competitive advantage essay definition

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What Is a Competitive Advantage?

• How It Works
• How To Build It
• Competitive vs. Comparative Advantage

The Bottom Line

• Business Essentials

Competitive Advantage Definition With Types and Examples

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Competitive advantage refers to factors that allow a company to produce goods or services better or more cheaply than its rivals. These factors allow the productive entity to generate more sales or superior margins compared to its market rivals. Competitive advantages are attributed to a variety of factors including cost structure, branding , the quality of product offerings, the  distribution network , intellectual property, and customer service.

Key Takeaways

• Competitive advantage is what makes an entity's products or services more desirable to customers than that of any other rival.
• Competitive advantages can be broken down into comparative advantages and differential advantages.
• Comparative advantage is a company's ability to produce something more efficiently than a rival, which leads to greater profit margins.
• A differential advantage is when a company's products are seen as both unique and of higher quality, relative to those of a competitor.

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Understanding Competitive Advantage

Competitive advantages generate greater value for a firm and its shareholders because of certain strengths or conditions. The more sustainable the competitive advantage, the more difficult it is for competitors to neutralize the advantage. The two main types of competitive advantages are comparative advantage and differential advantage.

A comparative advantage is when a firm can produce products more efficiently and at a lower cost than its competitors.

A differential advantage is when a firm's products or services differ from its competitors' offerings and are seen as superior. Advanced technology, patent-protected products or processes, superior personnel, and strong brand identity are all drivers of differential advantage. These factors support wide margins and large market shares.

For example, Apple is famous for creating innovative products, such as the iPhone, and supporting its market leadership with savvy marketing campaigns to build an elite brand. Another example is major drug companies. They can market branded drugs at high price points because they are protected by patents.

The term "competitive advantage" traditionally refers to the business world, but can also be applied to a country, organization, or even a person who is competing for something.

How To Build a Competitive Advantage

To build a competitive advantage, a company can use one of three main methods:

• Cost: Provide offerings at the lowest price
• Differentiation: Provide offerings that are superior in quality, service, or features
• Specialization: Provide offerings narrowly tailored to a focused market

Competing on price can be effective, but if you slash prices too much you risk decreasing profit margins to an untenable level. Many firms opt instead to differentiate themselves in other ways, which helps preserve or expand their profit margin.

Benefits of a Competitive Advantage

When a company creates a durable competitive advantage, it sets itself apart from the competition and provides value to customers as well as stakeholders. By producing a desirable product or service that is better or more cost-effective than its competitors,' the company can make more sales, generate more revenue, and enjoy greater profits.

Strategies to Build a Competitive Advantage

To build a competitive advantage, a company must know what sets it apart from its competitors and then focus its message, service, and products with that difference in mind. Here are several strategies companies use to build a competitive advantage:

• Research the market : Market research helps a company identify and define its target market, which can guide it in developing the most effective advantage.
• Identify strengths : A company can find its unique strengths, especially relative to competitors, by reviewing products, services, features, positioning, and branding.
• Evaluate finances : Companies can take a close look at their financial performance to spot profit centers and areas of stability, using financial statements and ratios.
• Review operations : How efficient is a company's operations? Where is it effective, and where is there room for improvement? Consider customer service as well as production and supply chain management.
• Consider human resources : The talent a company can attract as employees and leadership can make an important difference in the success of the business. Evaluating company culture, hiring, and staffing practices can help.

Competitive Advantage vs. Comparative Advantage

A firm's ability to produce a good or service more efficiently than its competitors, which leads to greater profit margins, creates a comparative advantage. Rational consumers will choose the cheaper of any two perfect substitutes offered. For example, a car owner will buy gasoline from a gas station that is 5 cents cheaper than other stations in the area. For imperfect substitutes, like Pepsi versus Coke, higher margins for the lowest-cost producers can eventually bring superior returns.

Economies of scale , efficient internal systems, and geographic location can also create a comparative advantage.

Comparative advantage does not imply a better product or service. It only shows the firm can offer a product or service of the same value at a lower price.

For example, a firm that manufactures a product in China may have lower labor costs than a company that manufactures in the U.S., so it can offer an equal product at a lower price. In the context of international trade economics, opportunity cost determines comparative advantages. 

Amazon ( AMZN ) is an example of a company focused on building and maintaining a comparative advantage. The e-commerce platform has a level of scale and efficiency that is difficult for retail competitors to replicate, allowing it to rise to prominence largely through price competition.

How Do I Know If a Company Has a Competitive Advantage?

If a business can increase its market share through increased efficiency or productivity, it would have a competitive advantage over its competitors.

How Can a Company Increase Its Competitive Advantage?

Lasting competitive advantages tend to be things competitors cannot easily replicate or imitate. Warren Buffet calls sustainable competitive advantages economic moats , which businesses can figuratively dig around themselves to entrench competitive advantages. This can include strengthening one's brand, raising barriers to new entrants (such as through regulations), and the defense of intellectual property.

Why Do Larger Companies Often Have Competitive Advantages?

