What Drives a Competitive Advantage?

A competitive advantage is an advantage that a company has over its competitors. Companies use their competitive advantage to sell more than their competitors and increase market share. According to QuickMBA, the two main drivers of competitive advantage are cost advantage, which allows a company to charge lower prices than its competitors, and differentiation, which enables it to offer product features and benefits that competitors cannot match. To achieve and maintain a competitive advantage, a company aims to make the best use of its resources, such as people, knowledge, materials and reputation, and capabilities, such as innovation, speed, efficiency and quality.

Companies that use cost to drive competitive advantage provide customers with the same benefits as competitors, but they are able to produce products or deliver services at lower cost. Cost advantage can result from several factors, including lower labor costs, higher levels of productivity, access to lower cost raw materials, or economies of scale through high-volume production.

Companies achieve differentiation through factors that competitors cannot match such as superior performance, higher quality, lower maintenance costs or other benefits that are important to customers. By offering customers superior benefits, companies can offer increased value at the same price as competitors. They can also differentiate themselves through intangible benefits such as reputation or brand image -- factors that give customers the confidence to buy their products or services.

The resources in a company drive competitive advantage. A highly skilled work force or a product design team led by an acknowledged industry leader are resources that competitors would find hard to match. Information is also vital to competitive advantage. Companies that use business intelligence systems to gain increased insight from the data they have are able to make better decisions and improve competitive performance, according to consultancy firm Accenture.

Companies can use their resources to develop capabilities that provide a strong competitive advantage. Developing an efficient supply chain, for example, gives a company the capability to respond rapidly to changing market opportunities and get new products to market before competitors can react. The ability to reduce time to market is an important competitive advantage, according to the Harvard Business Review.

When a company is able to create barriers to entry, it develops a powerful competitive advantage. Registering product patents, for example, can prevent market entrants from competing directly with similar products. Where raw materials or other important components are scarce, companies secure supplies to protect their business and reduce competitors’ ability to source essential supplies.