Competitive advantage

What is Competitive advantage?

Competitive advantage can be defined as a position a firm occupies against its competitors. It is an advantage that a firm has over its competitors, allowing it to produce greater sales or margins. It also allows a firm to retain more costumers than its competition. Competitive advantages give a company an edge over its rivals and an ability to generate greater value for the company and its shareholders. The more the competitive advantage can be maintained, the more difficult it is for competitors to counteract the advantage.

According to Michael Porter, there are three methods for creating a competitive advantage that can be maintained or sustainable. These methods are through cost leadership, differentiation, and focus.

  1. Cost leadership is a cost advantage that occurs when a firm has the ability to produce a good or service at a lower cost than its competitors, which gives the firm the ability to sell its goods or services at a lower price than its competition or to generate a larger margin on sales.
  2. Differentiation is an advantage that occurs when a firm delivers greater services for the same price of its competitors. This is a positive advantage because they indicate the firm’s position in its industry as a leader in superior costs and/or services. Some areas of differentiation can be product, distribution, sales, marketing, service, image, etc.
  3. Focus is an approach that ties into differentiation. It requires the firm to concentrate on a market niche, a narrow and exclusive competitive segment. The firm hopes to achieve a local rather than industry wide competitive advantages, and sets out to be the best in the segment or group of segments. There are two variables to this advantage: Cost Focus and Differentiation Focus.

Competitive advantages are important for an organization or firm. It is significant to understand that competitive advantages are usually temporary because competitors are quick to copy the advantages. Organizations watch their competition through environmental scanning, which is the acquisition and analysis of events and trends in the environmental external to an organization. Three common tools used in the industry to analyze and develop competitive advantages are Porter’s five forces model, Porter’s three generic strategies, and value chains.

In order to stay ahead, companies must strive to create more competitive advantages and also identify competitors' advantages. For example, Frito-Lay, a premier provider of snack foods such as Cracker Jacks and Cheetos, does not just send its representatives into grocery stores to stock shelves—they carry handheld computers and record the product offerings, inventory, and even product locations of competitors. Frito-Lay uses this information to gain business intelligence on everything from how well competing products are selling to the strategic placement of its own products. 

For the Competitive Advantage Model and explanation please click here

Please click the Wikipedia page for more references

For information from the quick MBA site about competitive advantage, click here