Competitive advantages that accrue from economies of scale typically refer to supply-side advantages, such as the purchasing power of a large restaurant or retail chain. But advantages of scale also exist on the demand side—they are commonly referred to as  network effects . This happens when a service becomes more valuable to all of its users as the service adds more users. The result can often be a winner-take-all dynamic in the industry.

How Is Competitive Advantage Different From Comparative Advantage?

Comparative advantage mostly refers to international trade. It posits that a country should focus on what it can produce and export relatively the cheapest—thus if one country has a competitive advantage in producing both products A & B, it should only produce product A if it can do it better than B and import B from some other country.

A company's competitive advantage is the way it excels compared to its rivals. This advantage may be through cost leadership, differentiation, or focus. Identifying a company's competitive advantage helps show how it is positioned to be more successful than its competitors, creating more revenue and generating greater profits.

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Module 2: Trade Theory, from Mercantilism to Free Trade

Reading: competitive advantage, competitive advantage is defined as the strategic advantage one business entity has over its rival entities within its competitive industry..

• A country is said to have a comparative advantage in the production of a good (say cloth) if it can produce cloth at a lower opportunity cost than another country.
• Competitive advantage seeks to address some of the criticisms of comparative advantage.
• Competitive advantage occurs when an organization acquires or develops an attribute or combination of attributes that allows it to outperform its competitors.
• Comparative advantage: The concept that a certain good can be produced more efficiently than others due to a number of factors, including productive skills, climate, natural resource availability, and so forth.
• Opportunity cost: The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity); the most valuable forgone alternative.
• Opportunity cost – The opportunity cost of cloth production is defined as the amount of wine for example, that must be given up in order to produce one more unit of cloth.

Competitive advantage is defined as the strategic advantage one business entity has over its rival entities within its competitive industry. Achieving competitive advantage strengthens and positions a business better within the business environment.

Competitive advantage seeks to address some of the criticisms of comparative advantage. A country is said to have a comparative advantage in the production of a good (say cloth) if it can produce cloth at a lower opportunity cost than another country. The opportunity cost of cloth production is defined as the amount of wine that must be given up in order to produce one more unit of cloth. Thus, England would have the comparative advantage in cloth production relative to Portugal if it must give up less wine to produce another unit of cloth than the amount of wine that Portugal would have to give up to produce another unit of cloth.

Michael Porter proposed the theory of competitive advantage in 1985. The competitive advantage theory suggests that states and businesses should pursue policies that create high-quality goods to sell at high prices in the market. Porter emphasizes productivity growth as the focus of national strategies. This theory rests on the notion that cheap labor is ubiquitous, and natural resources are not necessary for a good economy. The other theory, comparative advantage, can lead countries to specialize in exporting primary goods and raw materials that trap countries in low-wage economies due to terms of trade. The competitive advantage theory attempts to correct for this issue by stressing maximizing scale economies in goods and services that garner premium prices.

Competitive advantage occurs when an organization acquires or develops an attribute or combination of attributes that allows it to outperform its competitors. These attributes can include access to natural resources, such as high grade ores or inexpensive power or access to highly trained and skilled personnel human resources. New technologies, such as robotics and information technology, are either to be included as a part of the product or to assist making it. Information technology has become such a prominent part of the modern business world that it can also contribute to competitive advantage by outperforming competitors with regard to Internet presence. From the very beginning (i.e., Adam Smith’s Wealth of Nations ), the central problem of information transmittal, leading to the rise of middle men in the marketplace, has been a significant impediment in gaining competitive advantage. By using the Internet as the middle man, the purveyor of information to the final consumer, businesses can gain a competitive advantage through creation of an effective website, which in the past required extensive effort finding the right middle man and cultivating the relationship.

Business environment

The system within which companies exist.

Someone who acquires goods or services for direct use or ownership rather than for resale or use in production and manufacturing. The consumer is the one who pays to consume the goods and services produced. As such, consumers play a vital role in the economic system of a nation. In the absence of their effective demand, the producers would lack a key motivation to produce, which is to sell to consumers.

Collective focus of the study of money, currency and trade, and the efficient use of resources. The system of production and distribution and consumption. The overall measure of a currency system; as the national economy.

The act of selling to a foreign country the sale of capital, goods, and services across international borders or territories.

An object produced for market.

The sector of the economy consisting of large-scale enterprises.

Potential opportunity for a sale or transaction, a potential customer.

To conduct or direct with authority the management function of determining what must be done in a situation and getting others to do it.

A group of potential customers for one’s product. One of the many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange.

Bonus paid in addition to normal payments. The price above par value at which a security is sold. Something offered at a reduced price as an inducement to buy something else. The amount a policy-holder or his sponsor must pay to a health plan to purchase health coverage.

The price is the amount a customer pays for the product. The quantity of payment or compensation given by one party to another in return for goods or services. The cost required to gain possession of something.

Any tangible or intangible good or service that is a result of a process and that is intended for delivery to a customer or end user. Anything, either tangible or intangible, offered by the firm as a solution to the needs and wants of the consumer; something that is profitable or potentially profitable; goods or a service that meets the requirements of the various governing offices or society.

