Definition: Competitive Advantage, as the name signifies the upper hand of a business entity over its market rivals, which is the result of the company’s strategies and continuous efforts. It represents the combination of distinguishing features of the firm and its products, which has value to the target customers and are considered peerless by them.
In finer terms, competitive advantage is what makes a firm lead or dominate the entire market.
Therefore, we can say that a company possesses a competitive advantage when it provides the same value and benefits to the customers as competitors but relatively lower price i.e. cost advantage, or it offers products or services of higher value and benefits than competitors i.e. differentiation advantage.
It indicates the ability of a firm in deploying organization’s resources in an effective manner, increasing customer value and improving market position.
Capabilities and Resource
Basically, it is the competitive advantage which creates a difference between the ruling firm and the other firms in the market. It is concerned with the organization’s resources and capabilities (expertise) and its management.
So, if the resources and capabilities are valuable, rare, non-imitable and non-substitutable, then they create competitive advantage.
Basic Building Blocks of Competitive Advantage
- Superior Quality: Quality means standard in the product and service as compared to other products and services of the same type. It is something that makes or breaks a company. It provides an edge to the firm over its rival sellers. When the company makes improvement in the quality of goods and services or provides the best quality products, it becomes unrivalled, as it provides maximum value and satisfaction to the customers.
- Superior Efficiency: Efficiency refers to the firm’s capacity in increasing the level of production with the existing resources, so as to lower the cost per unit. When a firm gets success in attaining efficiency, it is able to deliver products at a lower price than its competitors.
- Superior Customer Responsiveness: Customer Responsiveness can be understood as the firm’s potential in delivering customized and innovative products and services to the target audience at a reasonable cost. Competitive Advantage can be achieved by a company if they provide the customer the desired products and services at a low price.
- Superior Innovation: Innovation implies the company’s capability in making changes in the already existing product and services, with new ideas. In business, innovation can be made in the products or processes.
Hence, when a firm has a competitive advantage its profitability and performance are greater than the normal profitability and performance of the companies operating in the same industry. So, it helps in getting more profit and generating a high return for its shareholders as compared to the competitors.
Sustainable Competitive Advantage
Sustainable Competitive Advantage as its name suggests is the long term favourable condition wherein the company is in a superior position which is difficult to imitate or transcend, thus making the firm dominant in the market.
Factors Affecting Competitive Advantage
As discussed, competitive advantage reflects the firm’s ability in generating super-profits, but there are certain factors which decide the sustainability of competitive advantage. These are:
- Durability: The rate at which the company’s resources and capabilities depreciate decides the period of sustainability of a firm’s competitive advantage.
- Appropriability: Appropriability implies the firm’s owners potential to allocate the returns on its resource base appropriately.
- Immitability: What makes a firm different from other is the resources and capabilities and if they are not acquirable and duplicable, then the followers or business rivals need to start everything from the scratch, in order to compete.
- Transferability: No matter how durable is the company’s competitive advantage it is likely to be undermined by the competitors. So, basically the access to the desired resources and capabilities decides the durability of the competitive advantage. Hence, if it is easily available or transferable, then it will become less sustainable.
Competitive Advantage may not necessarily mean being equal to or outperforming the competitors, rather it means to gain and maintain a superposition in the market. For this, the organization is required to show a highly comparative and distinguished value to the customers.
It aims at identifying the needs of the customers and not just satisfying those needs with the products or services, rather succeeding their expectations so as to achieve organizational goals.