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In business, a competitive advantage is an attribute that allows an organization to outperform its
competitors Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, indivi ...
. A competitive advantage may include access to
natural resources Natural resources are resources that are drawn from nature and used with few modifications. This includes the sources of valued characteristics such as commercial and industrial use, aesthetic value, scientific interest and cultural value. O ...
, such as high-grade ores or a low-cost power source, highly skilled labor, geographic location, high entry barriers, and access to new technology and to proprietary information.


Overview

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 (Christensen and Fahey 1984, Kay 1994, Porter 1980 cited by Chacarbaghi and Lynch 1999, p. 45). 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" (Barney 1991 cited by Clulow et al.2003, p. 221). 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. This is the reason behind
brand loyalty In marketing, brand loyalty describes a consumer's positive feelings towards a brand, and their dedication to purchasing the brand's products and/or services repeatedly, regardless of deficiencies, a competitor's actions, or changes in the envir ...
, or why customers prefer one particular product or service over another.
Value proposition In marketing, a company’s value proposition is the full mix of benefits or economic value which it promises to deliver to the current and future customers (i.e., a market segment) who will buy their products and/or services. It is part of a co ...
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. 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 ).
Michael Porter Michael Eugene Porter (born May 23, 1947) is an American academic known for his theories on economics, business strategy, and social causes. He is the Bishop William Lawrence University Professor at Harvard Business School, and he was one of t ...
defined the two ways in which an organization can achieve competitive advantage over its rivals: cost advantage and differentiation advantage. Cost advantage is when a business provides the same products and services as its competitors, albeit at a lesser cost. Differentiation advantage is when a business provides better products and services as its competitors. In Porter's view, strategic management should be concerned with building and sustaining competitive advantage. Competitive advantage seeks to address some of the criticisms of
comparative advantage In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade. Comp ...
. Competitive advantage rests on the notion that cheap labor is
ubiquitous Omnipresence or ubiquity is the property of being present anywhere and everywhere. The term omnipresence is most often used in a religious context as an attribute of a deity or supreme being, while the term ubiquity is generally used to describ ...
and natural resources are not necessary for a good economy. The other theory, comparative advantage, can lead countries to specialize in exporting primary goods and
raw material A raw material, also known as a feedstock, unprocessed material, or primary commodity, is a basic material that is used to produce goods, finished goods, energy, or intermediate materials that are feedstock for future finished products. As feedst ...
s that trap countries in low-wage economies due to terms of trade. Competitive advantage attempts to correct this issue by stressing on maximizing scale economies in goods and services that garner premium prices (Stutz and Warf 2009). Successfully implemented strategies will lift a firm to superior performance by facilitating the firm with competitive advantage to outperform current or potential players (Passemard and Calantone 2000, p. 18). To gain competitive advantage, a business strategy of a firm manipulates the various resources over which it has direct control, and these resources have the ability to generate competitive advantage (Reed and Fillippi 1990 cited by Rijamampianina 2003, p. 362). Superior performance outcomes and superiority in production resources reflect competitive advantage (Day and Wesley 1988 cited by Lau 2002, p. 125). The quotes above signify competitive advantage as the ability to stay ahead of present or potential competition. Also, it provides the understanding that resources held by a firm and the business strategy will have a profound impact on generating competitive advantage. Powell (2001, p. 132) views business strategy as the tool that manipulates resources and creates competitive advantage. Hence, viable business strategy may not be adequate unless it possesses control over unique resources that have the ability to create such a relatively unique advantage.
Johnson Johnson is a surname of Anglo-Norman origin meaning "Son of John". It is the second most common in the United States and 154th most common in the world. As a common family name in Scotland, Johnson is occasionally a variation of ''Johnston'', a ...
and
Foss Fos or FOSS may refer to: Companies * Foss A/S, a Danish analytical instrument company *Foss Brewery, a former brewery in Oslo, Norway * Foss Maritime, a tugboat and shipping company Historic houses * Foss House (New Brighton, Minnesota), Unite ...
have provided a formal account of what constitutes an optimal business strategy. According to well-established variational methods, a business pursuing an optimal strategy will follow the shortest economic path that makes the most efficient use of resources.


