Bmw | Strategic Management | Competitive Advantage

#3 focus

In a focus strategy, a company focuses on a narrow target market segment. This strategy is successful if the company is able to successfully create products/services that can cater to these customers. The focus strategy also has two variants;

  1. Cost-focus: Lowest-cost producer in a narrow market segment
  2. Differentiation-focus: Differentiated products/services in a narrow market segment

Bmw | strategic management | competitive advantage

Comparative advantage

A firm’s ability to produce a good or service more efficiently than its competitors, which leads to greater profit margins, creates a comparative advantage. Rational consumers will choose the cheaper of any two perfect substitutes offered. For example, a car owner will buy gasoline from a gas station that is 5 cents cheaper than other stations in the area.

Economies of scale, efficient internal systems, and geographic location can also create a comparative advantage. Comparative advantage does not imply a better product or service, though. It only shows the firm can offer a product or service of the same value at a lower price.

For example, a firm that manufactures a product in China may have lower labor costs than a company that manufactures in the U.S., so it can offer an equal product at a lower price. In the context of international trade economics, opportunity cost determines comparative advantages.

Amazon (AMZN) is an example of a company focused on building and maintaining a comparative advantage. The e-commerce platform has a level of scale and efficiency that is difficult for retail competitors to replicate, allowing it to rise to prominence largely through price competition.

Competitive advantage in the marketplace

Three great examples include:

Constructing a competitive advantage

Before a competitive advantage can be established, it is important to know the:

Differential advantage

A differential advantage is when a firm’s products or services differ from its competitors’ offerings and are seen as superior. Advanced technology, patent-protected products or processes, superior personnel, and strong brand identity are all drivers of differential advantage. These factors support wide margins and large market shares.

Apple is famous for creating innovative products, such as the iPhone, and supporting its market leadership with savvy marketing campaigns to build an elite brand. Major drug companies can also market branded drugs at high price points because they are protected by patents.

Examples of competitive advantage

  1. Access to natural resources that are restricted from competitors
  2. Highly skilled labor
  3. A unique geographic location
  4. Access to new or proprietary technology
  5. Ability to manufacture products at the lowest cost
  6. Brand image recognition

How can over increase their competitive advantage?

To find a lasting competitive advantage, look for something that your competitors cannot easily replicate or imitate. Esteemed investor Warren Buffet identifies «moats» that businesses can figuratively dig around themselves to entrench competitive advantages.

Buffett’s moat refers to a defensive barrier, but instead of protecting a castle, it helps prevent a company’s profits from being eroded by competitors. This can include strengthening one’s brand, raising barriers to new entrants (such as through regulations), and the defense of intellectual property.

How do i know if a company has a competitive advantage?

If a business is able to increase its market share through increased efficiency or productivity, it would have a competitive advantage over its competitors.

Other resources

To continue learning and advancing your career, see the following free CFI resources:

Understanding competitive advantage

Competitive advantages generate greater value for a firm and its shareholders because of certain strengths or conditions. The more sustainable the competitive advantage, the more difficult it is for competitors to neutralize the advantage. The two main types of competitive advantages are comparative advantage and differential advantage.

Video explanation of competitive advantage

Watch this short video to quickly understand the main concepts covered in this guide, including the definition of competitive advantage and how companies create it using various business strategies.

What is competitive advantage?

Competitive advantage refers to factors that allow a company to produce goods or services better or more cheaply than its rivals. These factors allow the productive entity to generate more sales or superior margins compared to its market rivals.

Competitive advantages are attributed to a variety of factors including cost structure, branding, the quality of product offerings, the distribution network, intellectual property, and customer service.

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