4.1.4 How to create value and competitive advantage?

A firm positions itself by leveraging its strengths. Michael Porter has argued that firm´s strengths fall into two basic types of competitive advantage: cost advantage or differentiation. Cost and differentiation advantages are identified as positional advantages since they express the firm?s position in the industry as a leader in either cost or differentiation.

A firm uses its resources and abilities to generate a competitive advantage that at last results in superior value creation, as illustrated in Figure 1.

Figure 1: Model of Competitive Advantage (Click on the thumb nail to enlarge)

The distinctive competencies (core competencies), resulting from the specific firm´s resources and capabilities, facilitate innovation, efficiency, quality and customer receptiveness, all of which can be leveraged to achieve either a lower cost structure or a differentiation product. A firm positions itself in its industry through its option of low cost or differentiation. This decision is a central piece of the firm´s competitive strategy.

A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage) or deliver benefits that go over those of competing products (differentiation advantage). Therefore, a competitive advantage allows the firm to create superior value for its customers and profits for itself.