The three forms of generic competitive strategy

Michael Porter, a professor at
Harvard Business School Harvard Business School (HBS) is the graduate business school of Harvard University, a private research university in Boston, Massachusetts. It is consistently ranked among the top business schools in the world and offers a large full-time MBA p ...
, wrote a book in 1985 which identified three strategies that businesses can use to tackle competition. These approaches can be applied to all businesses whether they are product-based or service-based. He called these approaches generic strategies. They include cost leadership, differentiation, and focus. These strategies have been created to improve and gain a competitive advantage over competitors. These strategies can also be recognized as the comparative advantage and the differential advantage.


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.


Differential strategy

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

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 is 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.


Underlying internal factors

Positioning is an important marketing concept. The main purpose of positioning is often to create the right perceptions in comparison to competitors. Thus, it creates competitive advantage. This positioning, or competitive advantage, is based on creating the right "image" or "identity" in the minds of the target group. This positioning decision exists of selecting the right core competencies to build upon and emphasize. Therefore, both corporate identity and core competencies are underlying internal factors of competitive advantage.


Corporate identity

The operational model for managing corporate reputation and image of Gray and Balmer (1998) proposes that
corporate identity A corporate identity or corporate image is the manner in which a corporation, firm or business enterprise presents itself to the public (such as customers and investors as well as employees). The corporate identity is typically visualized by ...
,
communication Communication (from la, communicare, meaning "to share" or "to be in relation with") is usually defined as the transmission of information. The term may also refer to the message communicated through such transmissions or the field of inquir ...
, image, and reputation are the fundamental components of the process of creating competitive advantage. Corporate identity through corporate communication creates corporate image and reputation, with an end result of competitive advantage. Corporate identity is the reality of an organization. It refers to the distinct characteristics or core competencies of the organization. It is the mental picture of the company held by its audiences. Corporate communication refers to all the official and informal communication sources, through a variety of media, by which the company outsources its identity to its audiences or stakeholders. Corporate communication is the bridge between corporate identity and corporate image or reputation. The above-stated process has two main objectives, namely to create the intended image in the minds of the company's principal constituents and managing the process to create a favourable reputation in the minds of the important stakeholders. Gray and Balmer (1998) say that a strong image can be built through a coordinated image-building campaign and reputation, on the other hand, requires a praiseworthy identity that can only be shaped through consistent performance.


Core competencies

A core competency is a concept introduced by Prahalad and Hamel (1990). Core competencies are part of the corporate identity; they form the foundation of corporate competitiveness. Core competencies fit within the "resource-based view of the firm" Resources can be tangible or intangible. A firm's knowledge assets are an important intangible source of competitive advantage. For firm knowledge to provide a competitive advantage, it must be generated, codified, and diffused to others inside of the organization. Many different types of knowledge can serve as a resource-based advantage: manufacturing processes, technology, or market-based assets such as knowledge of customers or processes for new product development. Firms with a knowledge-based core competency can increase their advantage by learning from "contingent workers" such as technical experts, consultants, or temporary employees. Those outsiders bring knowledge inside of a firm—e.g., understanding of competing technologies. Moreover, interactions with contingent workers can provoke the firm to codify knowledge that was tacit in order to communicate with the temporary employees. The benefits of these interactions with outsiders increases with the "absorptive capacity" of the firm. However, there is some risk that these interactions cause leakage or dilution of knowledge assets to others who later hire the same temporary employees. Modern knowledge management theory now suggests that serendipity can be tapped as a strategic advantage for building a core competency. The competitiveness of a company is based on the ability to develop core competencies. A core competency is, for example, a specialised knowledge, technique, or skill. Yang (2015) concluded, with the examination of a long-term development model, that developing core competencies and effectively implementing core capabilities are important strategic actions for any enterprise in order to pursue high long-term profits. In the end, real advantage can be created by the management's ability to unify corporate-wide technologies and production skills into competencies that capacitate individual businesses to adapt quickly to changing opportunities. To sustain leadership in a chosen core competency area, companies should seek to maximize their competency factors in the core products like being important in positioning its values, distinctive (differentiated), superior, communicable (visibility), unique, affordable, and profitable. When a company achieves this goal, it allows it to shape the evolution of an end market.