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Competitive Advantage

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Competitive edge ; Gamesmanship ; Relative advantage

The term competitive advantage refers to a company’s ability to outperform its competitors and to separate from them by creating more economic value in the same given market (Augier and Teece 2016 ). A competitive advantage may include access to natural resources, or it can be more inherently to the firm’s core, like better technology, a favorable cost structure, or other advantages in the value chain or resources of a company.

According to Michael Porter ( 1985 , 1989 ), strategic management should be concerned with building and sustaining competitive advantage. He distinguishes between two methods how an organization can gain a competitive advantage over its rivals: differentiation advantage and cost advantage. They can be described as follows:

A cost advantage occurs when a business can provide the same products or services as its competitors, but has lower costs.

A differentiation advantage means that a business...

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Augier, M., & Teece, D. J. (Eds.) (2016). Competitive advantage. In The Palgrave encyclopedia of strategic management. The Palgrave encyclopedia of strategic management . London: Palgrave Macmillan.

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Schweizer, L., Koscher, E.M.K. (2022). Competitive Advantage. In: Idowu, S., Schmidpeter, R., Capaldi, N., Zu, L., Del Baldo, M., Abreu, R. (eds) Encyclopedia of Sustainable Management. Springer, Cham. https://doi.org/10.1007/978-3-030-02006-4_365-1

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How to Successfully Achieve and Sustain Competitive Advantage

Updated on: 5 January 2023

Competitive advantage is at the core of an organization’s performance in markets where there is heavy competition. It sets an organization apart from its competitors and paves the way for higher profit margins, greater return on assets, and accumulating valuable resources.  

There are many ways to achieve a competitive advantage but only two basic types of it. In this post, we will be looking at the concept of competitive advantage and the steps an organization can follow to achieve and sustain competitive advantage through cost advantage and differentiation. 

What is Competitive Advantage

Competitive advantage stems from the value an organization is able to create for its customers. It can come in the form of prices lower than what is offered by competitors for the same benefits or in the form of unique benefits that counterbalance a higher price. In the end, the value created for the customer should exceed the organization’s cost of creating it in the first place. 

This creates a sustainable advantage allowing them to succeed in the market. 

According to Michael Porter, there are two types of competitive advantage; 

• Low cost – where an organization is able to produce its products at a lower cost than its competitors.
• Differentiation – where an organization is able to differentiate its products or service in terms of quality, style, customer service, etc. hence creating superior value to the customers over the competition. 

Cost advantage and differentiation stems from industry structure or how well it can cope with the industry forces that influence its profitability (as introduced in Michael Porter’s five forces model ) better than its competition. 

How to Create and Sustain Competitive Advantage 

Creating a sustainable competitive advantage is a laborious process that needs to be continuously attended to. Adhere to the following steps to ensure you get and remain ahead of the field.   

Analyze Competitors 

To successfully compete in an industry, an organization needs to understand its competitive landscape. This means gathering and analyzing information on competitor strengths, weaknesses, strategies, positioning, value proposition, customer perception, and more.  

Equipped with this knowledge, the right strategy can then be developed to achieve a sustainable competitive advantage.  

Learn more about conducting a competitive analysis . 

Map Competitors into Strategic Groups 

A business mainly competes against other businesses that offer similar products or services and follow the same generic competitive strategy. Such businesses that follow the same competitive strategy in an industry belong to the same strategic group. Identifying the other businesses that fall into the same strategic group as it does, is important to an organization in terms of developing a strategy to achieve competitive advantage. 

Learn more about mapping strategic groups .  

Assess the Most Attractive Position in the Industry 

Based on your strategic group analysis, you now know who your direct rivals are and where they stand. Next, you should articulate your position in the industry to succeed in the marketplace. Defining your competitive positioning will help identify areas of opportunity for your business. 

Michael Porter’s five forces analysis helps assess and evaluate the competitive strength and position of an organization. Porter’s five forces model helps organizations understand the intensity of competition in an industry, its attractiveness, and profitability level. It helps identify where power lies in a business situation and hence assess the strength of an organization’s current competitive position and the strength of a position that an organization may look to move into.

The five forces include, 

• The entry of new competitors
• The threat of new substitutes 
• The bargaining power of buyers 
• The bargaining power of suppliers 
• The rivalry among the existing competitors 

Three Generic Strategies for Achieving Competitive Advantage by Michael Porter 

An organization’s relative position in an industry decides whether its profitability is above or below the industry average. Even within an industry structure that is unfavorable, a well-positioned organization may earn high rates of return. 

Michael Porter introduces three generic strategies for achieving above-average performance in an industry and thus creating a competitive advantage. Generic strategies include cost leadership, differentiation, and focus which is divided into cost focus and differentiation focus.   

The idea behind the concept of generic strategies is that competitive advantage is at the core of any strategy. And in order to achieve a competitive advantage, the organization must make a choice about the type of competitive advantage it wants to attain and the scope within which it will attain it. 

