Competitive advantage

What is competitive advantage?

Competitive advantage is what lets a company earn better returns than its rivals over time, through lower cost or an offer buyers value more. Michael Porter's 1985 book Competitive Advantage tied it to two sources, cost and differentiation, and to the specific activities a company performs. An advantage has to show up in price, cost or both, and it matters only while the company can keep it.

Why it matters to a revenue leader

Sellers tend to describe advantage in adjectives such as responsive or experienced. A revenue leader needs evidence instead, such as the segments where the company wins at a higher price or wins at the same price with better margins. In commercial services, sources can include route density in a metro area or a bench of licensed technicians, and win-loss data shows which of these buyers will pay for. The same question comes up in commercial due diligence.

A testing and inspection firm wins 45% of its bids for hospital systems at prices 8% above the market, and 20% of its bids for retail chains at market prices. Its advantage sits with the hospitals, where accreditation expertise matters to the buyer. The retail wins come from price matching.