What is Competitive Advantage?
Competitive advantage is the sum of conditions that put one business in a superior or favorable position over another.
These conditions allow a company to produce a good or service that is better in some way than those produced by competitors. Companies with a strong competitive advantage are rewarded by their ability to outcompete rivals with better sales, better margins, or more revenue generally.
Competitive advantage arises from a variety of sources. Additionally, a business practice that creates competitive advantage for one firm may not be correctly leveraged or may not produce the same effect for another firm.
Where Does Competitive Advantage Come From?
Competitive advantage stems from specific business factors known as distinctive competencies.
Distinctive competencies are things that a business does better than its competitors. Almost anything can be a distinctive competency if it is unique to the business, provides value to the business or to its customers, and is difficult to replicate by competitors.
Instances of competitive advantage are classified as either a comparative advantage or a differential advantage, based on the distinctive competencies that contribute to that advantage.
Comparative advantages take the form of a firm’s ability to produce a good or service more efficiently than its competitors. These efficiencies produce cost savings and greater profit margins.
The most common comparative advantage can be seen in products similar to a competitor’s being offered to customers at a lower price. The company that can afford to offer their products at lower prices than their competitors can is able to do so by leveraging their distinctive competencies to produce competitive advantage.
Improved and efficient processes, the ability to leverage economies of scale, lower labor costs, less expensive distribution, and other innovative business practices can result in lower customer prices.
A comparative advantage is clear when two or more similar products are compared. A differential advantage exists when a firm’s products or services are seen to be superior to those of a competitor based on the differences between the products.
A product that is perceived as “premium” or “luxury,” and therefore more desirable, has a differential advantage over products that are perceived as “budget,” or less desirable. Products that are associated with positive or popular brands also have a differential advantage.
Companies that cultivate comparative advantages generally compete on price to win sales and market share.
Companies that cultivate differential advantages generally compete on perceived value to win market share and maintain robust profit margins.
Intangible Distinctive Competencies
When we think of the core capabilities of a business—the things that they do better than their competitors—we generally think of physical or tangible business practices. In many cases, however, intangible distinctive competencies can be both durable and difficult for competitors to replicate.
Successful branding, patents and other intellectual property, corporate reputation, and even corporate culture can all produce competitive advantage if they are unique, hard to replicate, and provide value to the business or to customers.