Competitive advantage refers to any type of advantage that a company has over other similar companies and organizations in the same or related industry. The two main types of competitive advantage are cost advantage and differentiation. While cost advantage refers to the ability of a company to offer products or services that are cheaper or lower than those of its competitors, differentiation refers to the ability of an organization to offer products and services that are perceived as unique or different. These two types of competitive advantage define the business advantage a company may have over other related businesses.
While assesing the types of competitive advantage, it is important to note that several factors contribute to the ability of a company to achieve a status of cost or differentiation advantage over its competitors. These issues include factors like availablility of resources and the cost of labor. For instance, when considering what contributes to cost advantage, aspects like outsourcing of labor come to mind. A company that is based in the United States might decide to outsource some of its jobs to other countries where the wages are just a fraction of what workers obtain in the US. This business strategy will bring down the overhead costs for a business, making it possible for the business to offer its services at a rate that is cheaper than that of those who pay higher wages to their employees.
Another consideration for the types of competitive advantage is the the advantage gained from the location of a company in terms of resources. For example, a company that produces orange juice will have cost advantage over other companies if it is located in an area where a lot of oranges are grown and harvested. Not only will this reduce overhead costs in terms of transportation and logistics, but it will also benefit in terms of time-saving and efficiency. The same company could also have a differentiation advantage over other producers of orange juice located in places where oranges are not mass-produced. Offering fresh orange juice rather than orange juice that is made from concentrates could be the differentiation advantage.
Differentiation advantage may take several forms. The bottomline is that it creates a perception that the product or service offered by the organization is different in some way from that of others. This type of advantage may be due to the manner in which a company packages or promotes its products. It may also be due to a difference in the product itself.