Each of the generic strategies highlights different methods competitive advantage can be achieved.  

Cost leadership  

An organization adhering to this strategy aims to become the low-cost producer in its industry. The sources of cost advantage vary here from industry to industry, and may include proprietary technology, preferential access to raw material, increased individual skills, improved organizational routines, location advantages, managerial effectiveness, and more .  

A low-cost producer must find and exploit all these sources of cost advantage. An organization that can achieve and sustain overall cost leadership, can become an above-average performer in its industry given that it can command prices at or near the industry average. 

By offering their products or services for a similar or lower price than their competitors, organizations following this strategy can maintain a low-cost position in their industry which will, in turn, increase their return. 

A cost leader however needs to consider the bases of differentiation, for if the product is not perceived as comparable or acceptable by its buyers, it will be forced to reduce prices well below its competitors to gain sales. This will in turn reverse the benefits of its favorable cost position. 

Differentiation

An organization that follows this strategy aims to become unique in its industry along certain dimensions that are highly valued by buyers. In this strategy, the organization selects specific attributes that are considered important by its buyers and uniquely positions itself to meet those needs. It is then rewarded for its uniqueness with premium prices. 

An organization can achieve differentiation through the product itself (quality, price, durability), its delivery system, marketing approach, customer service, and many other factors. The logic behind the differentiation strategy requires that the attributes an organization chooses to differentiate itself should be different from the attributes used by its rivals. 

An organization that can achieve and sustain differentiation can be an above-average performer in its industry if the premium price they offer can offset the extra costs spent for being unique. An organization aiming to become a differentiator therefore should adhere to ways of differentiating that lead to a price premium greater than the cost of differentiating. 

A differentiator shouldn’t ignore its cost position for there’s a chance of its premium prices being nullified by the inferior cost position of competitors. To overcome this, a differentiator can reduce costs in all areas that don’t affect differentiation. 

Focus 

An organization following this strategy selects a segment of the industry and tailors its strategy to cater specifically to them while excluding the rest of the market. By optimizing its strategy for a selected group of customers, the focuser aims to achieve a competitive advantage in its target segment although it cannot achieve an overall competitive advantage. 

The focus strategy has two variants; 

Cost focus: here, the organization seeks a cost advantage in its target segment by exploiting its cost behavior  

Differentiation Focus: here, the organization seeks differentiation in its target segment by exploiting the special needs of the buyers

How to Measure and Analyze Competitive Advantage 

The value chain model by Michale Porter can be used as a tool to diagnose competitive advantage and find ways to improve it. The value chain divides an organization into the distinct activities it performs in designing, producing, marketing, and distributing its products and helps identify the linkages among the activities that are central to achieving competitive advantage. 

Porter’s value chain model divides these activities into two categories,

• Primary activities are the activities involved in the physical creation of the product, its sale and transfer to the buyers, and after-sale assistance. 
• Support activities ; these are the activities that support the primary activities and each other by providing purchased inputs, technology, human resources, and various organization-wide functions.  

The value chain analysis helps understand the activities that are most valuable and should be optimized to achieve competitive advantage.The firm can then optimize the primary activities that account for the greatest share of production costs and increase profit margins. The analysis can also reveal the support activities that could use more spending to generate better value.

Analyzing competitive advantage 

Here’s how to analyze your organization’s value chain based on how you want to develop a competitive advantage (cost leadership or differentiation). 

Cost leadership 

In order to reduce the cost of internal business activities, 

• First, identify the primary and support activities involved in developing and delivering products and services. 
• Determine the importance of each activity in terms of production cost. Those activities that consume a large percentage of the total cost of production should be addressed first. 
• Identify the cost drivers behind each activity by analyzing how they use the company resources. 
• Map out the connections between the activities to better understand the roles each plays in the overall value chain. This will allow you to detect problems such as how reducing the cost of one activity would cause the cost of a linked activity to increase. 
• Now that you have understood the cost drivers and the inefficient processes in the value chain, you can make informed decisions on how to improve them and reduce production cost.

Differentiation   

An organization following a differentiation strategy can effectively create more value for the buyer by adding product features and improving customer satisfaction by following the steps below.

• Identify the activities in the value chain that contribute the most to creating customer value.  
• Evaluate the differentiation strategies for improving customer value. Strategies like adding more product features , improving customer service and responsiveness, and offering complementary products can be used to increase product differentiation and product value.
• Identify the best sustainable differentiation. Creating superior differentiation and customer value requires the use of many interrelated activities and strategies. Use the best combination of them to pursue a sustainable differentiation advantage.  

Now It’s Your Turn to Develop a Competitive Advantage Strategy 

To gain a competitive advantage is to attract more customers, make more profit, return more value to shareholders than rival organizations do. A company can effectively gain a competitive advantage in one of two ways; by reducing its own costs and by adding more value to its products or services hence differentiating itself from competitors. 

We hope this post will assist you in developing your own strategy to achieve a sustainable competitive advantage. Got anything to add? Let us know in the comments below. 

