When a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices. Competitive advantages are capabilities that are difficult to replicate or imitate and are non-tradable.
Pitts and Snow define a competitive advantage as “any feature of a business firm that enables it to earn a high return on investment despite counter pressure from competitors.”
A competitive advantage exists when the firm is able to deliver the same benefits as the competitors are but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, a competitive advantage enables a firm to create superior value for its customers and superior profits for itself.
Competitive advantage is gained at the corporate and business levels through synergy and market share, respectively.
- Synergy evolves from size and diversification. By being large, a firm can gain advantage by: (1) paying less interest to its creditors and underwriters; and (2) paying less tax by internally shifting funds from one business to another. Diversified firms can use portfolio planning to produce synergistic advantage by assisting the firm in allocating resources according to the product’s relative market share and market growth which in turn, directs the organization in its placement of managers in appropriate cells.
- Market share derives from three different sources: (1) economies of scale attained through specialization, automation, and vertical integration: (2) experience attained through employee learning as well as product and process development; and (3) market power-which is the amount of control the firm has over suppliers, customers, and competitors.
Main Sources of Competitive Advantage
Any business can perform well in over its competitors, and can plan for its future and survive more life by some special features’ that no competitors have. The key for success is to knowing what your customers want and finding an efficient and effective way to give it to them, so then the business can enter in a never ending way, the whole purpose of business success is to find a new source of competitive advantage.
- QUALITY: Every customer wants a product less expensive and durable. Any company with good and less expensive product than its competitors will win out and enjoy more good reputation in market. We might spend extra money on a Toyota than any other brand even if they are a little more costly because of Toyota’s quality.
- CONVENIENCE: Many customers are prepared to pay a little additional for convenience. This can for having good location and a better customer service for Example a price of coke is bit more than any ordinary retail outlet, but customer prefer to buy the coke from a good reputed retail store like Tesco or Waitrose even if they have to little extra money. Packaging is also a factor in some industries, for example. Speed and accuracy is also a cause of competitive advantage.
- INNOVATION: Innovation is creative thinking because to place a product, which people demand and want, and which your competitor can’t match, is also a competitive advantage Example Apple Computer, that uses innovation as a source of differentiation in its iPod and iPhone products. Innovation needs to be on going for any one company to win against its competitors.
- SERVICE: Customer service is a type of competitive advantage, where all the company’s have same products and they cannot differentiate in any other way. Example Car rental companies, all the car rentals charge a same amount. There is little they can do to separate themselves extra than by submission of exceptional customer facility. The same is particular of many sellers like Tesco, Asda, Sainsbury’s and Waitrose etc. BRANDS Many customers are agreeable to pay a slight further for brand, particularly in the fashion trade, but it also relates to many other products. To make a brand is time consuming but this is the only way some industries can distinguish themselves. Example many customers agree to pay extra cash for Toyota over any other car having same specifications.to maintain a standard of brand is a difficult task.
- COST: This is a major factor of competitive advantage. Cost advantage is so successful that’s why many companies are moving to China because in china costs are very lesser than in high salary nations. Indeed, there is a descending boundary on this method of competitive advantage. Example, Japanese wagons were once mostly general because they were cheaper than American wagons. Now Korean cars are cheaper. Possibly we will momentarily be buying wagons made in China or India. This means that competitors will continuously reducing their prices as they find more efficient ways of making their product.
A firm must have resources and capabilities superior to its competitors. Resources are the firm specific assets that are useful for creating advantage and are cost effective, some resources are brand equity, reputation of firm and patents and trademark. Capabilities are the firm ability to utilize its available resources effectively and efficiently to bring a product to its customers at a rite time, faster than its competitors is also an example of utilizing its resources.
Other sources of Competitive Advantage include:
- Economies of Scale.
- Latest technology.
- Human resources (Skilled, trained, creative, positive attitude, high EQ and IQ, competitive, etc.)
- Continuous learning philosophy and knowledge management.
- Automation and modernization of business processes like implementation of ERP, CAD-CAM manufacturing, E-commerce, Business Process Reengineering, etc.
- Product and process innovation and development.
- Diverse workforce.
- Low cost.
- Development in the external environment favoring the firm’s business.
- Acquisition of market power.