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Competitive Advantage Explained With Example

Last updated 03/20/2024 by

SuperMoney Team

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Summary:
In a competitive market, businesses need to have an edge over their rivals to succeed. This edge is known as competitive advantage. In this article, we’ll take a closer look at what a competitive advantage is, the different types of competitive advantages, and how businesses can achieve and maintain them.

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What Is a competitive advantage?

A competitive advantage is the advantage a business has over its competitors that enables it to be more successful in the market. It is a unique quality or feature that sets a business apart from its competitors and makes it stand out.

How it works

To have a competitive advantage, a business needs to provide a product or service that is more desirable to customers than those of its competitors. It can be achieved through various means, such as offering superior quality, lower prices, better customer service, or a more extensive range of products or services. By having a competitive advantage, businesses can attract and retain customers, generate higher profits, and maintain a leading position in the market.

Types of competitive advantage

There are three main types of competitive advantage:
  1. Cost advantage: This occurs when a business can produce goods or services at a lower cost than its competitors, allowing it to offer lower prices and still generate profits.
  2. Differentiation advantage: This occurs when a business offers unique products or services that are not available elsewhere, giving it an advantage over its competitors.
  3. Niche advantage: This occurs when a business targets a specific market segment that is not being catered to by its competitors, allowing it to dominate that segment and generate higher profits.

Factors of competitive advantage

Several factors contribute to a business’s competitive advantage, including:
  • Innovation and research and development (R&D)
  • Efficient operations and supply chain management
  • Strong brand reputation and recognition
  • Skilled and motivated workforce
  • Access to resources, such as technology, patents, or exclusive contracts

Comparative advantage

Comparative advantage is a theory in economics that states that a country should specialize in producing goods and services that it can produce at a lower opportunity cost than other countries. This principle applies to businesses as well, where they can have a comparative advantage over their competitors by focusing on their strengths and core competencies.

Differential advantage

Differential advantage is a type of competitive advantage that occurs when a business’s products or services are better than its competitors in some way. This can include offering better quality, superior features, or more convenient delivery options. Differential advantage is often achieved through innovation and continuous improvement.

Example of competitive advantage

Apple

One example of competitive advantage is Apple’s brand reputation for innovative and high-quality products, which allows them to charge a premium price compared to their competitors and still maintain a large market share.

Amazon

Another example of competitive advantage is Amazon’s extensive logistics network, which enables them to offer faster and more efficient delivery of products compared to their competitors. This, in turn, has helped them gain a significant market share in the e-commerce industry. Having a strong competitive advantage can be a key factor in a company’s long-term success and sustainability in a competitive market.

Competitive advantage FAQs

What is the difference between a competitive advantage and a unique selling proposition (USP)?

A unique selling proposition (USP) is a statement that describes what sets a business apart from its competitors. It is a marketing tool that can help businesses stand out in the market. A competitive advantage, on the other hand, is a quality or feature that enables a business to outperform its competitors.

How can businesses achieve a competitive advantage?

Businesses can achieve a competitive advantage by focusing on their strengths and core competencies, investing in research and development, offering superior quality, lowering costs, providing excellent customer service, and targeting specific market segments.

Key takeaways

  • Competitive advantage refers to a company’s ability to outperform its competitors and achieve superior profitability in the long run.
  • Types of competitive advantage include cost advantage, differentiation advantage, and niche market advantage.
  • Factors that contribute to competitive advantage include economies of scale, brand recognition, proprietary technology, and access to distribution channels.
  • Comparative advantage refers to a country’s ability to produce a good or service at a lower opportunity cost than another country, while competitive advantage refers to a company’s ability to outperform its competitors.

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