Competitive Advantage Definition, Types, Example & How to Achieve It?

Mon, 04/14/2014 - 10:50 -- Gulzar Ahmed

Definition of Competitive Advantage

Competitive Advantage has been introduced in business world for many years. It can be defined as “the superior performance of a particular company relative to other competitors in the same industry or superior performance relative to the industry average.” “It can also be defined as “anything that a particular company does better compare to its competitors in the same industry.”

Different things can be considered as competitive edge for a company, for example greater return on assets (ROI), higher profit margin, valuable resource such as brand loyalty or reputation or unique competencies. Every company must have at least one or two advantage to successfully compete in the rival market. If a company can’t identify one competitive advantage or just doesn’t possess any, competitors soon surpass it and force such company to leave the market.

There are many ways to achieve the competitive advantage but companies mainly focus on only two basic types of it: differentiation advantage and cost advantage. A company that is capable of achieving superiority in cost advantage or differentiation advantage is able to offer consumers products at lower prices or with higher degree of differentiation and therefore, it become able to compete with its rivals. Here in this post I would discuss both two types in detail and I would also explain key factors to achieve competitive advantage.

what is competitive advantages, definition, meaning & types

Two Types of Competitive Advantages

Cost Competitive Advantage

The first type of competitive advantage is cost competitive advantage, which means a company is able to provides/offers products or services to its customers for less than competitor’s price. A company only become in the position to do so when the company has a lower cost of doing business.

One of the best-known companies that avail cost competitive advantage is Walmart. Walmart's customers/shoppers know that a Walmart store will always provide them low-prices products. Maybe merchandise has not the highest quality or the best selection, but a given product will be provided to the customers at the lowest price in Walmart.

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Differentiation Competitive Advantage

The second major type of competitive advantage is differentiation. Differentiation competitive advantage can be achieved when a company providing products that customers perceive in higher value than competitors' products and such companies are able to charge a premium or higher prices for those products.

BMW is the best example of differentiation competitive advantage. BMW sets itself apart from other through innovative products. Company also builds a consistent theme through the product line and through its marketing slogan (i.e. The Ultimate Driving Machine). This differentiation competitive advantage enabled BMW to pass Mercedes in unit sales and dollar sales in the United States, which was a very difficult task since Mercedes had held a significant lead in both.

How a Particular Company may Achieve Competitive Advantage?

A company may achieve Competitive Advantage by the help of two given ways:

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By Means External Changes

External changes include PEST factors. When these factors change, many opportunities can appear for a company, if seized upon, could provide many benefits for company. A particular company which is capable to respond to external changes faster than other rival, can also gains an upper hand over its competitors. So when there is a change in PEST factors a successful company should have the ability to respond fast to changes.

By Developing them Inside the Company

 A company can achieve differentiation or cost advantage when it develops unique competences, VRIO (valuable, rare, hard to imitate and organized) resources, or through innovative processes and products. When a company possesses VRIO resources it always has an edge over its competitors due to superiority of VRIO resources. The VRIO resources have following attributes:

  1. Intellectual property (patents, trademarks, copyrights,)
  2. Brand equity
  3. Culture
  4. Know-how
  5. Reputation
  6. Unique competences
  7. Innovative capabilities

Pulling it all together a company must understand its competitive advantage if it wants to leverage it and as illustrated above BMW and Walmart understand the importance of competitive advantage and increasing their share as well as profit rapidly.