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Competitive Advantage

A competitive advantage refers to a factor or circumstance that allows a company to produce products or services better or cheaper than its competitors.

A competitive advantage refers to a factor or circumstance that allows a company to produce products or services better or cheaper than its competitors.

These factors or circumstances allow the company to subsequently achieve more sales or superior margins compared to its main competitors.

These advantages can be achieved in several ways, but are often the result of a number of factors, such as the cost structure of a company or productive entity, branding, quality of offer, distribution network, intellectual property or customer service.

Competitive advantage definition

Thus, the term competitive advantage refers to what exactly makes a company’s or entity’s goods or services better than a customer’s alternative choices.

The term is often used for companies, but the advantage can also be gained by an individual or country in a competitive environment.

Sustainable competitive advantage

A sustainable competitive advantage is a advantage that is difficult to reproduce. A sustainable competitive advantage is the ability to continue to do things better than the competitor in the long run.

It is possible to have more than 1 sustainable competitive advantage.

Examples of competitive advantage

Below are some examples of factors that can provide a competitive advantage for organizations.

  • Access to new or patented technology
  • Highly educated employees
  • Exclusive access to natural resources
  • Possibility for low cost production processes
  • Brand image
  • Geographic location

McDonald’s has multiple advantages, including a strong brand image and cost leadership.

The massive company has managed to open restaurants worldwide that leverage economies of scale to sell products at a relatively low price.

Louis Vuitton has differentiation as its main advantage. The company is a leader in the luxury consumer goods market and can demand high prices due to its unique product range.

Competitive advantage versus comparative advantage

A comparative advantage usually refers to international trade. It states that a country should focus on the products and services it can produce and export relatively cheaply.

What they cannot produce cheaply themselves, they can best import from a country with a different comparative advantage.

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Different kinds of competitive advantage

Michael Porter, a Harvard Business School professor and management guru, wrote Competitive Advantage in 1985, a widely distributed textbook on competitive advantage.

In the book, Michael Porter explains that a company must build clear objectives and strategies to gain a sustainable competitive advantage. The company culture and the values of the employees must also be geared to this.

He examined the success of hundreds of companies to discover the three most important ways organizations can gain sustainable competitive advantage. He discovered the following three factors: cost leadership, differentiation and focus.

Cost leadership

Cost leadership means that productive entities have low operating costs compared to competitors in the same industry.

Companies realize this by continuously optimizing the efficiency of their production processes. Cost leadership can also be achieved by cutting back on other costs, such as offering lower wages for their staff.

In the United States, Walmart is known as a distinctive company when it comes to cost leadership. This is partly achieved through economies of scale and low wages. An increase in the statutory minimum wage is seen as a threat to them.

Differentiation

Differentiation means that companies distinguish themselves by supplying a unique or high-quality product. Differentiation can also be achieved through, for example, fast delivery times, innovations or superior customer service.

A company that is good at differentiation can often charge a higher price. This improves the profit margin.

In practice, innovation often means that companies meet the same needs in a different way. A well-known example of this is Apple, with the introduction of the iPad, iPad Mini, etc.

Focus

Focus in this context means that the leaders and managers of organizations understand their customers and target market better than any other player in the industry.

The key to a successful focus strategy is choosing a very specific target audience. Larger companies often do not serve a smaller niche.

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