competitive advantage


competitive advantage

The possession by a firm of various ASSETS and attributes (low cost plants, innovative brands, ownership of raw material supplies, etc.) which give it a competitive edge over rival suppliers. To succeed against competitors in winning customers on a viable (profitable) and sustainable (long-run) basis, a firm must, depending on the nature of the market, be cost-effective and/ or able to offer products which customers regard as preferable to the products offered by rival suppliers. The former enables a firm to meet and beat competitors on price, while the latter reflects the firm's ability to establish PRODUCT DIFFERENTIATION advantages over competitors. See VALUE ADDED MODEL.

Cost advantages over competitors are of two major types:

  1. absolute cost advantages, that is, lower costs than competitors at all levels of output deriving from, for example, the use of superior production technology (e.g. COMPUTER-AIDED MANUFACTURING, LEAN MANUFACTURING) or from VERTICAL INTEGRATION of input supply and assembly operations;
  2. relative cost advantages, that is, cost advantages related to the scale of output accruing through the exploitation of ECONOMIES OF SCALE in production and marketing and through cumulative EXPERIENCE CURVE effects. Over time, investment in plant renewal, modernization and process innovation (either through in-house research and development or the early adoption of new technology developed elsewhere) is essential to maintain cost advantages.

Product differentiation advantages derive from:

  1. a variety of physical product properties and attributes (notably the ability to offer products which are regarded by customers as having unique qualities or as being functionally better than competitors' products);
  2. the particular nuances and psychological images built into the firm's product by associated advertising and sales promotion. Again, given the dynamic nature of markets, particularly PRODUCT LIFE CYCLE considerations, competitive advantage in this area needs to be sustained by an active programme of new product innovation and upgrading of existing lines. See COST DRIVERS, BENEFIT DRIVERS, VALUE CHAIN ANALYSIS, CRITICAL OR KEY SUCCESS FACTORS, CORE SKILL OR COMPETENCIES, SWOT ANALYSIS, COMPETITIVE STRATEGY, BUSINESS STRATEGY, RESOURCE BASED THEORY OF THE FIRM, CONSUMER SURPLUS, DISTINCTIVE CAPABILITIES.
Competitive advantage (of countries)Fig. 26 Competitive advantage (of countries). The Porter ‘diamond’.

competitive advantage (of countries)

the resources and capabilities possessed by a country that underpin its competitiveness in international trade (see COMPARATIVE ADVANTAGE). Countries per se do not trade - only persons and firms do. Persons and firms may possess their own unique resources and capabilities, which give them a competitive advantage over others. See COMPETITIVE ADVANTAGE (OF FIRMS). This can be enhanced by firms being able to contribute, and tap in, to a country's resources and capabilities. Michael Porter has developed the so-called ‘diamond’ framework, which encapsulates this potential, consisting of four elements: factor endowments, demand conditions, infrastructure and firm strategy/structure/ rivalry.

A basic starting point is a country's factor endowments, such as plentiful (i.e. cheap) labour or skilled labour, raw materials and capital stock, together with its underlying scientific and technological infrastructure. With regard to demand conditions, it is not so much the size of the home market (although it is accepted that a large home base may be necessary to underpin economies of scale in lowering supply costs and prices) as its nature that matters. Porter emphasizes the importance of the presence of sophisticated and demanding buyers in stimulating the innovation and introduction of new products capable of being ‘transferred’ into global markets. The category of ‘related and supporting industries’ provides an important bedrock for competitive success through a network of suppliers and commercial infrastructure (see CLUSTERS). The final quadrant, ‘firm strategy structure and rivalry’, Porter suggests, may be the most important of all, especially the element of fierce local competition. While international rivalries tend to be ‘analytical and distant’, local rivalries become intensively personal but nonetheless beneficial in providing a ‘springboard’ for international success. All these factors, it is suggested, are interrelated, creating a ‘virtuous circle’ of resource generation and application, and sensitivity in meeting customer demands.

competitive advantage (of firms)

the possession by a firm of various assets and attributes (low-cost plants, innovative brands, ownership of raw material supplies, etc.) that give it a competitive edge over rival suppliers. To succeed against competitors in winning customers on a viable (profitable) and sustainable (long-run) basis, a firm must, depending on the nature of the market, be cost-effective and/or able to offer products that customers regard as preferable to the products offered by rival suppliers. The former enables a firm to meet and beat competitors on price, while the latter reflects the firm's ability to establish PRODUCT DIFFERENTIATION advantage over competitors.

Cost advantages over competitors are of two major types:

  1. absolute cost advantages, that is, lower costs than competitors at all levels of output deriving from, for example, the use of superior production technology or from VERTICAL INTEGRATION of input supply and assembly operations;
  2. relative cost advantages, that is, cost advantages related to the scale of output accruing through the exploitation of ECONOMIES OF SCALE in production and marketing and through cumulative EXPERIENCE CURVE effects. Over time, investment in plant renewal, modernization and process innovation (either through in-

house RESEARCH AND DEVELOPMENT or the early adoption of new technology developed elsewhere) is essential to maintain cost advantages.

Product differentiation advantages derive from:

  1. a variety of physical product properties and attributes (notably the ability to offer products that are regarded by customers as having unique qualities or as being functionally better than competitors’ products);
  2. the particular nuances and psychological images built into the firm's product by associated advertising and sales promotion. Again, given the dynamic nature of markets, particularly product life cycle considerations, competitive advantage in this area needs to be sustained by an active programme of new product innovation and upgrading of existing lines. See COMPETITIVE STRATEGY, RESOURCE BASED THEORY OF THE FIRM, BARRIERS TO ENTRY, MOBILITY BARRIERS, VALUE-CREATED MODEL, VALUE CHAIN ANALYSIS.