The concept of competitive advantage


Competitive advantage is essentially a position of superiority on the part of the firm in relation to its competition in any of the multitude of functions/activities performed by the firm. It means that a firm can gain a competitive advantage in several ways. For example, some firms may be superior in production, some in R&D and some others in marketing. And within given function, the superiority may be rooted in different aspects of the function. For example, superiority in production may emanate from different aspects; the firm may be a more efficient producer compared to its competitors, or, it may have more flexible production system, or else, it may have the strength of variety. Superiority can also mean that the firm performs a given function differently distinct from the way other firms perform it. In either case, the firm gains a competitive advantage.

It will be clear from the above explanation that in developing a competitive advantage, a firm basically figures out how it can perform a particular function or group of functions, either, in a superior way, or in a distinctive way, relative to competition. The only other criterion is that the superiority/distinction has to be of value to the customer and should be perceived by him as such. Without this condition being fulfilled, no competitive advantage accrues to the firm, from the superiority/distinction. In other words, there are two questions;

1. Do I perform some function in a superior /distinctive way, compared to competition?

2. Does the superiority/distinction mean something in terms of customer value?

Competitive advantage is thus superior or distinctive competence of the firm relative to competition in some area. The superior or distinctive competence must mean something in terms of customer value. The areas may include practically all functions/activities, which business firms normally carry out, such as marketing , R&D, production, finance, new product launch, brand management etc. The superiority or distinction may also cover the resource and capability dimension and factors like technology.

Outstanding leaders in any industry possess superiority/distinction in several functions/areas.

A Few Illustrations:

Let us see a few illustrations of competitive advantage

Toshiba: For Toshiba of Japan variety and flexibility in production serves as a competitive advantage. Through a flexible manufacturing system (FMS), Toshiba manufactures different products/varieties of the given product in the same assembly line. Its computer factory assembles nine different word processors on the same line and 20 varieties of lap top computers on an adjacent line. It is able to switch from one product/variety to another instantly and at low cost. It makes profits even on short volume runs. The flexibility allows Toshiba to easily meet the fast-changing market demand. While its competitors make their profits through long volume runs of a particular product, or model, Toshiba scores over the competitors through variety, speed and quicker response to market demand, making profits with short volume runs. This is the competitive advantage of Toshiba.

Sony: As a contrast to the flexibility of Toshiba, Sony enjoys the advantage of low cost, in personal stereo players. The cost advantage comes through the offer of a globally standardized product. Sony’s Walkman is a global product, offered all over the world, ignoring differentiation. In other words, in this product, Sony sells the same thing, the same way, all over the World. The high quality and low cost of Walkman attracts customers the world over. Sony is able to combine economy and high quality, by simultaneously achieving high volume and standardization at a high quality level. It has built a competitive advantage through this edge.

Caterpillar: Caterpillar has built a competitive advantage in its business of earth moving equipment through after-sales service. Caterpillar assures its customers that it will attend to any service requirement and spare part needs in any part of the world, within 48 hours. This is a far superior offer compared to its competitors.