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What Is the Competitive Advantage Theory?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 29 August 2016
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The competitive advantage theory is an approach to the sales and marketing process that emphasis should be placed on the production of high quality goods and services that can in turn be sold at the best possible prices. This is in contrast with the comparative advantage theory, which tends to focus more on the production of goods and services based on the availability of natural resources and the potential to produce goods that may be exported. There is an ongoing controversy regarding the essentials of competitive advantage theory and how well that theory fits into the current worldview.

There are several assumptions commonly associated with the competitive advantage theory. One has to do with the understanding that having natural resources on hand is not necessary in order to produce goods and services. Importing what is needed for the production can be managed with ease, making it possible for any good or service to be produced anywhere in the world. This is in contrast to the idea of making the most of local resources as a means of keeping costs low. According to proponents of competitive advantage, being open to importing essentials means that there is no danger of the economy being locked into the production of goods that are dependent on natural resources which may eventually be depleted, limiting the range of production within that given geographical location.

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With the focus of the competitive advantage theory on quality production, the understanding is that the labor used to produce the goods in question will be somewhat inexpensive in comparison to the returns generated. This does not mean that labor will necessarily be cheap, but that it will be in proportion to the profits generated from the sale of high quality goods at higher prices. Higher profits means the ability to maintain production, meet demand, and keep employees working, which in turn feeds the local economy and helps to increase the standard of living.

This emphasis on quality is understood to provide a distinct advantage over competitors who operate from a different approach. With the competitive advantage theory, quality eventually overcomes other options that are of lower quality, even when those inferior goods are available at much lower prices. As consumers become more aware that they are spending more money buying other goods that do not provide the same level of satisfaction, they will migrate to products that may cost a little more initially, but ultimately provide more utility in the long run.

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