Competitive Advantage

What it does:
Evaluates the competitiveness of companies by developing their strategic strengths in the marketplace.

Its other names:
Porter's Competitive Advantage

Where it comes from:
The writings of Harvard economist Michael E. Porter, especially the 1998 book Competitive Strategy: Techniques for Analyzing Industries and Competitors (Free Press).

Summary:
A company enjoys competitive advantage over other companies when it is able to sustain greater profits than they do over time.  This competitive edge occurs when a company's resources (such as proprietary technologies or products, loyal customers or brand equity) converge with its capabilities (such as the ability to respond to customer needs, market effectively or bring new products to market). Resources and capabilities combine to form the distinctive competencies that a company enjoys in the marketplace (such as efficiency, product quality, or loyal customers) that differentiate it as an organization.

Usually, a company with these competencies becomes a leader in its field by achieving one or both of these marketplace advantages:
- Cost Advantage, such as products that sell for less than comparable products.
- Differentiation Advantage, such as products with features that make them preferable to competing products.

What else you need to know:
When these forces are in alignment, the result is Value Creation. The company succeeds and remains profitable because it is more competitive than its competition.

In addition to the factors mentioned above, Porter also mentioned focus, which he defined as the ability to improve competitiveness by correcting problems, developing new products, or addressing other critical needs.