Competitive Advantage Definition
Competitive advantage refers to an advantage availed by a company who has remained successful in outdoing its competitors belonging to the same industry by designing and implementing effective strategies that allows 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 is able to make more profits, build a positive brand reputation, make more sales, maximize return on assets, etc.
Competitive advantage is not something that can be vested rather it can only be earned through hard work, dedication and ethical performance of an organization. It does not come easy and an organization might need to dedicate years and sometimes decade in earning this advantage over its arch rivals belonging to the same industry. The key to earning it is excellent and ethical performance and the same cannot be earned through degrading or defaming rival companies operating in the same domain.
Types of Competitive Advantage
- Cost Advantage – This is a type where similar products can be sold at lower prices. 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. The companies seeking cost advantage will focus on following a cost leadership strategy.
- Differentiation Advantage – This type can only be achieved by means of offering products or services that are unique and thus, the companies can charge an exclusive price for providing such products or services. The companies willing to pursue differentiation advantage are more likely to focus on aspects like advertising, branding, quality, design, and development of a new product.
- Comparative Advantage – It can be defined as the ability of an organization to effectively produce goods or services better than as compared to its competitors and this ultimately results from higher profit margins for the company and ultimately paves way for the company to earn a comparative advantage.
How does it Work?
Competitive advantage enables an organization in easily generating 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 really difficult to neutralize the strengths of the former.
Examples of Competitive Advantage
- 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.
- Companies can pursue 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.
- Differentiation strategy can also be used by companies by offering unique products or services that none or just a few of its competitors have to offer and in this way, it can set premium prices on their products or services and earn more profit marginsProfit MarginsProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. .
- The companies can even make use of other strategies like the information advantage, adaptability, technology-based competitive advantage, operational effectiveness strategy, and innovative strategy as well.
How to Gain Competitive Advantage?
A company can gain competitive advantage by following either all or few of the mechanisms where it can choose to sell the similar product at a 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.
Attaining a competitive advantage does not necessarily mean that the same shall remain for the lifetime as the company will need to work on sustaining the same for its entire lifetime. The importance is discussed below-
- It helps companies in enhancing their profit margins. This is entire because of the fact that 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 by the company 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 to a significant extent.
- Having this advantage will enable the company to have its brand name to get recognized in the industry.
- An organization can dictate its own pricing after gaining a competitive advantage for its products or services.
- An organization can have a greater ROA or return on assetsReturn On AssetsReturn on assets (ROA) is the ratio between net income, representing the amount of financial and operational income a company has, and total average assets. The arithmetic average of total assets a company holds analyses how much returns a company is producing on the total investment made. in the industry.
- An organization can even maximize the wealthMaximize The WealthWealth maximization means the maximization of the shareholder’s wealth as a result of an increase in share price thereby increasing the market capitalization of the company. The share price increase is a direct function of how competitive the company is, its positioning, growth strategy, and how it generates profits. of its shareholders.
Competitive advantage can be applied to a company, country, or individual too. It is mainly of three types- comparative advantage, cost advantage, and differentiation advantage. The strategies with which an organization can earn are the information advantage, cost leadership strategy, adaptability, differentiation strategy, operational effectiveness strategy, technology-based competitive advantage, and innovative strategy as well.
This has been a guide to Competitive Advantage and its definition. Here we discuss examples of competitive advantage, how does it work, along with its types, strategies and importance. You can learn more about from the following articles –