When a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices. Competitive advantages are capabilities that are difficult to replicate or imitate and are non-tradable.
Pitts and Snow define a competitive advantage as “any feature of a business firm that enables it to earn a high return on investment despite counter pressure from competitors.”
A competitive advantage exists when the firm is able to deliver the same benefits as the competitors are but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, a competitive advantage enables a firm to create superior value for its customers and superior profits for itself.
Competitive advantage is gained at the corporate and business levels through synergy and market share, respectively.
Synergy evolves from size and diversification. By being large, a firm can gain advantage by: (1) paying less interest to its creditors and underwriters; and (2) paying less tax by internally shifting funds from one business to another. Diversified firms can use portfolio planning to produce synergistic advantage by assisting the firm in allocating resources according to the product’s relative market share and market growth which in turn, directs the organization in its placement of managers in appropriate cells.
Market share derives from three different sources: (1) economies of scale attained through specialization, automation, and vertical integration: (2) experience attained through employee learning as well as product and process development; and (3) market power-which is the amount of control the firm has over suppliers, customers, and competitors.
Sources of Competitive Advantage include: –
- Economies of Scale.
- Latest technology.
- Human resources (Skilled, trained, creative, positive attitude, high EQ and IQ, competitive, etc.)
- Continuous learning philosophy and knowledge management.
- Automation and modernization of business processes like implementation of ERP, CAD-CAM manufacturing, E-commerce, Business Process Reengineering, etc.
- Product and process innovation and development.
- Diverse workforce.
- Low cost.
- Development in the external environment favoring the firm’s business.
- Acquisition of market power.