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2.4 Competitive Advantage

While accounting measures and stock market returns provide a sense of how well a firm is performing, these indicators may not be ideal if the intent is to understand which firms perform well systematically over the long term. One limitation of those indicators is that they may reflect random perturbations in market outcomes. A firm may have a stroke of good luck that leads it to capture exceptional profits, even if the strategic position of its business is poor. A firm may also have a stroke of bad luck that leads it to have underwhelming profits, even if the strategic position of its business is healthy. A second limitation of these indicators is that firms are not always attempting to carry profits on their books. For example, there are several publicly traded firms that rarely earn profits but are considered healthy, and even thriving, because they use much of their “would be” profits to invest in further improving their businesses.

At a conceptual level, strategic management scholars are often less concerned with specific accounting and stock market performance indicators and more concerned with the idea of competitive advantage . Before offering a formal definition of competitive advantage, it is useful to recall the more familiar concept of economic value creation. Economic value creation (EVC) is the difference between what a customer is willing to pay ( WTP ) for a product and the cost incurred to produce the product.

EVC = WTP – Cost

The customer’s WTP is also referred to as their reserve price—the maximum they are willing to pay for the product. In this equation, cost reflects the cost incurred by the producer, rather than the cost to the consumer of purchasing the product, which is referred to instead as the price of the product.

Economic value creation may vary across firms. Firms that sell the same product may each incur a different cost of production. Further, consumers may be willing to pay one price when purchasing the good from one firm, but willing to pay another price when purchasing the good from the firm’s competitor. This all implies that the economic value created will differ from firm to firm.

With this in mind, we can now say that a firm has a competitive advantage over a competitor if it has a larger economic value creation than that competitor. For example, if we have two firms, A and B, A has a competitive advantage over B if the economic value created by A exceeds the economic value created by B. The magnitude of A’s competitive advantage is given by the difference between the economic value created by each firm.

The concept of competitive advantage is useful for several reasons. First, unlike measures such as profits and stock price, competitive advantage does not change based on random perturbations. If a firm’s competitive advantage increases, that means that either its economic value creation increased, or its competitor’s economic value creation decreased. These changes, in turn, reflect relative shifts in the cost structure, or relative shifts in consumers’ willingness to pay. Second, the notion of competitive advantage better reflects the strategic health of firms that reinvest in their business, and therefore are healthy, but do not observe profits. For instance, if firm A earns a profit of $100, but then re-invests $98 of that profit into the business to improve the product, then the accounting profits are $2, but the actual health of the company may have improved because the consumers willingness to pay for the product may have increased. Such a firm would still display a large economic value creation measure, and therefore may still hold a competitive advantage.

Section Video

What is Competitive Advantage? [07:58]

The video for this lesson further explains competitive advantage.

You can view this video here: https://youtu.be/PeCCT7CKpYA .

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WolvesandFinance. (2018, February 11). What is Competitive Advantage? [Video]. YouTube. https://youtu.be/PeCCT7CKpYA .

When the economic value creation of a firm is greater than its competitors.

Strategic Management Copyright © 2020 by Reed Kennedy is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

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What is a Competitive Advantage? Explained with Examples

Free Competitive Analysis Kit

Aayushi Mistry

• December 12, 2023

Competitive advantages are the strengths and opportunities that you have over your competition.

It includes all the factors that help you stand out from your competition. It is also the factor of seeing which your target audiences may decide to go with your product/service over your competitors.

Depending on your industry, there can be many other advantages. However, eventually, it is the factor that earns you more sales and gives you a surplus in profit.

What is a Competitive Advantage?

Competitive advantages are the strengths and opportunities that you have over your competition. It is an attribute that allows a company to achieve superior profits compared to its rivals and generates more value for the company, customers, and shareholders.

11 Common Competitive Advantage Examples

Strong Branding is one of the strongest sustainable competitive advantages. A lot goes into making a brand like building customer relationships, quality service/product, time, and money.

But when the company is identified as a brand in the market, it brings you a positional advantage. And at the same time, your sales become easier and wider.

2. Network Effect

The network effect happens when the value of a product or service depends on the number of its users.

In a positive network effect, the more people use it, the more valuable the product becomes. Once the user base reaches a critical mass, it’s extremely hard for anyone else to achieve the same position.

Scale can give companies a sustainable advantage in several ways. For example, in the retail industry, large chains can use their scale to buy merchandise at low prices unavailable to their smaller competitors.

4. Customer Lock-in

Some businesses make products or services that have very high switching costs for customers. For example, enterprise automation software such as ERP systems is so tightly integrated with critical customer functions that changing an ERP vendor is unthinkable.

5. Patents/Intellectual Property

Patents are essentially a temporary monopoly granted by the governments to stimulate risky R&D. Example: biotech and pharmaceutical companies.

6. Know-how/Monopolies

If a critical enabling element can be kept secret, it can become a source of sustainable advantage.

