Cost leadership involves becoming the lowest cost producer in the industry by pursuing strategies such as economies of scale, process automation, supply chain efficiency, etc. Differentiation means being unique in the industry along some dimensions that are widely valued by buyers. Differentiation can be on the basis of product, distribution, sales, marketing, service, image, etc. Focus means being the best in a carefully chosen segment or group of segments.

Firms should pursue one of these strategies and take care not to get stuck in the middle. But care must also be taken to maintain a proper balance between cost leadership and differentiation. Thus a cost leader should not be seen to be offering distinctly inferior products, compared to rivals who are competing on the basis of differentiation. A differentiator cannot afford to have a very high cost structure. The costs should not exceed the price premium it receives from the buyers.

Source of advantage

Number of distinct source of advantage

Constant improvement and ungradation

The sustainability of competitive advantage depends on three conditions. The first is the particular source of the advantage. There is a hierarchy of sources of competitive advantage in terms of sustainability. Lower-order advantages, such as low labor costs or cheap raw materials are relatively easy to imitate. Higher-order advantages, such as proprietary process technology, product differentiation, brand reputation and customer relationships are more durable. Higher-order advantages involve more advanced skills and capabilities such as specialized and highly trained personnel, internal technical capability and often close relationships with leading customers. Such advantages also demand sustained and cumulative investment in physical facilities and specialized intangible assets.

The second determinant of sustainability is the number of distinct sources of advantage a firm possesses. If there is only one advantage, competitors can more easily nullify this advantage. Firms which sustain leadership over time, tend to proliferate advantages throughout the value chain.

The third, and most important basis for sustainability is constant improvement and upgrading. A firm must keep creating new advantages at least as fast as competitors can replicate old ones. The firm must improve relentlessly its performance against its existing advantages. This makes it more difficult for competitors to nullify them.

In the long run, competitive advantage can be sustained only by expanding and upgrading sources and by moving up the hierarchy to more sustainable types. To sustain competitive advantage, a firm may have to destroy old advantages to create new, higher-order ones. A company must learn to exploit industry trends and close off the avenues along which competitors may attack by making pre emptive investments.