3 Strategies for Competitive Advantage

In an earlier post, we had discussed Warren Buffett's 4 rules of value investing. these rules are: Competitive Advantage, Reputed Management, Businesses within Circle of Competence, Price.

In this post, we delve deeper into the topic of competitive advantage. Michael Porter, a professor at Harvard Business School, has devised 3 strategies to attain competitive advantage.

Courtesy valuebasedmanagement.net

Approach 1 to Competitive advantage: Cost leadership.
• = a firm sets out to become the low cost producer in its industry.
• Note: a cost leader must achieve parity or at least proximity in the bases of differentiation, even though it relies on cost leadership for it’s CA.
• Note: if more than one company aim for cost leadership, usually this is disastrous.
• Often achieved by economies of scale

Competitive advantage model 2: Differentiation.
• = a firm seeks to be unique in it’s industry along some dimensions that are widely valued by buyers.
• Note: a differentiator cannot ignore it’s cost position. In all areas that do not affect it’s differentiation it should try to decrease cost; in the differentiation area the costs should at least be lower than the price premium it receives from the buyers.
• Area’s of differentiation can be: product, distribution, sales, marketing, service, image, etc.

Competitive advantage 3: Focus.
• = a firm sets out to be best in a segment or group of segments.
• 2 variants: cost focus and differentiation focus.