7. Economies of Scale

The basic tenet of economies of scale is that the cost per unit declines as output increases. The lower cost per unit is largely driven by the presence of fixed costs within the business’s cost curve.

8. Exclusive Access to a resource

Exclusive or near-exclusive access to valuable resources can give a sustainable advantage. For example, China currently provides nearly 95% of the world’s rare earth metals.

9. Exclusive License

Sometimes governments grant exclusive licenses to businesses. For example, Stepan is the only company in the US that is legally allowed to import coca leaves and extract cocaine from them.

10. Cost Advantage

Cost advantage can be achieved through economies of scale. This makes it difficult for competitors to match the low prices.

11. Adapting Product Lines

For products that continuously evolve, many tech companies could fit in this category.

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How do I know if a company has a Competitive Advantage?

During competitive analysis , you must have come across a few factors where you stand out from your competitors. If these unique factors bring you any strength or opportunity, then those advantages are valuable. And only then, they can help you thrive.

For example, if you have a larger team than your competitor, then it is a competitive advantage. But you also need to look closer and see how this is bringing you any profit. Is this advantage helping you bring more business? Is this advantage helping you serve more customers/clientele? Is this advantage making a positive impact on your branding? If yes, then it is bringing you value. Hence, it is valuable.

Other than that, there are a few different perceptions to look at your competitive advantage:

Is your Competitive Advantage Sustainable?

Sustainable competitive advantages are company assets, attributes, or abilities that are difficult to duplicate or exceed; and provide a superior or favorable long-term position over competitors.

In this case, you have an advantage that your competition can not easily catch up with. It can include having new features for your service/products, initiating new sales and marketing strategies , or introducing new technology. This advantage is simply intuitive. It is so much like a race-Looking at the current situation, the industry knows what is the next step. But whoever implements it first has an advantage.

For example, Apple. Inc had this advantage when they released AirPods. That step was intuitive and groundbreaking and sustainable until their competitors had a similar product.

Is your Competitive Advantage Replaceable?

You may have a great advantage. But you need to know if that is replaceable. For example, people who still don’t use AirPods, still have traditional earphones that work equally well. In fact, you will find a lot of people who would prefer earphones to air pods. In that case, having air pods as an advantage is a replaceable advantage.

Similarly, you may have a large team to cater to your target market and your company. But at the same time, if your competitor can invest in heavy technology and innovation to do the same work, then they have a replaceable advantage.

Is your Competitive Advantage Strategic?

Such an advantage is mostly seen in the R&D department, sales, and marketing as well as in operations.

Is your Competitive Advantage Rare?

In these cases, your competition will not have this feature in their product/service or business. A lot of times, such an advantage lies in the way you operate. It can include having unique raw materials, a unique team management system, quicker transportation, a better-developing team, and so on and so forth. Having a rare advantage can help you become superior sooner. And usually, having a rare advantage is like having that secret ingredient in the recipe-Something, that no one can get a hack of.

You can learn these different perspectives by studying your competition analysis with a detailed overview, gaining better knowledge of the market, brainstorming with your team, and being intuitive with respect to your business.

Steps to derive Competitive Advantages

• Determine the right competition
• Understand your market situation and your position in it
• SWOT Analysis
• Porter’s Five Forces
• Strategic Group Analysis
• Growth-Share Matrix
• Perceptual Mapping
• Figure out the points where you stand out from your competition.
• Those stand-alone points are your competitive advantages.

A table for listing your Competitive Advantages:

Add competitive advantage to your business plan.

Your competitive advantage section will come after you have explained your competition.

In the beginning, you have to explain the competitive environment. If you are going to put it next to the section on competitive analysis, you will not have to go into details. Because you will already have explained those details.

However, if you are to present this section only, you will have to explain your competition . Along with that, you will also have to share analytic comparisons. For this, you can use pie charts, graphs, metrics, and other such diagrams.

And then, finally, you have to start explaining your competitive advantage over your competitors. Note that you have to write this section in the most convincing way. So, your prospects understand your dynamics well and invest in your business. Moreover, it is important for them to know if you have a clear strategic plan to run your business successfully.

A lot of people may want to skip this section of your business plan. But in our opinion, you must never make that mistake. For it is your chance to tell your investors the ways you stand out from your competitors in your industry.

Important of Competitive Advantages

• You get a chance to highlight your business’s strengths and opportunities
• Your investors can have an idea that you have crystal clear ways to thrive in your business
• You restore your investors’ faith in you.
• You explain why your business would be their best choice to invest in.

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About the Author

Since childhood, I was in awe of the magic that words bring. But while studying computer science in college, my world turned upside down. I found my calling in being a copywriter and I plunged into a world of words. Since then, there is no looking back. Even today, nothing excites me to find out the wonders the words can bring!

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Competitive advantage – definition and meaning

Competitive Advantage is a feature that gives a company an edge over its rivals. It is something that helps it compete more effectively. A competitive advantage could be a superiority that a company gains. For example, perhaps it can provide the same value as other companies can, but at a lower price. It may also offer more attractive credit terms than its competitors.

