Competitive advantage – definition, meaning, and theories

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Competitive advantage – definition and meaning

Competitive advantage is ‘anything that a firm does especially well compared to rival firms’ (David, 2002, p. 6). It is the idea that a company can offer a product or a service that is different and superior from its competitors. It is an advantage that a company has over its competitors by offering consumers greater value, either by means of lower prices or by providing greater benefits and services that justifies higher prices.

 

Types of competitive advantage (How to create a competitive advantage)

There are different types of competitive advantage that a company can consider; however, the suitability of implementing those ideas will depend on several factors such as industry, availably of resources, and expertise. Generally, companies can achieve advantages by adopting methods such as cost-advantage, differentiation, fast-mover advantage, exclusive advantage, and technology-based advantage.

 

Cost advantage is where a company produces its products/services with the lowest costs possible and offers a lower price to consumers compared to competitors. Differentiation is about offering a product or a service that is perceived as unique in the industry which justifies a premium price. It usually comes from differences in quality, design, and features.

 

Exclusive advantage is something offered by a company that its competitors do not have, like a patented product. This would allow the company to have more control over pricing and production because it is the only one in the market that has that product/service.

 

A first mover in the market can gain advantages as well.  Being the first company to enter the marketplace has a strong correlation with success; however, it is not without its corresponding disadvantages (Indeed, 2021). Google (search engine) and Coca-Cola enjoyed a lot of benefits for being first movers in the market.

 

Companies can gain competitive advantages using technology as well. Lipovich (2020) states that with technological innovation, a company can form a sustainable competitive advantage that can help it strengthen its position as a segment or industry leader. The author suggests that automating processes, leveraging data, machine learning, and user experience (UX) can be considered for achieving sustainable advantages.

 

Importance of competitive advantage

Companies need competitive advantages for two main reasons. Firstly, it is important to have a competitive advantage to survive in the market. In a competitive environment, companies are always trying to one-up each other with better products/services, better customer service, or more innovative advertising. Without a clear advantage, a company may fall well behind its competitors.

 

Secondly, having a competitive advantage can help a business grow. When it has that edge over its competitors, it will be easier for it to turn potential customers into loyal ones. For example: if its customer service is great and people start talking about it is on social media, then many people may start buying products/services from it as they know that they will get good services with every purchase.

 

Competitive advantage examples

Exploring competitive advantage examples reveals that many companies have used different strategies to gain competitive advantages. Some companies understand that customer service is extremely important and therefore, they offer their customers unparalleled service. Imagine offering 24/7 customer service or free shipping on all products!

 

IKEA often comes in the discussion of competitive advantage examples. It has a huge number of standardized products. This allows it to reduce its production costs substantially in comparison to a local furniture shop. How about Uber? It is a technology company whose original product is ridesharing. However, it has also come up with food delivery services under the name of Uber Eats. It has used technology very well to stay ahead of competition.

 

How about Amazon? It has advantages over its competitors based on different things such as reputation, and scale of operations. Likewise, Apple Inc. attempts to stay ahead of competition in the smart phone market with its excellent design of iPhones.

 

Lidl and Aldi have advantages over their competitors in the UK grocery and supermarket industry. Though they both compete with each other fiercely, prices of most of their products are cheaper than those offered by the competitors.

 

Theories of competitive advantage

Business literature contains several theories of competitive advantage. Among them is Michael Porter’s ‘generic’ strategy. He suggested four strategies i.e Cost Leadership, Differentiation, Cost Focus, and Differentiation Focus that companies can apply to gain competitive advantages. He argues that strategies are generic as they could be applied to a variety of circumstances and contexts.

 

One of the popular theories of competitive advantage is Value Chain Analysis which is again developed by Michael Porter. He sees every firm being a collection of activities that are performed to design, produce, market, deliver, and support its product. These activities are of two types i.e. primary activities and secondary activities.

 

Primary activities go directly into the creation of a product or a service including Inbound logistics, Operations, Outbound logistics, Marketing and sales, and After-sales services. Secondary activities help primary activities become more efficient—effectively creating a competitive advantage. These activities are Procurement, Technological development, Human resources management, and Infrastructure (Porter, 1985).

 

Concluding statement

A competitive advantage is a sustainable way for a company to achieve success in the marketplace that is not easily copied or matched by its competitors. It can be an exclusive product, a technological innovation, or simply the way it does business.

 

Hope you have liked the article ‘Competitive advantage – definition, meaning, types, and theories’.  If you have liked it, please share it with others. You may also like:

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Last date: 04 March 2022

References:

David, R. (2002) Strategic Management: Concept and Cases, 13th edition, London: Pearson Education

Indeed (2021) First mover’s advantage: benefits, disadvantages, and examples, available at: https://www.indeed.com/career-advice/career-development/first-movers-advantage (accessed 04 March 2022)

Lipovich, I. (2020) How to use technology to gain a sustainable competitive advantage, available at: https://www.forbes.com/sites/forbesbusinesscouncil/2020/10/06/how-to-use-technology-to-gain-a-sustainable-competitive-advantage/?sh=39a62e24328c (accessed 04 March 2022)

Porter, M. (1985) Competitive Advantage: Creating and Sustaining Superior Performance, London: Collier Macmillan Publishers

Author: M Rahman

M Rahman writes extensively online with an emphasis on business management, marketing, and tourism. He is a lecturer in Management and Marketing. He holds an MSc in Tourism & Hospitality from the University of Sunderland. Also, graduated from Leeds Metropolitan University with a BA in Business & Management Studies and completed a DTLLS (Diploma in Teaching in the Life-Long Learning Sector) from London South Bank University.