An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retains more customers than its competition. There can be many types of competitive advantages including the firm's cost structure, product offerings, distribution network and customer support. Competitive advantages give a company an edge over its rivals and an ability to generate greater value for the firm and its shareholders. The more sustainable the competitive advantage, the more difficult it is for competitors to neutralize the advantage.

Popular Sources of Competitive Advantage

1.      Cost – This is a major source of competitive advantage. Cost advantage is the reason why Wal-Mart is so successful and why so much is made in China where costs are much lower than in high wage countries. Naturally, there is a downward limit on this form of competitive advantage. For example, Japanese cars were once mainly popular because they were cheaper than North American cars. Then Korean cars were cheaper. Now Chinese and Indian cars are cheaper (i.e. Tata Nano). But even their cost advantage will soon disappear as the playing field for wages levels out globally. Competitors can only reduce costs so far before becoming unprofitable. The experience curve states that the cost of making any product declines with experience at a predictable rate.

2.      Quality – Everyone wants a product that works and lasts a reasonable length of time. Any company with a better quality product that is not too much more expensive than its rivals will win out. We might be willing to pay a bit more for a Toyota than some other cars even if they are a little more expensive because of Toyota’s reputation for quality.

3.      Service – Customer service is a popular form of competitive advantage in markets where all the players offer similar services or products and they cannot be differentiated in any other way. Car rental companies for example, all charge a similar amount and offer a similar product. There is little they can do to differentiate themselves other than by offering outstanding customer service. The same is true of many retailers. Other than Southwest Airlines that has other sources of competitive advantage, there is not much to differentiate the major airlines other than perceived service levels.

4.      Brand – Many people are willing to pay a little extra for a name brand, especially in the fashion industry, but it applies to cars, soft drinks and many other products. Building a brand is expensive and time consuming but often the only way some businesses can differentiate themselves. But brands are not invincible. They have not saved General Motors from their competitors or IBM, which recently got out of the PC business despite having a highly recognized brand. However companies like Google and Apple are thriving due to their brands.

5.      Convenience – Many consumers are willing to pay a little extra for convenience. This can mean having a good location, as in the case of retail outlets in a mall, or shopping via the internet (i.e. Amazon or B&N). The latter is obviously easy to copy but a great location for a retail outlet is not so easy to replicate. Convenience also includes one-stop-shopping and products that are simply easier to use than other offerings.

6.      Innovation – The most current example of a company that uses innovation as a means of differentiation is Apple with its iTunes, iMac, iPod, iPhone and iPad (future: iWatch) products. As with all forms of differentiation, innovation needs to be ongoing for any one company to keep beating its competitors over several years, but it can yield great dividends for any business that is good at it. Innovation is harder than other forms of competitive advantage, not just because it requires creative thinking but also because most businesses have a short-term, risk-averse focus that is driven by the demand for quarterly profits. This pressure makes it hard for them to take a longer term or more entrepreneurial focus. In any case, having a product that people want, and which no other company can match, is a great source of competitive advantage. Companies protect this form of competitive advantage through patents, as in the case of drug manufacturers, or by continuous innovation.

7.      There are other forms of competitive advantage. This list covers the most popular forms but is not exhaustive. Attractive packaging can also be a factor in some industries, for example. Speed can also be a source of competitive advantage (i.e. FedEx). Opportunists who are quicker than others to spot a new market and enter it fast gain a momentary advantage.