Business Strategy - Competitive Advantage

When a firm sustains profits that exceed the average in its industry, the firm is said to possess a competitve advantage over its rivals. The goal for many companies is to achieve a sustainable competitive advantage(SCA). An SCA is different from a competitive advantage (CA) in that it provides a long-term advantage that is not easily replicated.

Competitive Advantage: a company is said to have a competitive advantage over its rivals when its profitability is greater than the average profitability of all other companies competing for the same set of customers.
Sustainable Competitive Advantage: a company has a sustained competitive advantage when its strategies enable it to maintain above-average profitability for a number of years.

The two basic types of Competitive Advantage are: Cost Leadership and Product/Service Differenciation.

Cost Leadership – Lowest cost leadership (a focus on the costs of running the business, not just the low pricing offered to its customers)
With more than 3,000 stores in the US and more than $200 billion in annual sales, Wal-Mart sits firmly atop the Fortune 500, because it is a relentlessly profit-driven company. Wal-Mart made it through cost leadership, Wal-Mart not only competes on price, but also competes on time and convenience because they offer so many products customers do not have to drive to multiple stores to get what they need. They also compete on location and reputation. Successful inventory management, an important part of maintaining low prices at Wal-Mart, requires up-to-date information about sales as well as good communication withsuppliers. This scenario is critical when there are thousands of stores, tens ofthousands of suppliers, and hundreds of thousands of products. Wal-Mart turned totechnology in the early 1980s, first for collecting and analyzing sales data and then fortransmitting orders to suppliers with electronic data interchange (EDI), and Wal-Mart is able to keep their low cost through its valuable supply chain.

Product/Service Differentiation - Seeking to be perceived as unique compared to competition; seeking a perceived product advantage over rivals; deriving profits by charging a higher price for perceived value it provides.
Dell's buy-direct sales method, coupled with its built-to-order system, has allowed it to compete not only on price, but also on loyalty, time, reputation, customer experience, service, quality and process. In 2006, Fortune magazine ranked Dell as the 25th-largest company in the Fortune 500 list, 8th on its annual Top 20 list of the most-admired companies in the United States. A 2006 publication identified Dell as one of 38 high-performance companies in the S&P 500 which had consistently out-performed the market over the previous 15 years. Dell Computer Corp. was able to use the Internet to trim costs and boost sales, both of which were becoming increasingly difficult to do in the nearly saturated personal computer (PC) market of the late 1990s. Hoping to gain a competitive advantage, the firm started to sell PCs via the Internet in 1996. It became possible for customers who previously had placed custom orders via the telephone to place them on Dell's Web site. Customers could customize their PCs by select configuration options, get price quotes, and order both single and multiple systems. The site also allowed purchasers to view their order status, and it offered support services to Dell owners. Within a year, Dell was selling roughly $1 million worth of computers a day via the Internet. Even more importantly, nearly 80 percent of the online clients were new to Dell.