Use this framework to gain a competitive advantage
This model is used to work out how to obtain a competitive advantage by focusing on volume production and/or differentiation.
In 1981, Richard Lochridge, a Boston Consulting Group consultant, developed a two axis matrix to show how companies can develop a growth strategy. The competitive advantage matrix sits in parallel with what is frequently referred to as simply the Boston Matrix (that of cash cows, dogs, question marks and stars). It hasn't achieved the recognition and use of the Boston Matrix (growth/share matrix) but it is (as all frameworks) useful for building a big picture of how your company can grow.
The Competitive Advantage Matrix (CAM) is based on the premise that a competitive advantage can be achieved by differentiation and/or economies of scale. As with any matrix it has two axes.The horizontal axis measures economies of scale (i.e. the size of business). The vertical axis measures the number of different opportunities there are for achieving differentiation (i.e. the ability of the company to differentiate from its competitors). This results in four quadrants –
Fragmented business (in the North West of the matrix are small businesses who have a variety of different ways in which they can achieve a competitive advantage). Typical of such companies are small retailers who can compete in different ways. Some could have a specialist product, others low prices, or a site on a busy thoroughfare. These companies don't have size on their side but they are able to differentiate and win a competitive advantage through playing in a niche. Think of restaurants, printers, engineering jobbing shops and the like, all of them with loyal customer bases.
Stalemated business(these are companies in the South West of the matrix. They are small businesses that have few options for competing – hence their stalemate position). Examples of companies in this part of the matrix are those specialised manufacturers of metal components that are found in the Midlands of the UK or the Great Lakes area of the US. Stalemated companies produce commodities that have little to differentiate from the competition and their survival depends on them managing their costs as much as possible. These companies have much less opportunity for achieving a competitive advantage than others in the matrix.
Specialised business(here in the North East of the matrix a company has a big competitive advantage and there are many approaches to achieving that competitive advantage). Examples here are the strongly branded food companies. A company such as Kellogg’s has massive scale as well as a strong brand. Other companies could compete with Kellogg’s by having large scale but making own brand cereals for supermarkets. In this North East corner of the matrix companies with scale have different ways of achieving a competitive advantage.
Volume business (in the South East of the matrix companies have a big competitive advantage very few ways in which that competitive advantage can be achieved), a typical example would be the car industry where vehicle manufacturers need scale to be competitive and the only way they can achieve this is in large assembly sites.
The framework helps you understand where your competitive advantage lies and so it can be useful in guiding future strategy. For example, if you know that you are a stalemated business, there is no point attempting to compete by increasing the volume of your output or trying to differentiate, but you may be able to gain some advantage by finding a location for your business where there is low cost labour. Or, it may be possible to build a reputation for the company in terms of reliability and so move into the fragmented quadrant with a “trusted” brand.
Business success is about achieving competitive advantage and to this extent The Competitive Advantage Matrix is helpful. As with all frameworks it doesn't stand on its own. It implies that a profitable strategy can be achieved by either scale or creating a distinctive offer, but it doesn't necessarily predict future success. Toyota may be a successful car manufacturer through its huge market share and volume production but it may be overtaken by electric vehicles in the future. A restaurant may have a distinctive offer which gives it a strong position in its locality until an entrepreneurial restaurateur opens a new place on the other side of the street.
Some things to think about:
Where is your competitive advantage – is it a differentiated offer or is it an efficient level of production that competition can’t easily match.
How could you improve your competitive advantage? What are the opportunities for building volume and/or differentiation?
Where are the threats to your competitive advantage? Which competitors could usurp your position? How could they do so?
How profitable is your competitive advantage? To what extent are you using your competitive advantage to generate cash flow and higher earnings?