A company is said to have a competitive advantage when it has developed a method of providing the same benefits as a competitor, but at a lower cost, or when it can offer additional benefits at the same cost as a competitor. The two types of competitive advantage are: cost advantage or differentiation advantage. Developed by Michael Porter in the mid 1980’s, this theory outlines the two ways that a company can move ahead within an industry.
In order to maintain a competitive advantage, a company must have resources and capabilities that exceed those of the competition. Resources can include skills, patents and trademarks, an established customer base or brand equity. Capabilities include the ability to produce materials faster than the competition or a highly developed distribution process. By maximizing the resources and capabilities a company has, they can develop a competitive advantage over other companies.
This is done through either a cost advantage – offering services for a lower cost than other companies, or a differentiation advantage – maximizing the capabilities of the company to create a unique opportunity. Establishing a strategy that uses the advantages a company has will be a key indicator of superior performance by the company.
According to Porter, by utilizing the resources that a company already possesses, it is in a unique position to capitalize on the industry and move ahead of the competition. Through careful structure and strategy, a company can claim the advantage and maintain an edge over rivals. By focusing on that advantage, the company can maintain the lead and continue to generate opportunities for growth and development. This is essential for companies that wish to survive in the marketplace, as well as for companies that wish to expand into other market areas. Identifying the potential for competitive advantage will provide guidance to the company that wishes to pull ahead of the competition and establish a company as a leader – regardless of the industry.