Competitive advantage is the ability of an organization to gain a material edge over its competitors. Having such an advantage can result in above-average profits or high levels of customer loyalty.
There are many types of competitive advantage that a business can take advantage of, such as the following:
- Having a supply of unusually inexpensive raw materials
- Having access to a low-cost labor force
- Owning a patent that is key to a product category
- Having a large field servicing operation that can maintain products on short notice
- Having a large chain of retail stores through which goods can be sold
- Having a highly-regarded Internet store that experiences a large number of return visits
- Having a design team that routinely produces leading-edge designs
- Having a short product development cycle that pushes new products into the marketplace faster than what competitors can achieve
An example of how a core competency is used is to leverage a strong field service operation by noting the company's 24-hour response time when pitching a prospective sale to a customer. Another example is being able to offer a commodity product to a customer at an unusually low price, since the seller's workforce is located overseas, where labor costs are reduced by more than half.
Competitive advantage can be taken away by a determined competitor in one of two ways:
- Match and then exceed the advantage offered by the company; or
- Undermine the company's position by developing an entirely new competitive advantage that is highly prized by customers.
It is essential to maintain a competitive advantage, in order to sustain long-term profitability. This means that management must be aware of the advantage, and continually reinforce it with ongoing investments in the targeted area.
A competitive advantage can even be achieved by unethical means, such as by offering bribes to the purchasing manager of a customer. Since other sellers are presumably not willing to engage in unethical behavior, the use of bribes can be seen as a competitive advantage.