Unfair competitive advantage

An unfair competitive advantage may arise to the benefit of one or more businesses operating within a competitive context, for example in
public procurement Government procurement or public procurement is the procurement of goods, services and works on behalf of a public authority, such as a government agency. Amounting to 12 percent of global GDP in 2018, government procurement accounts for a subst ...
if one bidder has access to information not available to other bidders.See, for example, Government Accountability Officer (GAO)
Health Net Federal Services, LLC
published 4 November 2009: one specific bidder "should be excluded from the competition based on an alleged unfair competitive advantage".


See also

*
Comparative advantage In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade. Comp ...
*
Core competency A core competency is a concept in management theory introduced by C. K. Prahalad and Gary Hamel.Prahalad, C.K. and Hamel, G. (1990)The core competence of the corporation", Harvard Business Review (v. 68, no. 3) pp. 79–91. It can be defined ...
*
Cost leadership In business strategy, cost leadership is establishing a competitive advantage by having the lowest cost of operation in the industry. Cost leadership is often driven by company efficiency, size, scale, scope and cumulative experience (learning cu ...
*
Differentiation (economics) In economics and marketing, product differentiation (or simply differentiation) is the process of distinguishing a product or service from others to make it more attractive to a particular target market. This involves differentiating it from co ...
*
Economies of scale In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables ...
*
Resource-based view The resource-based view (RBV) is a managerial framework used to determine the strategic resources a firm can exploit to achieve sustainable competitive advantage. Barney's 1991 article "Firm Resources and Sustained Competitive Advantage" is widely ...
*
Tacit knowledge Tacit knowledge or implicit knowledge—as opposed to formal, codified or explicit knowledge—is knowledge that is difficult to express or extract, and thus more difficult to transfer to others by means of writing it down or verbalizing it. This ...
*
Value chain A value chain is a progression of activities that a firm operating in a specific industry performs in order to deliver a valuable product (i.e., good and/or service) to the end customer. The concept comes through business management and was firs ...


References


Further reading

*''Competitive Advantage: Creating and Sustaining Superior Performance'' by Michael E. Porter *''Creating Competitive Advantage: Give Customers a Reason to Choose You Over Your Competitors'' by Jaynie L. Smith *''Using MIS'' by David M. Kroenke pages 71–77 *''Unraveling The Resource-Based Tangle'' by Peteraf M. & Barney J (2003). Managerial and Decision Economics 24. * Erica Olsen (2012). ''Strategic Planning Kit for Dummies, 2nd Edition''.
John Wiley & Sons John Wiley & Sons, Inc., commonly known as Wiley (), is an American multinational publishing company founded in 1807 that focuses on academic publishing and instructional materials. The company produces books, journals, and encyclopedias, in p ...
, Inc. *'' Profit from the Core: Growth Strategy in an Era of Turbulence'' by Chris Zook and James Allen *'' Beyond the Core: Expand Your Market Without Abandoning Your Roots'' by Chris Zook *'' Unstoppable: Finding Hidden Assets to Renew the Core and Fuel Profitable Growth'' by Chris Zook *'' Value Migration: How to Think Several Moves Ahead of the Competition'' by Adrian Slywotzky


External links


Examples of Competitive Advantage

Competitive Advantage



Competitive Advantage in Business
{{DEFAULTSORT:Competitive Advantage Strategic management Marketing strategy Competition (economics)