As I noted in the previous post, competitive advantages are incredibly important for value creation and therefore strategy. In fact, McKinsey (and many others) actually define strategy around this concept (McKinsey's classical definition of strategy is "an integrated set of actions that lead to a sustainable competitive advantage").

The reason is simple: a company that enjoys sustainable competitive advantages create a lot of economic value. Those who don't, on the other hand, generate average results. 

In fact, over the long-run, competitive advantages are the most important driver of value. 

What are the types of competitive advantages? Here's an overview of the main ones, heavilly borrowed from "7 powers" (Hamilton Helmer)

• Scale Economies
  Scale economies occur when a business's cost per unit decreases as it scales up production. This creates a barrier for smaller competitors because the larger company can offer products at a lower cost, thus commanding market dominance.

• Network Economies
  A network economy arises when the value of a product or service increases as more people use it. This is typical for social networks or platforms where users benefit from a growing user base, making it difficult for new entrants to compete without a critical mass of users.

• Counter-Positioning
  Counter-positioning occurs when a new entrant adopts a superior business model that an incumbent cannot replicate due to fear of disrupting its existing revenue streams. This advantage allows the entrant to capture market share without the established player responding effectively.

• Switching Costs
  Switching costs refer to the economic and psychological costs a customer incurs when switching to a competitor. High switching costs lock customers into a particular product or service, making it harder for competitors to attract them away.

• Branding
  Branding power exists when a company’s brand carries significant value that influences customer preference beyond just the product features or price. This enables the company to command premium pricing and maintain customer loyalty.

• Cornered Resource
  A cornered resource is a unique asset or capability that a company controls and competitors cannot access. This could be a rare technology, intellectual property, or exclusive rights that offer the company a distinct advantage in the market.

• Process Power
  Process power arises from unique and difficult-to-replicate organizational processes that create efficiency or performance advantages. This could include proprietary supply chains, manufacturing processes, or talent development systems.

We will deepen our understanding of these in the next section.

For now though, it is important to note the following: Only counter positioning and cornered resources are available when the company is small. The other advantages are the result of careful execution and strategy as the company scales. At scale, the value of these advantages is driven by a) the effect itself (for example, the dergee of switching costs each customer experiences) and b) the relative market share (how many more customers the company has relative to competition).

The implication is this: to build an advantage, you must first innovate. You must innovate to create either a) a new resource (cornered resource) or b) a new approach (counter positioning)