that affect the industry's competitive situation, namely "the threat of new entrants", "the bargaining power of purchasers (customers)", "the threat of substitutes (or services)", "the supplier's "Bargaining power" and "antagonism of existing competitors". Through the analysis of these five aspects, we can measure the competition intensity and profit potential of the industry.

In traditional industrial economics, economists have thoroughly explored the impact of market structure on firm behavior and firm performance. "Exclusive status can bring excess profits" has become a well-known basic theorem.

From this perspective, Porter believes that the basic principle of corporate competition is to find a way to maintain exclusivity. Based on this logic, he develops three general strategies: "low-cost strategy", "specialized strategy" and "differentiation strategy".

Although the theory put forward by Porter is not original, his advantage is that he can integrate the theory of industrial economy and business management, and combine practice to develop a simple, clear and practical method, which has been favored by the business management practice community.

Competitive advantage theory diamond system

In addition to industrial and corporate strategies, Porter extended his theory to international competition. He mentioned that "in international competition, companies can extend their activities to several different locations, and coordinate through global networks, so that Activities in different locations generate potential competitive advantages ", such as Swiss chocolate, Japanese robots, high-performance cars in West Germany, etc. In 1990, Porter published a book" National Competitive Advantage "focusing on geographical location in The role in competitive advantage. In addition, Porter applies the concept of corporate competitive advantage to the national level in this book, exploring how a country can build its competitive advantage. In response to this topic, Porter proposed an analysis framework for the "diamond system" (also known as the diamond theory). He believes that the speed at which domestic companies may create domestic competitive advantages includes:

1. "Production factors": A country's ability to transform basic conditions, such as natural resources, education, and infrastructure, into special advantages. Nowadays, countries already have perfect transportation systems and telecommunication networks, as well as the best manpower. Therefore, basic production factors can no longer guarantee competitive advantages, but rather establish special advantages, such as high professional skills and applied technology, like the Netherlands. It is not because of its tropical status that it has a leading flower industry, but because it has highly specialized research institutions in the cultivation, packaging and transportation of flowers.

2. Demand status refers to the quantity and maturity of the demand for or services provided by the industry in the domestic market. For example, because Japanese households are narrow and densely populated, home appliances are moving toward small, portable TVs, stereos, and video tapes. Because the domestic market has a group of the most discerning consumers, Japan has the world's most sophisticated and highest value home appliance industry .

3. "Performance of related industries and supporting industries". If an industry wants to reach its peak, it must have world-class suppliers and benefit from the competition of enterprises in related industries. These manufacturers and suppliers have formed an industry cluster that can promote innovation. For example, Italy leads the world's gold and silver jewelry industry because Italy's machinery industry has created 60% of the global jewelry production machinery market, and Italy's machinery for recycling valuable metals also leads the world.

4. "Enterprise strategy, structure and competitors". This is the last factor affecting competitive advantage. The organization, management, and competition of an enterprise all depend on the environment and history of the location. If the hometown of an enterprise encourages innovation, and there are policies and rules to stimulate the enterprise to train technology, enhance capacity and invest in fixed assets, the enterprise is naturally competitive. In addition, if there are strong competitors in the local area, it will also stimulate continuous improvement and improvement.

The impact of these four factors on each industry is not the same and should be evaluated separately. More importantly, the diamond system is a dynamic system, and each factor within it will affect each other's performance.