Some companies with a competitive advantage can charge more. They charge more by providing greater value through differentiation. Differentiation refers to the results of efforts to make a brand stand out to customers. Specifically, it stands out as a provider of unique value.

We can use the term ‘competitive advantage’  at individual, company, or country levels. This article focuses on its meaning at company level.

Specifically, the article focuses on conditions that allow companies to generate either greater margins or superior sales than their rivals.

When a company sustains greater-than-average profits, we say it possesses a competitive advantage over its competitors. The goal of most firms is to achieve a sustainable competitive advantage.

According to the Financial Times’ glossary of business terms , competitive advantage is:

“When a company has an advantage over another in the provision of a particular product or service.”

Do not confuse the term with ‘comparative advantage.’  Comparative advantage refers to nations becoming wealthier by trading rather than becoming self-sufficient. In other words, they specialize, trade with other nations, and get richer.

Competitive advantage – reasons

A firm may have a competitive advantage due to its quality, price, brand, distribution network, intellectual property, or location.

It could also be due to customer support, cost structure, natural resources access, and a supply of suitably-skilled labor.

Historically, access to new technology has consistently given companies a significant advantage over their rivals.

In the digital age, data analytics and customer insights play a crucial role in shaping competitive advantage, allowing companies to anticipate market trends and customer needs more accurately.

Competitive advantage provides an edge over the competition. It can also generate more value for a business and its shareholders.

In customers’ minds, a competitive advantage is what makes a company superior to others. Businesses first utilized this ‘competitive advantage’ method of success. However, any person or entity can also adopt it.

The rise of sustainable business practices and corporate social responsibility is increasingly influencing consumer choice, allowing companies with strong ethical commitments to differentiate themselves in crowded markets.

Competitive advantage – three determinants

Before finding out what your competitive advantage is, you need to know about three determinants. First, the competition; second, what you produce; and third, the target market.

Your Target Market

Which customers should you target? You must know who is currently buying from you. You also need to find out who will purchase from you in the future.

Furthermore, you must determine what you need to do to make them happier. In other words, find out how can get them to spend more.

For example, physical newspapers today know that their target market is older individuals. They know this because younger adults prefer going online. Many newspapers did not prepare for this evolution and consequently died.

What Are You Providing?

You must be clear on what type of product you are providing. Only then can you focus on making sure it is something that offers real value.

You need to list all the advantages and benefits that your product provides consumers.

For example, since the Internet emerged, retailers have had to redefine what a shopping experience is for the customer.

The Competition

You need to know everything about rival companies. You also need to find out as much as you can about your customers. Then you have to try to meet their particular needs.

Major retailers thought their competition was other major retailers. However, it was, in fact, the online world.

Suddenly, the market opened up to millions of smaller players. Operating online means having considerably lower costs than retailers with physical shops. Online retailers are forever looking for innovative ways of enhancing the shopper’s experience.

Make sure you are completely familiar with every aspect of these three determinants. They will help you identify what you are better able to provide to your target market than your competitors. Being able to do that is your main competitive advantage.

Value proposition

When understanding competitive advantage, value proposition is important. A value proposition is a summary of why a consumer should buy a product. We also use value propositions for services.

If the value is effective, it may produce a competitive advantage in the good or service.

The value proposition will also increase customer expectations and choices.

Competitive advantage – two types

American academic, Michael Porter, famous for his economic and business theories, identified two basic types of competitive advantage: First, Cost Advantage ; and second, Differentiation Advantage .

Cost Advantage

Cost advantage exists when a company can deliver the same benefits as its competitors. However, it does so at a lower price.

It can achieve this with superior technology, efficient processes, waste reduction or elimination, and a skilled workforce. A favorable location and access to cheaper inputs also help.

Differentiation Advantage

Differentiation advantage is when a company delivers more benefits than its competitors. In other words, the company’s unique features set it apart and above those of its competitors. Differentiation advantage may refer to a company, product, or service.

Prof. Porter published his book – Competitive Advantage – in 1985, as the ‘essential companion’ to his earlier work – Competitive Strategy (1980). While ‘Competitive Strategy’  looked at competition at industry level, ‘Competitive Advantage’ considered it from a company’s-eye view.

Prof Porter said:

“My quest was to find a way to conceptualize the firm that would expose the underpinnings of competitive advantage and its sustainability.”

Is competitive advantage dead?

What usually happens when one academic coins a phrase or comes up with a new theory? A few years later another professor tries to kill it.

In 2013, Rita Gunther McGrath published her book – The End of Competitive Strategy: How to Keep Your Strategy Moving as Fast as Your Business . Prof. McGrath, a professor at Columbia Business School in New York, is a leading expert on strategy.

In her book, Prof. McGrath wrote:

“Strategy is stuck. Virtually all strategy frameworks and tools in use today are based on a single dominant idea: that the purpose of strategy is to achieve a sustainable competitive advantage. This idea is strategy’s most fundamental concept. It’s every company’s holy grail. And it’s no longer relevant for more and more companies…”

“Strategy was all about finding a favorable position in a well-defined industry and then exploiting a long-term competitive advantage. Innovation was about creating new businesses. It was seen as something separate from the business’s core set of activities.”

