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On Competitive Advantage

06 January, 2022 - 6 min read


Competitive advantage is the leverage a business has over its competitors.

A situation wherein one party has significantly more experience, knowledge, or resources than a competitor.

Definition

In business, a competitive advantage is the attribute that allows an organization to outperform its competitors. A competitive advantage may include access to natural resources such as high-grade ores or a low-cost power source, highly skilled labor, geographic location, high entry barriers, and access to new technology.

Deep analysis

To maintain a competitive advantage, you must constantly assess your mental models and improve them when possible. By properly organizing your cognitive resources, you can position yourself better in the world and find greater success.

One way to gain a competitive advantage is by learning how to learn faster than other people. This will allow you to develop new skills and knowledge exponentially faster than others.

Warfare

Consider this excerpt from a Future War Paper titled Sustaining Competitive Advantage: Mental Models and Organizational Learning for Future Marines:

Napoleon shocked the Prussians at Jena. The Prussian generals could not conceive of an entity capable of defeating the system designed by Frederick the Great. Wedded to a scheme that brought them past successes, the Prussians were unable to see the new conditions confronting them. The Prussians never fully recognized the true extent of the mental rigidity and deterioration afflicting the generals until that October afternoon in 1806, at Jena and Auersted. The Prussian generals did not see what was happening in the world around them because their collective frame of mind would not allow new ideas to intrude. This historical example – and countless others like it – includes the elements of change and an inability to perceive change.

So why were the Prussians, among many others, unable to recognize change and then successfully adapt?...The answers lie in mental models and organizational learning. They explain how people make sense of and act in the world, and how organizations learn and adapt to achieve winning results.

When planning your strategy, show a preference for paths that are best suited for someone with your distinct knowledge and resources. Creating a pattern of habits that allow you to navigate that path is the key to maintaining your competitive advantage after acquiring it.

To a certain extent, you can predict the outcomes of events that you have significant knowledge of. Therefore, someone who has a competitive advantage is effectively someone who can see a part of the bigger picture that is not apparent to the rest of the audience. With more information on hand, they are better equipped than their competitors, allowing them the opportunity to achieve greater success at potentially faster speeds than those who contest them.

Competition in business

Knowing mental models can have huge competitive advantage in business. They have been influential in strategic thinking. They have a shaping effect on long-term, analytical and creative thinking.

Competition is a cornerstone o business, and competitive advantage has been documented in some form for centuries. Historically, a competitive advantage could readily be seen in businesses that decided to build their stores in locations that later became heavily trafficked.

For businesses in most industries during the mid 19th century, the location of your business was critically important. If you opened a bar in the middle of the town’s business district, then your odds of success were much greater. A bar located 25 miles outside of town wouldn’t fare quite nearly as well under typical circumstances.

In those days, opportunities to gain a competitive advantage were rare, and companies that could retain such an advantage for an extended period were unheard of.

As technology continued to advance, it became easier for people to innovate, making a competitive advantage much easier to gain for the average individual. Today, there are countless avenues through which people and organizations can gain a competitive advantage.

How to develop a competitive advantage?

Michael Porter, a professor at Harvard Business School, wrote a book in 1985 which identified three strategies that businesses can use to tackle competition. These approaches can be applied to all businesses whether they are product-based or service-based. He called these approaches generic strategies. They include cost leadership, differentiation, and focus. These strategies have been created to improve and gain a competitive advantage over competitors. These strategies can also be recognized as the comparative advantage and the differential advantage.

There is no precise method of acquiring a competitive advantage, though, in the realm of business some would suggest that the advantage goes to whoever can provide the greatest value, at the lowest expense.

It should also be noted that there is a difference between competitive advantage and sustained competitive advantage. To develop a competitive advantage, you must position yourself in a place where few others go, providing you access to a unique vantage point that puts you into a position of great strategic importance.

On the other hand, sustaining a competitive advantage requires well-timed adaptation to the world as it changes. By developing a competitive advantage in multiple fields, then sustaining them all at once, you can create a situation where the sum value of each part is actually greater than the whole. Each area where you hold competitive advantage impacts another, allowing you to amplify your effectiveness in all areas by improving yourself in just a single discipline.

Sustainable sources of competitive advantage

According to Morgan Housel, the key to business and investing isn't finding an advantage but finding a sustainable sources of advantage.

Finding something others can’t do is nearly impossible. Intelligence is not a sustainable source of competitive advantage because the world is full of smart people, and a lot of what used to count as intelligence is now automated. That leaves doing something others aren’t willing to do as the top source of sustainable competitive advantage.

According to him, there are 5 sources of sustainable competitive advantage:

  1. The ability to learn faster than your competition
  2. The ability to empathize with customers more than your competition.
  3. The ability to communicate more effectively than your competition.
  4. The willingness to fail more than your competition.
  5. The willingness to wait longer than your competition.

What kills competitive advantage?

Sears made more profit in 1954 than its market cap in the decade it died. More than 40% of all public companies lose their value. So what kills the competitive advantage?

Being right is the enemy of staying right because it leads you to forget the way the world works. – Jason Zweig

Beginner's mind in Buddhism unburdens past preconceptions. It is an active openness to trying new things and studying new ideas. Being locked into a single view is fatal in today's world in maintaining competitive advantage.

Morgan Housel has written more on why big winners falling off the podium when competitive advantage dies.