Competitive Advantage: Theories - Examples

Studying economics will help you to become familiar with many distinct theories and concepts. Competitive advantage is one such area that you need to master.

According to this theory, a company has an advantage when it is able to offer similar or related products to customers at a lower price. The concept of competitive advantage is a decisive factor for countries in terms of which of their products will be exported. The competitive advantage of a nation will ensure that goods exported will lead to higher margins of profit and lower opportunity cost.

Now, considering the intricacies involved with this specific theory, it’d be useful to have some clarity on it. So, leaf through the various elements of competitive advantage.

What is a competitive advantage?

Competitive advantage is a phenomenon that enables an organisation to outperform its competitors. The idea behind this theory is to allow businesses to have an edge over competitors by presenting consumers with greater value. It can be implemented by providing low cost products and services or by offering higher quality services which justify higher prices.

Competitive advantages can vary significantly even among organisations offering a similar type of services or producing the same products. In case of small businesses, particularly start-ups, competitive advantage is the most vital factor of the entire marketing strategy.

Decoding the theory of competitive advantage

Competitive advantage is a control that a business has in the market over its competitors. This can be achieved by offering greater value to the clients. Advertising services and products with reduced prices or higher quality generates the curiosity of the consumers. Target markets can identify these unique products or services. This is the main idea behind brand loyalty, or why consumers prefer one specific product or service over another.

Value proposition is a significant factor while dealing with competitive advantage. If the value proposition offers better and greater value, it can present a competitive advantage in either the product or service. The value proposition can uphold the consumer choices and expectations.

There are three determining elements that encompass the theory of competitive advantage.

Target market

You need to determine who your consumers are and what are their specific needs. You need to have a complete understanding of exactly who buys your products, and how you can meet their needs. This is how you can maintain demand for your products and services.

Benefit

Consider the real benefits of availing your products and services. It has to be something that your consumers are truly looking for, and that provides real value. In this case, you not only have to be well-versed in your product's features but also know how these features can benefit your consumers. This also means you have to be constantly aware of new trends that affect your product.

Competition

Determine who your real competitors are. This involves more than similar products or companies. In fact, it also involves anything else your consumer could do to meet the expectations and needs.

Competitive advantage vs. Absolute advantage

Organisations can come up with numerous strategic moves to develop competitive advantage. The objective is to maintain a clear difference that is crucial to your consumers and is something your competitors can’t match. You can present a competitive advantage by forming a strategy of leadership in factors like cost, customer experience and innovation.

Cost

Costs offer you with a significant competitive advantage. You can offer your consumers with unmatched prices that your competitors can’t refuse. If you can charge low prices while maintaining quality, you can consolidate your competitive advantage even further.

Innovation

A strategy of innovation provides a competitive advantage by creating products that set your company apart. It helps you meet customer needs more conveniently than competitors. Your product development program should emphasise on features that present the consumers with exceptional value or unique benefits.

Customer experience

Thorough knowledge of consumers and unparalleled service are the only sustainable form of competitive advantage. To achieve this, you must invest in four main areas. Those areas are customer research, customer service, effective sales channels, and marketing material that uses customer information. Here’s is a table that highlights the difference between competitive and absolute advantages:

Absolute Advantage	Competitive Advantage
Absolute advantage solely focuses on the ability of a business to sell products or services at a lower cost per unit than other service providers in a given market.	Competitive advantage refers to a condition that allows a company to enjoy a superior business position in comparison to other competitors functioning in the market.

Table 1: Difference between competitive advantage and absolute advantage

This theory was used as a counter-argument for mercantilism by Adam Smith. In the words of Adam Smith, it was impossible for all the countries to become rich simultaneously by practising mercantilism. He further stated that all nations would gain simultaneously if they followed the free trade principle and specialised according to their absolute advantage. Smith also opined that the wealth of a nation relies upon the services and products available to the citizens, instead of their gold reserves.

A nation's absolute advantage or disadvantage in a specific industry can have a determining role in the types of goods it decides to produce. For instance, the United States and Japan can both produce cars. If Japan can produce sports cars of a higher quality faster than the US, then Japan would have an absolute advantage in that specific industry.

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Difference between Comparative and Competitive Advantage

Comparative advantage due to lower costs (e.g. labour, capital, raw materials, or infrastructure) or size still exists. However, it no longer allows a competitive advantage in most industries, nor supports high wages. The impact of globalisation allows the companies to match comparative advantages by outsourcing inputs.

Global organisations must focus on these things to achieve operational effectiveness. The size of the home market is a lot less crucial than the ability to leverage much larger world market in this case. Moreover, the improved technology has given organisations the capacity to reduce or nullify many weaknesses in comparative advantage. For instance, Japanese organisations have flourished in many industries by spearheading space-saving and energy-saving innovations like lean production.

Competitive Advantage	Comparative Advantage
1. Competitive advantage denotes the benefits that an organisation may have over its competitors. This could incorporate things like having a low cost structure, low cost of labour, better access to raw materials, etc. 2. It compares the liabilities of two companies that compete with each other and function in the same industry.	1. Comparative advantage is another form of competitive advantage. Having a comparative advantage would provide a company with many competitive benefits in a given market. 2. It focuses on the relative costs of production and emphasises on the opportunity cost that varies from one nation to another.

Table 2: Difference between Competitive Advantage and Comparative Advantage

As such, the main difference in comparative and competitive advantage lies in the fact that competitive advantages are decided by higher profits and lower costs to consumers, while comparative advantages are decided by the ease of production.

Competitive advantage in International trade

As per an article published in the Harvard Business Review, organisations that have assumed international leadership adopt strategies that vary from each other in multiple aspects. Every successful organisation will adopt its own strategy. However, the underlying mode of operation is essentially the same.

Organisations around the globe gain a competitive advantage through the process of innovation. They focus on innovation in its broadest sense, which includes both new technologies and newer techniques of doing things.

Innovation can be implemented in terms of product design, a production process, a new marketing approach, or a unique way of carrying out training. Innovation often involves ideas that are not even “new”, in the strictest sense of the term.

These ideas have been around, but never pursued frequently. It also involves investments in knowledge and skill, as well as in physical assets and brand reputations. Once a company attains competitive advantage through effective innovation, it can sustain the process through relentless improvement.

Some innovations propagate competitive advantage by assuming a whole new market opportunity or by catering to a market segment that others have ignored. When competitors respond slowly, such innovation presents a competitive advantage. For instance, Japanese organisations gained their initial advantage by emphasising smaller, and lower capacity home appliances. These are the very elements that the foreign competitors regarded as less profitable, and less important.

In conclusion,

When dealing with a complex concept like competitive advantage, you need to weigh different aspects. Being familiar with all these layers will help you put together a great academic paper.

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