Competitive Advantage

Business Dictionary defines Competitive Advantageas a "superiority gained by an organization when it can provide the same value as its competitors but at a lower price, or can charge higher prices by providing greater value through differentiation." Competitive advantage results from matching core competencies to the opportunities.

Determining Factors of Competitive Advantage

How Can You Create Competitive Advantage
To create a competitive advantage, you've got to be clear about these three determinants.

• Benefit. What is the real benefit your product provides? It must be something that your customers truly need and that offers real value. You must know not only your product's features, but also its advantages how they benefit your customers. That means being constantly aware of new trends that affect your product, especially new technology. For example, newspapers were slow to respond to the availability of free news on the internet. They thought people were willing to pay for news delivered on a piece of paper once a day.
• Target market. Who are your customers? What are their needs? You've got to know exactly who buys from you, and how you can make their life better. That’s how you create demand, the driver of all economic growth. Newspapers' target market drifted to older people who weren't comfortable getting their news online.
• Competition. Have you identified your real competitors? That's more than just similar companies or products. It includes anything else your customer could do to meet the need you can fulfill. Newspapers thought their competition was other newspapers until they realized it was the internet. They didn't know how to compete with a news provider that was instant and free.

Types of Competitive Advantage

What are the Different Types of Competitive Advantage?
Competitive advantages generate greater value for a firm and its shareholders because of certain strengths or conditions. The more sustainable the competitive advantage, the more difficult it is for competitors to neutralize the advantage. The two main types of competitive advantages are comparative advantage and differential advantage.

• Comparative Advantage: A firm's ability to produce a good or service more efficiently than its competitors, which leads to greater profit margins, creates a comparative advantage. Rational consumers will choose the cheaper of any two perfect substitutes offered. For example, a car owner will buy gasoline from a gas station that is 5 cents cheaper than other stations in the area. For imperfect substitutes, like Pepsi versus Coke, higher margins for the lowest-cost producers can eventually bring superior returns. Economies of Scale, efficient internal systems and geographic location can also create comparative advantage. A comparative advantage does not imply a better product or service, though. It only shows the firm can offer a product or service of the same value at a lower price. For example, a firm that manufactures a product in China may have lower labor costs than a company that manufactures in the U.S., so it can offer an equal product at a lower price. In the context of international trade economics, opportunity cost determines comparative advantages.

Amazon is an example of a company focused on building and maintaining a comparative advantage. The e-commerce platform has a level of scale and efficiency that is difficult for retail competitors to replicate, allowing it to rise to prominence largely through price competition.

• Differential Advantage: A differential advantage is when a firm's products or services differ from its competitors' offerings and are seen as superior. Advanced technology, patent-protected products or processes, superior personnel and a strong brand identity are all drivers of differential advantage. These factors support wide margins and large market shares.

Apple is famous for creating innovative products, such as the iPhone, and supporting their market leadership with savvy marketing campaigns to build an elite brand. Major drug companies can also market branded drugs at high price points because they are protected by patents.