In business, a competitive advantage is the attribute that allows an organization to outperform its competitors. A competitive advantage may include access to natural resources, such as high-grade ores or a low-cost power source, highly skilled labor, geographic location, high entry barriers, and access to new technology.
A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices.
The term competitive advantage refers to the ability gained through attributes and resources to perform at a higher level than others in the same industry or market. The study of this advantage has attracted profound research interest due to contemporary issues regarding superior performance levels of firms in today’s competitive market. “A firm is said to have a competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential player”.
Competitive advantage is the leverage a business has over its competitors. This can be gained by offering clients better and greater value. Advertising products or services with lower prices or higher quality piques the interest of consumers. Target markets recognize these unique products or services. This is the reason behind brand loyalty, or why customers prefer one particular product or service over another.
Value proposition is important when understanding competitive advantage. If the value proposition is effective, that is, if the value proposition offers clients better and greater value, it can produce a competitive advantage in either the product or service. The value proposition can increase customer expectations and choices.
Competitive Strategy is defined as the long-term plan of a particular company in order to gain competitive advantage over its competitors in the industry. It is aimed at creating defensive position in an industry and generating a superior ROI (Return on Investment).
Cost leadership strategy
Cost leadership is a business’s ability to produce a product or service that will be at a lower cost than other competitors. If the business is able to produce the same quality product but sell it for less, this gives them a competitive advantage over other businesses. Therefore, this provides a price value to the customers. Lower costs will result in higher profits as businesses are still making a reasonable profit on each good or service sold. If businesses are not making a large enough profit, Porter recommends finding a lower-cost base such as labor, materials, and facilities. This gives businesses a lower manufacturing cost over those of other competitors. The company can add value to the customer via transfer of the cost benefit to them.
A differential advantage is gained when a business’s products or services are different from its competitors. In his book, Michael Porter recommended making those goods or services attractive to stand out from their competitors. The business will need strong research, development, and design thinking to create innovative ideas. These improvements to the goods or service could include delivering high quality to customers. If customers see a product or service as being different from other products, consumers are willing to pay more to receive these benefits.
Focus strategy ideally tries to get businesses to aim at a few target markets rather than trying to target everyone. This strategy is often used for smaller businesses since they may not have the appropriate resources or ability to target everyone. Businesses that use this method usually focus on the needs of the customer and how their products or services could improve their daily lives. In this method, some firms may even let consumers give their inputs for their product or service.
This strategy can also be called the segmentation strategy, which includes geographic, demographic, behavioral, and physical segmentation. By narrowing the market down to smaller segments, businesses are able to meet the needs of the consumer. Porter believes that once businesses have decided what groups they will target, it is essential to decide if they will take the cost leadership approach or differentiation approach. Focus strategy will not make a business successful. Porter mentions that it is important to not use all 3 generic strategies because there is a high chance that companies will come out achieving no strategies instead of achieving success. This can be called “stuck in the middle”, and the business won’t be able to have a competitive advantage.
When businesses can find the perfect balance between price and quality, it usually leads to a successful product or service. A product or service must offer value through price or quality to ensure the business is successful in the market. To succeed, it’s not enough to be “just as good as” another business. Success comes to firms that can deliver a product or service in a manner that is different, meaningful, and based on their customers’ needs and desires. Deciding on the appropriate price and quality depends on the business’s brand image and what they hope to achieve in relation to their competition.
VRIO resources. A company that possesses VRIO (valuable, rare, hard to imitate and organized) resources has an edge over its competitors due to superiority of such resources. If one company has gained VRIO resource, no other company can acquire it (at least temporarily). The following resources have VRIO attributes:
- Intellectual property (patents, copyrights, trademarks)
- Brand equity
Unique competences. Competence is an ability to perform tasks successfully and is a cluster of related skills, knowledge, capabilities and processes. A company that has developed a competence in producing miniaturized electronics would get at least temporary advantage as other companies would find it very hard to replicate the processes, skills, knowledge and capabilities needed for that competence.
Innovative capabilities. Most often, a company gains superiority through innovation. Innovative products, processes or new business models provide strong competitive edge due to the first mover advantage. For example, Apple’s introduction of tablets or its business model combining mp3 device and iTunes online music store.
Changes in PEST factors. PEST stands for political, economic, socio-cultural and technological factors that affect firm’s external environment. When these factors change many opportunities arise that can be exploited by an organization to achieve superiority over its rivals. For example, new superior machinery, which is manufactured and sold only in South Korea, would result in lower production costs for Korean companies and they would gain cost advantage against competitors in a global environment. Changes in consumer demand, such as trend for eating more healthy food, can be used to gain at least temporary differentiation advantage if a company would opt to sell mainly healthy food products while competitors wouldn’t. For example, Subway and KFC.
If opportunities appear due to changes in external environment why not all companies are able to profit from that? Its simple, companies have different resources, competences and capabilities and are differently affected by industry or macro environment changes.
Company’s ability to respond fast to changes. The advantage can also be gained when a company is the first one to exploit the external change. Otherwise, if a company is slow to respond to changes it may never benefit from the arising opportunities.