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Competitive Advantage

What Is Competitive Advantage?

Competitive advantage relates to the factors which enable a company to produce goods or services with better quality or for a cheaper price than its market rivals, enabling the company to generate more sales or sustain greater margins that its competitors.

These factors that contribute to a company’s competitive advantage can include cost structure, product/ service quality, network of distribution, customer service, branding, or intellectual property. The company’s products or services can be deemed as more desirable to customers thanks to competitive advantage over rivals.

Types of Competitive Advantage

There are two types of competitive advantage, comparative advantage and differential advantage.

Comparative advantage - This is when a company’s ability to generate greater profit margins than competitors through more efficient production. Customers often choose the cheaper of two options when faced with a decision, leading to one product/ service having comparative advantage. In the case of imperfect substitutes, the higher margins for lower cost producers will bring around greater returns for the company. Comparative advantage can be achieved through economies of scale, efficient internal processes, or even a favourable geographical location.

Just because a product/ service has comparative advantage doesn’t mean it is inherently better than its competitors, it simply indicates that the company has the ability to produce the same value of goods/ services as rivals but at a lower price.

Differential Advantage - This is when a company’s goods or services are seen as higher quality or unique compared to market rivals, generating larger margins and market shares. The products differ and are seen as superior thanks to factors including patented processes or resources, advanced technology, customer service, or a strong brand image.

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Competitive Advantage Definition

What is Competitive Advantage?

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