While everyone recognizes the importance and even the need for a competitive advantage, building and identifying it can sometimes be more complex than it sounds. Likewise, the link between competitive advantage and value proposition is not always very clear. In this modest article, I will come back to some important elements that should be known to better understand, identify and exploit this major notion of the business world …
“In competitive markets, any offer must have an advantage over competing offers” Mercator 11th edition, p.643
Two types of competitive advantages
In terms of competitive advantages, the eponymous book by Michael Porter published in 1980 is an absolute reference. In this book, Harvard’s professor identifies two types of competitive advantage:
- Cost advantages;
- Benefits on perceived value.
Depending on the type of competitive advantage, Mr. Porter explains the business strategy. The cost advantages lead to cost domination strategies, while the value based advantages generate differentiation strategies.
The competitive environment
Of course, who says competitive advantage says competition. Again, the reference is called Michael Porter. The latter offers a matrix intended to better understand the competitive environment and the positioning of a company in its sector.
Reading the diagram above allows an easy understanding of the 4 forces making it possible to appreciate the fifth.
Identify a source of competitive advantage with the VRIO model
In 2006, Hesterly and Barney, believe that a resource is a source of competitive advantage if it meets four main criteria forming the VRIO model:
- If it generates value (V);
- If it is rare (R);
- If it is impossible to imitate (I);
- If it can be organized (O).
Thus, according to the two authors, assessing the advantageous character or not of a resource requires questioning its VRIO nature.
Competitive advantage: basis of the value proposition
Have a competitive advantage is one thing, but it’s useless if it’s not translated into the Value proposition. This is why it is essential to take this notion into account when creating a business or launching a new product.
The value proposition represents what generates value for a business. It meets customer needs and allows the company to differentiate itself, define its strategy and send the right message to consumers. This notion is central to the thinking of Alexander Osterwalder and Yves Pigneur in their book “Business Model: New generation”. For them, the value proposition answers several questions:
- What does the product bring to its customers?
- What is the added value?
- What are the strengths compared to the competition?
- What need is the product likely to meet?
To sum up the value proposition (as described in “Business Model: New Generation”) is what drives customers to buy the product. To be effective, it must therefore be legitimate, that is to say be based on competitive advantages.