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In business, a competitive advantage is a strategy, product, or process that allows one business to get ahead of its competitors. Possessing a competitive advantage can be the key to better performance, though they are not always easy to come by. There are many different sources of competitive advantage, though most fall into two categories, known as cost-reduction and differentiation. Cost-reduction advances focus on strategies that help reduce costs, and thus prices, while differentiation advantages help make the company distinct from competitors. Understanding the different sources of competitive advantage can help a business develop ideas regarding profit maximization in a tough, competitive market.
One of the major sources of competitive advantage is proprietary information or technology. A firm that has a patented product or process is often in an excellent position to lower costs or differentiate their products through superior technology. Additionally, competitors may have to pay a firm with patented processes in order to license the same technology. Patented or proprietary information can also allow a business to develop further, improved versions of products faster than their competitors, giving them a distinct advantage in the market place.
Some experts say that one of the most important differentiation-based sources of competitive advantage is customer relations. Customer loyalty is created not just through the creation of good products, but through the ability of the company to assist its customers. If a customer has a good experience with company representatives, such as excellent help-line workers or an efficient and hassle-free exchange process, he or she may be more likely to rely on that company for future needs. Developing a reputation as a customer-friendly firm can certainly help improve performance, thus outdistancing the competition.
Market-related agility is also quite important to creating a competitive advantage. Companies must be able to note market trends and respond quickly in order to keep up with customer needs. This type of advantage is created through a two-fold process: first, the company must have market analysts who can understand trends and forecast futures with good accuracy, and second, the company itself must be flexible enough to quickly and smoothly incorporate changes.
One of the most difficult-to-come-by sources of competitive advantage is supply access. If a company can control the majority of a resource, it may be able to reduce costs far more effectively than competitors. Supply control can also help differentiate the product from other similar offerings, especially if the company is the only source of the specific resource. For example, a sports arena that serves as the home field of a professional football team has a supply-based competitive advantage over other nearby sports facilities, as it is the only supplier of professional football games in the area. This effectively means that it can charge whatever it wishes for tickets, since it does not have competition.
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