When a firm has an advantage over its competitors, allowing it to generate greater sales or margins and/or retain more customers than its competition, then it is referred to as competitive advantage. There can be many types of competitive advantages including the firm’s cost structure, product offerings, distribution network and customer support.
At its essence, the concept of competitive advantage is a firms ability to provide value to customers that exceeds what competitors can provide. In a for-profit organization, having a competitive advantage contributes to consistently higher profits than its competitors.
A competitive advantage is created by having and managing resources to provide goods
and services that meet the following criteria:
(1) They provide superior value,
(2) They are rare competitors do not provide similar products and services in quality and quantity,
(3) They are difficult to imitate, and
(4) They are nonsubstitutable.
The essence of superior value as an aspect of competitive advantage is straightforward. Does the firm provide a product or service which provides value to customers that is greater than that of a competitors product or service? If, yes, then you are on right track. It is also sometimes referred to as a distinctive competence because the superior product or service is the result of a competence that is distinctive.
For a company to hold a competitive advantage, no other firms can have the capabilities needed to provide the quality and quantity of products and services it produces. If even one other firm has similar capabilities, it can then provide the customers products and services of equal value.
Difficult to Imitate
Having capabilities that provide superior value for customers and that are rare will produce only a temporary advantage. Firms must try to avoid competitor imitation of these capabilities and must create barriers that make it difficult for others to imitate these capabilities to produce a competitive advantage.
In addition to the qualities identified previously, for a competitive advantage to be sustainable over time requires a low possibility of substitution. Substitution refers to the ability to fulfill a customers need by alternative means.
Turning a Competitive Advantage into Profits
Firms must manage their resources in such a way so as to capture profits from their competitive advantage. Above-average returns are the profits greater than the average for a comparable set of firms (usually compared by industry and size). These above-average profits are primarily a function of larger-than-average cost-price margins.
A competitive advantage is created when a firm’s products or services differ from its competitors and are seen as better than a competitor’s products by customers. So, remember to make and provide something different to your customers.