What is Competitive Advantage?

Competitive advantage puts a Company in a superior position over other Companies or outperforms other Companies present in the market. Competitive advantage helps a Company earn better or  save costs leading to better profits as compared to its rivals.

A Company can use own value chain which can help it have advantage over its competitior. Examples of the same are  having low-cost or lowest-cost product, better branding, having high-quality product, better relationship management with customers, better network, better reach, customer service etc. These are also factors said to be a part of resource-based theory of competitive advantage which use internal resources like mentioned above to gain advantage. All these factors help a company to do much better than the others in the industry.

Types of Competitive Advantage

Competitive advantage could be divided into two parts.

A. Comparative advantage

B. Differential advantage

Comparative Strategy or Advantage

When two Companies are selling the same quality of product, the one which can sell it at a lesser price is said to have Comparative advantage over the other. For example, Pepsi and Coca Cola are brands that have similar products. The Company which sells the product at lesser price attracts higher number of customers.

A Company is able to sell the product at a lesser price, as it is able to efficiently manage its manufacturing costs.

Better economies of scale, efficient manufacturing methods, timely repairs to the machinery to avoid break down, being updated about the latest or new technology, taking care of product / service quality by ensuring timely Quality control checks and avoiding breach of regulatory requirements, having geographical advantage etc. help the Company in becoming cost efficient and thereby get an  advantage over its  competitors / industry players. This helps in maintaining the profit margins while charging less to the customer.

For example, IT Companies outsource their backend jobs to  Asian Countries for getting cost advantage in labour costs. A Company which takes advantage of this situation is able to manage with less cost thus earning better profits over its peers who do not use this option.

A recent example, during this current  pandemic , Companies had to manage their business by providing work from home facility to their employees Companies that were already ready with these facilities had a smooth transition with minimal or no cost. In-fact the work from home culture helped companies reduce their power, rent and other operational expenses.  This has resulted in better output at a lesser price. This cost advantage obtained can be easily transferred to the client by means of a reduced / discounted selling price of the product / service.

Differential Advantage

When a Company is able to differentiate its products from other competitors such that its product is better compared to them, it is said to have Differential advantage.

Differential advantage is made possible due to advanced technology, better personnel, and strong brand identity thus creating better brand loyalty.

Intellectual property rights and long term contracts are examples of strategic assets that provide sustainable competitive advantage. Let’s take an example of a Pharmaceutical Company which does a lot of research and launches medicines to deal with critical diseases. There are multiple companies working on the cure of same disease , however they are able to differentiate themselves from others on the basis of the efficacy of their drug / medicine to treat the disease. Currently, a lot of pharma Companies are into research and production of vaccines for Covid. The vaccine manufactured by every company has a different efficacy rate. The price of the product varies basis the effectiveness of each vaccine. Thus in order to ensure sustained and profitable business in future ,  the Pharma Companies apply for a patent to protect themselves from competition stealing their research.

Methods Used to judge the Competitive Advantage of a company

When judging its competitive or comparative advantage, the Company needs to check its own standing in the market.

For knowing the standing there a lot of theories  in the market. Each theory is built using  already existing theories to get better at measuring the advantage and for long term sustainability.

However , the most read or spoken about models are SWOT Analysis and Michael Porter’s Five forces. Let’s understand each of these methods below.

SWOT Analysis

SWOT (Strengths, Weaknesses, Opportunities, Threats) an   analytical tool which was introduced by Albert Humphrey at the Stanford Research Institute to help companies know their position within a competitive landscape.

A company has to divide itself between strengths, weaknesses, opportunities and threats. Once you know your strengths , you can price yourselves better in the market while improving on your weaknesses, exploring the available opportunities and tackling the threats.

The Limitations here are lack of prioritization, lack of clarity, subjective analysis and multiple opinions.

Porter’s Five Forces

Porter launched his book in 1980 called Competitive Strategy: Techniques for Analyzing Industries and Competitors. In the book , he has discussed the five principles required to earn Competitive advantage.

Porter developed this method while teaching about SWOT analysis at Harvard. He already knew the limitations of the method and felt the urge to develop his own framework that took care of the competitive landscape holistically, taking the industry into consideration.

  1. Threat of new entrants - How easily can a new entrant enter the market?
  2. Rivalry among existing competitors – Knowing how many rivals exist who offer similar product at the same price
  3. Threat of substitute products or services – How replaceable is your product ? Can a rival’s product compete with your product and how easy is it for a consumer to switch to the substitute product ?
  4. Power of buyers – How much control do the buyers hold in the pricing of the product such that the fluctuating demand is directly proportional to the fluctuation in prices ?
  5. Power of suppliers – How much control do the suppliers have in pricing of materials ?

The above principles are just like a self-assessment taking the market reality into consideration.

Michael Porter's techniques or generic strategies to create superior advantage over competition

In his 1985 book, ‘Competitive Advantage: Creating and Sustaining Superior Performance’ Porter had written that once the potential of a Company has been established, the next step towards gaining a competitive advantage is to decide what kind of approach is to be used to gain competitive advantage.

Sustainable competitive advantage is required for a successful business. It helps a business to have higher focus, better sales, good profit margin and greater customer and staff retention  than competitors.

Cost leadership strategy – In this strategy, a Company would first identify whether the product could be priced lower as compared to market to gain competitive advantage. This strategy can be used by Companies who are already established in the market. Such Companies can use synergies of scale and other advantages to reduce the cost price and transfer it to the customers by reducing the selling price.

Differentiation strategy– In this strategy, it is important to know whether the customers are ready to pay premium price, if the product is more appealing, has better quality and has unique features. This is where the opportunity cost of one Company is lower than that of another. An established entity can invest its resources towards research on how to better the quality of product or add additional features to the same product thereby giving it a better competitive scope

Focus strategy– Should the product be introduced in new markets altogether where no other competitor has entered?  Focus strategy tries to get firms to aim at a few target markets rather than trying to target everyone. This strategy is useful for new and smaller companies who do not have resources to reach out to the entire market.

Once the focus strategy is implemented, the Company will now have to use the differentiation and cost leadership strategies to decide how to proceed in that focused market.

It is important to do a self-assessment first and then decide which strategy works best for an organization. Applying all the strategies would lead to disorientation. Hence it is better to apply one strategy at a time to reap benefits.

Common Mistakes

  • Applying the methods without understanding the underlying situation / problem / target could lead to erroneous results.
  • Choosing the wrong strategy for gaining competitive edge.
  • Using all the strategies of gaining the advantage at once could lead to confusion and could be unnecessarily expensive. It is an experiment.

Lack of market research and strategic planning

Context And Application

This topic is significant in professional exams for both undergraduate and graduate courses related to marketing especially following:

  • B.Com Banking and Finance/Marketing
  • Chartered Accountancy
  • CIMA (Management Accounting)
  • MBA (Marketing)
  • CFP
  • CFA
  • CPA

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