In case you are not aware, Abalone goes through elaborate processing before it ends up on the shelves. Firstly, it is harvested from farms or from the oceans. It then has to arrive at the processing plant within hours of being collected by the divers. Next the shellfish are shucked (removed from the shell) on the premises, washed and blanched. They are then inspected for quality, colour, and cleanliness. The abalone are then weighed and placed in cans or clear pouches to be sealed and cooked. After cooking the cans or pouches are labelled and packed for export.

Alright, let us now dive into Competitive Advantage before we revisiting abalone. This concept (competitive advantage, not abalone) was put forth by Michael Porter in the 1980s in his book, "Competitive Strategy" and further developed in his book, "Competitive Advantage". This concept has since become so universal that most people roll the words competitive advantage off their tongue pretty easily. However I think it is worth revisiting the original concept that Porter outlined in his book.

Porter pointed out three forms of competitive advantage :

•  Cost Advantage
•  Differentiation
•  Focus (cost advantage or differentiation focus)

Cost advantage refers to a company’s ability to produce a good or deliver a service at a significantly lower cost as compared to their competitors. This could be due to anything from lower distribution costs, lower raw material costs, lower production costs to cheaper financing costs. Thus in the perfect market, the lower cost enables the company to make a higher profit margin than its competitors.

So say Cheap N Good Pte Ltd ("CNG") can produce abalone at a cost of $5 a piece as compared to its competitors who produce abalone at $8 a piece, then CNG has a competitive advantage. If the differential is $5 and $5.10, this does not constitute a competitive advantage as the advantage is not significant. Of course different industries have different level of significance.

How sustainable this cost advantage is depends on how it is achieved. If its is merely the place of production, say China farms abalone at a cheaper cost then anywhere else in this world, then this cost advantage is not very sustainable. This is because CNG’s competitors can then set up farming facilities in China to remove CNG’s cost advantage.

However if CNG’s cost advantage comes from a proprietary process of shucking and cooking the abalone such that processing cost are reduced by say three times as compared to their competitors, then this cost advantage is more sustainable. Although we cannot rule out the fact that one day, one of its competitors could come up with an equally or more cost-effective process.

Another factor in sustainability is the number of sources of cost advantage. If CNG has cost advantages in harvesting, processing, distribution and marketing, then its overall cost advantage is more sustainable than if it only has a cost advantage in processing.

Differentiation refers to a company’s ability to be unique in its product sold or service offered. Of course this uniqueness must be something of value to consumers and can thus be sold at a premium over its competitor’s price. Of course the more unique and the more valuable this uniqueness is, the higher the differentiation and thus the higher the premium. Differentiation however comes with a cost, so for differentiation to be a competitive advantage, the cost of differentiating must be significantly lower than the premium earned. Thus in the perfect market, this premium enables the company to make a higher profit margin than its competitors.

So say Expensive Taste Pte Ltd ("ET") has a special cooking process that makes the abalone extra soft and tasty and this process costs an additional $5 per piece. It can then sell this extra soft and tasty abalone at an additional $20 per piece as compared to normal abalone of a certain grade, then ET has a competitive advantage. If the additional cost is $10 and additional price is $10.10, this does not constitute a competitive advantage as the advantage is not significant. Of course again, different industries have different level of significance.

How sustainable this differentiation is really depends on how the uniqueness is achieved and how valuable it is in the eyes of the consumer. Assuming that consumers like extra soft and tasty abalone and that most abalone tends to be quite tough and not as tasty, then ET through its special cooking process has quite a strong competitive advantage. But if for some reason, say seasonal fluctuations in ocean currents can lead to increased ocean temperatures which soften abalone and increase its taste, then ET’s competitive advantage will not be that strong or sustainable. Or if consumer taste change frequently and they alternate between crunchy and soft abalone, then ET’s competitive advantage will not be as sustainable.

Another factor in sustaining differentiation is the lack of imitation or rather the ability to imitate. If ET’s process is so unique and secret and none of its competitors can imitate or emulate its process, then its differentiation is pretty sustainable. But if ET’s competitors could come out with their own process to soften and add taste to their abalone, then ET’s competitive advantage is not so sustainable. Even if this process is not as good as ET’s, it could still erode the premium that ET enjoys and affect ET’s competitive advantage.

Focus

Focus refers to a company targeting a particular segment of consumers. This focus could take either a cost advantage stance or a differentiation stance. This stance is dependent on what the needs of that particular segment of consumers. The key thing here is to cater to the need of that particular segment of consumers. This need must be significantly catered to, for this to be considered a competitive advantage. And similarly the sustainable of this competitive advantage is as discussed above.

So say Crunchy Abalone Pte Ltd ("CA") produces abalone that has a very crunchy taste for a group of consumers who like their abalone crunchy. An additional process (additional cost) is used to make the abalone crunchy. The group of crunchy abalone eaters willingly pay CA a premium (significantly higher than cost) for their abalone, hence CA’s competitive advantage of focus with differentiation.

And finally Baby Abalone Pte Ltd ("BA") harvests abalone when they are young and sells them to a group of consumers who like to eat young abalone. BA by focusing only on young abalone has a cost advantage in preparing the young abalone and thus can sell it to its customers at a significantly low cost than other abalone sellers who sell both young abalone and normal abalone. This gives BA a competitive advantage of focus with cost advantage.

So really for a concept that has been thoroughly analysed, what new ideas can be breathed into it? I think a lot of intelligence has been directed to this and it would be awfully egoistic of me to think that I can further add to this. But if I may, I would like to re-emphasise two points which I think make or break this concept of competitive advantage.

The first is Significance. The competitive advantage be it cost advantage or differentiation has to be significant. While different industries or scenarios present different levels of significance, for a company to claim to have a competitive advantage, this company should stand head and shoulders above the competition and not be merely neck to neck. It should not be the case of leading this quarter and than trailing the next. So an appreciation of the significance will help size the competitive advantage.

The second is Sustainability. A company’s competitive advantage is transient. Today it may be strong, but tomorrow it may be gone. The reasons for these I have briefly touched on earlier. But really the biggest enemy to competitive advantage has to be Innovation. Innovation can come in the form of process, technology, strategy or positioning. So an appreciation of the sustainability will help determine the shelf life of the competitive advantage.

So the next time when you talk about competitive advantage (or eat abalone), do give some thoughts to Significance and Sustainability. This should help you to discuss more deeply and meaningfully on competitive advantage.