Competitive Advantage is doing better in terms of sales turnover and revenue earnings as compared to the competitors and to earn more than the average in the industry, and also to sustain such advantage over a long period of time. The goal of business strategy is to achieve competitive advantage in a sustained manner.
There are two types of competitive advantage according to Michael Porter:-
Cost advantage means the ability to deliver the same benefits as the competitors but at a lower cost.
Differentiation advantage is to deliver more benefits or benefits that exceed the competitors.
Cost advantage makes a company create superior values in terms of cost or benefits to its customers as compared to competitors and better profits for the company. In other words, a company utilizes its resources and capabilities to create a cost advantage which ultimately results in superior value creations for its customers.
The cost or differentiation advantages are also known as “positional advantage”, since it expresses the company`s position in the industry as a leader in either cost or differentiation.
Resources + Capabilities > Distinctive Competencies =
Cost Advantage or Differential Advantage > Value Creation.
To prevent competition from replicating the cost advantages, a company must have superior resources and capabilities; otherwise any advantage will soon disappear.
Resources are a company`s assets which help it create a `cost advantage`, which other competitors cannot easily copy or replicate. Some of these resources are –
Capabilities are again unique to a company in using its resources most effectively. For example a company distributes its products in the market more quickly and efficiently. Such capabilities are routine and part of a good organization, which the competitors may not be aware of, since these activities do not get documented for others to copy.
Value Creation: Porter identified a series of activities performed by a company to create value and termed it as "value chain".In addition to these, a company operates in a value system of vertical activities that includes up stream suppliers and down stream channel members.
For achieving cost advantage, a company must operate one or more value creating activities that will create more overall value as compared to the competitors. Superior value is obtained through lower costs or superior benefits to the customers.