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Competitive Advantage

Updated on January 19, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Competitive Advantage?

Competitive advantage refers to an advantage availed by a company that has remained successful in outdoing its competitors belonging to the same industry by using different and innovative strategies.

Competitive Advantage

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These entities of use better designs and implements effective strategies that allow the same in offering quality goods or services, quoting reasonable prices to its customers, maximizing the wealth of its stakeholders and so on and as a result of which the company can make more profits, build a positive brand reputation, make more sales, maximize return on assets, etc.

Key Takeaways

  • Competitive advantage refers to the advantage gained by a company that surpasses its competitors within the same industry. 
  • This advantage is achieved through the implementation of innovative ideas that allow the company to provide high-quality goods or services, competitive pricing, and ultimately increase shareholder wealth. 
  • Cost advantage, differentiation advantage, and comparative advantage are the three main types of competitive advantage. 
  • Competitive advantage enables an organization to create greater value for itself and its shareholders rapidly. By outperforming competitors, a company can secure a stronger market position, increase market share, and enhance profitability, leading to long-term success.

Competitive Advantage Explained

Competitive advantage in business is not something that can be vested. Rather it can only be earned through the hard work, dedication, and ethical performance of an organization. It does not come easy, and an organization might need to dedicate years and sometimes decades to earning this advantage over its arch rivals belonging to the same industry. The key to earning it is excellent and ethical performance, and one cannot earn the same through degrading or defaming rival companies operating in the same domain.

Sustainable competitive advantage can be applied to a company, country, or individual. It is mainly of three types- comparative advantage, cost advantage, and differentiation advantage. The strategies with which an organization can earn are:

  • Information advantage
  • Cost leadership strategy
  • Adaptability
  • Differentiation strategy
  • Operational effectiveness strategy
  • Technology-based competitive advantage
  • Innovative strategy

Types

Cost Advantage – This is a type to sell similar products at lower prices. The companies seeking cost advantage will focus on following a cost leadership strategy. Here, the company chooses to sell its products or services at a price similar to its competitors, but at the same time, it will reap higher profit margins due to lower costs of production.

Differentiation Advantage – This type can only be achieved using offering products or services that are unique. The companies willing to pursue differentiation advantage are more likely to focus on advertising, branding, quality, design, and development of a new product. Thus, the companies can charge an exclusive price for providing such products or services.

Comparative Advantage – It can be defined as the ability of an organization to effectively produce goods or services better than its competitors, which ultimately results from higher profit margins for the company and ultimately paves the way for the company to earn a comparative advantage.

Examples

Some examples of Sustainable competitive advantage is given below.

  • High skilled workforce
  • Gaining exclusive access to resources
  • Gaining exclusive access to new technologies
  • Gaining exclusive access to proprietary technologies
  • Cost leadership strategy
  • Offering unique products or services·      
  • Recognition of brand image, and so on

Strategies

Companies can pursue competitive advantage in marketing by implementing a cost leadership strategy through which they can offer similar products at similar prices as compared to the competitors but at the same time earn more profits due to lower cost of production.

Companies can also use a differentiation strategy by offering unique products or services that none or just a few of their competitors have to offer. This way, it can set premium prices on its products or services and earn more profit margins.

The companies can even use information advantage, adaptability, technology-based competitive advantage in business, operational effectiveness strategy, and innovative strategy.

How To Gain Competitive Advantage?

Competitive advantage theory enables an organization to easily generate a higher value for itself and its equity holders. An organization with a sustainable advantage can easily outdo its competitors, while the latter will find it difficult to neutralize the strengths of the former.

A company can gain a competitive advantage by following either all or a few of the mechanisms where it can choose to sell a similar product at the lowest possible price and that too without compromising on the quality of the same, different and unique products or services with different and unique attributes, pooling resources through strategic alliance, maximum utilization of resources, hiring high skilled labor, designing and implementing defensive strategies and so on.

An organization can even maximize the wealth of its shareholders.

Importance

Attaining a competitive advantage in marketing does not necessarily mean that the same shall remain for the lifetime as the company will need to sustain the same for its entire lifetime. The importance is discussed below –

  • It helps companies in enhancing their profit margins. Customers will like the products or services that the companies with competitive advantage have to offer, and they will readily want to buy more from them without a question of doubt in their mind. If they like the products or services offered they will go on and recommend the product in their contacts which means an enhancement in sales and with this, there shall be a rise in profits too.
  • It enables an organization to leverage its sales figures significantly.
  • This advantage will enable the company to have its brand name recognized in the industry.
  • An organization can dictate its pricing after gaining a competitive advantage for its products or services.
  • An organization can have a greater ROA or return on assets in the industry.

Competitive Advantage Vs Comparative Advantage

  • Competitive advantage theory means the business has some edge over its peers regarding price, innovation, business strategy, etc, whereas comparative advantage means the business can produce goods at a lower opportunity cost than its peers.
  • To gain the former, the entity will try to do something which will make it better than competitors whereas to get the latter, the business will try to achieve economies of scale quality production, higher sales, etc.
  • The former does not always relate to price, whereas the latter is mostly related to price and cost.

Frequently Asked Questions (FAQs)

1. How can the marketing mix build a competitive advantage?

The marketing mix of product, price, place, and promotion can build a competitive advantage by differentiating a company’s offerings, targeting the right market segment, setting competitive prices, utilizing effective distribution channels, and implementing impactful promotional strategies. A well-crafted marketing mix aligns a company’s offerings with customer needs, enhances brand perception, and creates a unique position in the market, ultimately leading to a competitive advantage.

2. What are the six factors of competitive advantage?

According to Michael Porter’s framework, the six factors of competitive advantage are innovation, operational efficiency, quality, customer responsiveness, differentiation, and cost leadership. These factors enable a company to stand out from competitors, achieve superior performance, and provide unique value to customers. 

3. How can diversity create a competitive advantage for a firm? 

Diversity can create a competitive advantage for a firm in several ways. Firstly, diverse perspectives and experiences foster innovation and creativity, leading to the development of unique products and services. Secondly, a diverse workforce can better understand and serve a diverse customer base, enhancing customer satisfaction and loyalty. Additionally, diversity promotes a positive brand image, attracting diverse talent and expanding market reach, ultimately giving the company a competitive edge.

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