What is competitive advantage?

Everyone has got their own idea on what a competitive advantage is. Virtually anything could be considered as a competitive advantage, e.g. greater profit margin, better return on resources, valuable resource such as brand reputation or exclusive capability in producing a specific product. Every company must have at least one advantage to effectively compete in the market. If a company can’t identify one or just doesn’t possess an advantage, competitors will soon outperform you and force your business to leave the market.

There are many ways to achieve a competitive advantage two basic strategies for gaining an edge over your competitors are: cost or point of difference advantage. A company that is able to achieve dominance in cost or differentiation is able to offer consumers the products at lower costs or with higher degree of individuality and most importantly, is able to compete with its competitors.

Cost advantage – when a company can produce similar quality products or services but at lower costs. In this case the company can sell products at the same price as competitors but acquires higher profit margins because of lower production costs. The company that tries to achieve cost advantage is pursuing cost leadership strategy. Higher profit margins lead to further price reductions, more investments in process innovation and ultimately greater value for customers.

Differentiation advantage – Differentiation advantage is achieved by offering unique products and services and charging premium price for that. Differentiation strategy is used in this situation and company positions itself more on branding, advertising, design, quality and new product development rather than efficiency, outsourcing or process innovation. Customers are willing to pay higher price only for unique features and the best quality.

Regardless of what strategy your business adopts to achieve its competitive advantage you must ensure that you are able to measure and maintain your competitive edge over your competition.