Prof. McGrath argues that competitive advantage is not sustainable. In other words, it is transient. To operate, we need a new series of assumptions about how the global marketplace works. We also need ‘a new playbook to compete and win when competitive advantages are transient,’ she said.

Basing one’s strategy on a new set of assumptions may not seem very appealing. This is especially the case for managers who are still ‘stuck’ in the old economy.

Absolute advantage refers to what one entity can produce at a better rate than another. Imagine John Doe Inc. produces three shirts per worker per day, and Mary Ltd. produces four shirts per worker per day. Mary Ltd. has an absolute advantage over John Doe.

Compound phrases containing “advantage”

Apart from competitive advantage, comparative advantage, and absolute advantage, there are many compound phrases in business English containing the word “advantage.” Let’s have a look at some of them:

AA company’s ability to produce at a lower cost. Example: “The company’s cost advantage allowed it to undercut the prices of its competitors, winning a larger market share.”

Technological Advantage

Superiority in using advanced technology. Example: “With its technological advantage, the startup was able to disrupt the traditional market with its innovative app.”

First-mover Advantage

Benefits of being the first in a new market. Example: “The company’s first-mover advantage secured its position as the leading provider before other potential competitors entered the space.”

Brand Advantage

Recognition and esteem of a company’s brand. Example: “Due to its brand advantage, customers are willing to pay a premium for their products over lesser-known brands.”

Strategic Advantage

A unique and hard-to-imitate business approach. Example: “Their strategic advantage stems from a unique partnership with suppliers that gives them priority access to high-demand materials.”

3 Videos related to types of advantage

These three educational videos, from our sister channel on YouTube – Marketing Business Network , explains what ‘Competitive Advantage,’ ‘Comparative Advantage,’ and ‘Absolute Advantage’ mean using simple and easy-to-understand language and examples.

What is Competitive Advantage?

What is Comparative Advantage?

What is Absolute Advantage?

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Competitive Advantages in Business Essay

The four building blocks of competitive advantage, including superior efficiency, quality, innovation, and customer responsiveness, allow an organization to improve its status amongst other companies. When utilized in a balanced way, the factors will directly impact the success of a business. In that way, the blocks are related to each other in a similar role of ensuring the work efficiency of an organization. For example, one study demonstrated how incorporating the building blocks of competitive advantage into the business plan of two major cereal companies affected their internal strengths (Kang, 2019). The factors work together to achieve the primary goal of a company.

Top management can play a critical role in helping a company achieve superior efficiency, quality, innovation, and responsiveness to customers. To improve superior efficiency, a clear annual strategy that involves outlining and analyzing the most successful exchanges. Ultimately, the described term is based on the innovative and customer-related aspects of building competitive advantage. One way to achieve innovation through the role of top management includes the encouragement of new knowledge acquisition (Papa et al., 2018). Responsiveness to customers is a factor that can be improved by establishing an accessible network for communication with the employees. Most importantly, the top management must allocate the necessary resources in advance.

The adoption of Six Sigma quality improvement processes will eventually lead to a significant decrease in product defects. This is evident through its definition: Six Sigma is a business management strategy used for quality improvement (Niñerola et al., 2019). At the same time, the processes do not guarantee an advantage, as risks regarding its deployment are also common (Galli, 2018). Hence, over time the implemented tools will ensure minimal waste and reduced costs, which will help to achieve parity with other competitors. Still, the risks involved, including incorrect implementation in various business fields, can lead to adverse consequences for the company’s progress. Therefore, the adoption of Six Sigma processes will only generate productivity in the case of its risks’ minimization and correct implementation.

Galli, B. J. (2018). Risks related to lean six sigma deployment and sustainment risks: How project management can help. International Journal of Service Science, Management, Engineering, and Technology, 9 (3).

Kang, H. (2019). An application of building blocks of competitive advantage approach to the U.S. cereal market leaders. International Journal of Management Studies, 25 (2), 1–17. Web.

Niñerola, A., Sánchez-Rebull, M. V., & Hernández-Lara, A. B. (2019). Six Sigma literature: A bibliometric analysis. Total Quality Management & Business Excellence, 32 (9-10), 959-980. Web.

Papa, A., Dezi, L., Gregori, G.L., Mueller, J., and Miglietta, N.(2018). Improving innovation performance through knowledge acquisition: The moderating role of employee retention and human resource management practices. Journal of Knowledge Management, 24 (3), 589-605. Web.

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IvyPanda. (2023, February 24). Competitive Advantages in Business. https://ivypanda.com/essays/competitive-advantages-in-business/

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1. IvyPanda . "Competitive Advantages in Business." February 24, 2023. https://ivypanda.com/essays/competitive-advantages-in-business/.

Bibliography

IvyPanda . "Competitive Advantages in Business." February 24, 2023. https://ivypanda.com/essays/competitive-advantages-in-business/.

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