Loading the player...

What is 'Competitive Advantage'

Competitive advantages are conditions that allow a company or country to produce a good or service at a lower price or in a more desirable fashion for customers. These conditions allow the productive entity to generate more sales or superior margins than its competition. Competitive advantages are attributed to a variety of factors, including cost structure, brand, quality of product offerings, distribution network, intellectual property and customer support.

BREAKING DOWN 'Competitive Advantage'

Competitive advantages provide an edge over rivals and an ability to generate greater value for a firm and its shareholders. The more sustainable the competitive advantage, the more difficult it is for competitors to neutralize the advantage. The two main types of competitive advantages are comparative advantage and differential advantage.

Comparative Advantage

Comparative advantage is generated by a firm's ability to produce a good or service at a lower cost than its competitors. This gives the firm the ability sell its goods or services at a lower price than its competition or to generate a larger margin on sales. Rational consumers will choose the cheaper of any two perfect substitutes offered. If the effects of comparative advantage are partially offset by imperfect substitution, higher margins for the lowest-cost producers will eventually benefit shareholders through superior returns or provide the company with more resources for marketing, research and development or administrative infrastructure improvements to support future growth.

Comparative advantage can be derived from economies of scale, more efficient internal systems, location in geographies with low labor or low property expenses. These do not always imply the company can produce a better product or service, but rather they can offer a product or service for a lower price. In the context of international trade economics, comparative advantages are determined by opportunity cost, and any part has a comparative advantage at something. Amazon.com Inc. is an example of a company focused on building and maintaining comparative advantage. The e-commerce platform, its vendor relationship and its shipping network provide a level of scale and efficiency that is difficult for retail competitors to replicate. Amazon has risen to prominence largely through price competition.

Differential Advantage

A differential advantage is created when a firm's products or services differ from its competitors and are seen as superior than a competitive offering. Differential advantages can be driven by more advanced technology, patent-protected products or processes, superior personnel, or a strong brand identity. These factors support wide margins and large market shares. Apple Inc. is famous for creating innovative products like the iPhone and supporting their market leadership with savvy marketing campaigns to build an elite brand. Major drug companies can also market branded drugs at high price points due to patent protection.

RELATED TERMS
  1. Comparative Advantage

    The ability of a firm or individual to produce goods and/or services ...
  2. Economic Moat

    The competitive advantage that one company has over other companies ...
  3. Competitive Pricing

    Setting the price of a product or service based on what the competition ...
  4. Perfect Competition

    A market structure in which the following five criteria are met: ...
  5. National Diamond

    A theory of competitive advantage developed by Harvard Business ...
  6. Product Differentiation

    A marketing process that showcases the differences between products. ...
Related Articles
  1. Investing

    What's a Competitive Advantage?

    A competitive advantage is an advantage a firm has over its competitors.
  2. Insights

    Competitive Advantage Counts

    What's the best indicator of a company's future success? Its ability to succeed when others fail.
  3. Insights

    Explaining Comparative Advantage

    Comparative advantage is the ability of an individual, company or country to produce a good or service at a lower opportunity cost than its competitor. Having a comparative advantage doesn't ...
  4. Insights

    Basic Concept Of Absolute Advantage

    Absolute advantage is the ability of an individual, country or company to produce a good or service at a lower cost than any competitor. An entity with an absolute advantage requires fewer inputs ...
  5. Small Business

    3 Secrets Of Successful Companies

    Make smart investments by spotting up-and-coming success stories early.
  6. Small Business

    Understanding Competitive Pricing

    Competitive pricing is the practice of setting prices for products or services based on what the competition charges.
  7. Small Business

    The Basics Of Value Chain Analysis

    Value chain analysis establishes an action plan to understand and implement actvities that create values to a firm's clients, resulting in firm profits.
  8. Managing Wealth

    How To Profit During High Inflation

    Some companies are better than others at pivoting their strategies to overcome inflation or other cost-increasing concerns. The best companies can push cost increases out to the market quickly ...
  9. Small Business

    How Can Companies Increase Market Share?

    Companies that increase their market share enjoy a competitive advantage. They receive better prices from suppliers, and they’re able to produce goods faster.
RELATED FAQS
  1. How do I determine my company's competitive advantage?

    Find out how to determine if your company has a competitive advantage and, if so, learn how to figure out how to make it ... Read Answer >>
  2. What happens when a country focuses exclusively on its competitive advantage?

    Find out what happens when a country intentionally focuses solely on its most competitive factors of production or industries ... Read Answer >>
  3. Is it possible for a country to have a comparative advantage in everything?

    Learn whether one country can have a comparative advantage in everything and what the difference between comparative advantage ... Read Answer >>
  4. What are some real life examples of absolute advantage?

    Learn about absolute advantage, comparative advantage and their impact on trade through a real-world example involving call ... Read Answer >>
  5. How does globalization impact comparative advantage?

    Learn how comparative advantage is becoming increasingly relevant due to globalization and how this has affected both advanced ... Read Answer >>
  6. What factors influence competition in microeconomics?

    Find out what influences competition in microeconomics and how perfect competition, monopoly and oligopoly vary in their ... Read Answer >>
Hot Definitions
  1. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  2. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  3. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  4. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  5. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  6. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
Trading Center