“Competitive Advantage” is the title of a book by Michael Porter (see article) which became a bible of business thinkers in the late 1980s. With its echo of the ideas of comparative advantage expounded by David Ricardo, a 19th-century economist, it provided managers with a framework for strategic thinking about how to beat their rivals.
Porter argued that:
"Competitive advantage is a function of either providing comparable buyer value more efficiently than competitors (low cost), or performing activities at comparable cost but in unique ways that create more buyer value than competitors and, hence, command a premium price (differentiation).
You win either by being cheaper or by being different (which means being perceived by the customer as better or more relevant). There are no other ways.
Few management ideas have been so clear or so intuitively right. Although there were business and management books that sold more copies in the last two decades of the 20th century, none was as influential as 'Competitive Advantage'."
Behind Porter’s idea lay a novel way of looking at the firm as a series of activities which link together into what he called “a value chain”. For many, this was the theory’s eureka moment. Writers since have developed further concepts based on the metaphor of a linked chain of activities or groups of activities (or their close equivalent, processes). Each of the links in the chain adds value—that is, something that a customer is prepared to pay for. Even a company’s support activities, such as its training and compensation systems, can be links in the chain and sources of competitive advantage in their own right.
“Competitive Advantage” was published in 1985 as “the essential companion” to Porter’s earlier work, “Competitive Strategy” (1980). “Competitive Strategy” considered competition at the industry level, whereas “Competitive Advantage” looked at it from a firm’s-eye view. “My quest”, said Porter, “was to find a way to conceptualise the firm that would expose the underpinnings of competitive advantage and its sustainability.”
“Competitive Strategy” (subtitled “Techniques for Analysing Industries and Competitors”) was an aide for ambitious young executives in the planning department to help them come up with grand ideas about what to do next. The book identified five factors that have an impact on a company’s profitability: customers, suppliers, substitutes, potential entrants into the industry, and competitors. “Competitive Advantage”, however, was a book for chief executives. Its subtitle was “Creating and Sustaining Superior Performance”. Not only did it promise to enable senior managers to get ahead of the competition, it also promised to help them stay there.
The ideas in “Competitive Advantage” persuaded corporate chiefs to undertake more internal reflection. Previously their firm’s identity had been largely described in terms of its relationship to others: its market share, for instance, or its relative size. Porter made corporate navel-gazing respectable. In practice, many firms had difficulty in identifying all the discrete Porterian activities in their organisation, even in cases where they were confident that they knew what they were looking for—and many were not.
In a later book, “The Competitive Advantage of Nations”, Porter looked at how the choice of location by an internationalising business might be a source of competitive advantage. From this issue of location he was drawn on to consider clustering and how business clusters are nowadays “critical to competition”.