What Is Cost Advantage

What Is Cost Advantage

When a company accomplishes gains that exceed the average for its business, the company is said to possess a competitive edge over its competitors. The goal of much of strategic management is to achieve a competitive advantage which is sustainable. Michael Porter recognized two basic types of competitive benefit: cost benefit - distinction benefit - A competitive edge exists when the company can deliver the same benefits as rivals, but at a lower cost, or deliver benefits which exceed those of competing products.

Thus, a competitive edge enables the company to create higher value for its customers and outstanding profits for itself. Cost and distinction gains are called positional benefits since they explain the firm's position in the marketplace as a leader in either price or distinction. A source based view emphasizes that a company uses its resources and capabilities to make a competitive edge which finally leads to superior value production. The next diagram combines the source based and positioning perspectives to illustrate the idea of competitive advantage: A Model of Competitive Edge - Cost Benefit - or - Differentiation Edge - Value - Generation - Resources and Capabilities - In compliance with the resource based perspective, so as to develop a competitive edge the company should have resources and capacities that are outstanding to those of its rivals.

Without this excellence, the opponents simply could replicate what the company was doing and any advantage rapidly would disappear. Resources are the firm specific activities useful for creating a cost or distinction advantage and that few rivals can acquire easily.

The following are some samples of such resources:


Patents and trademarks - Proprietary know how - Installed client Base - Reputation of the company - Brand equity - Capabilities refer to the company's capability to utilize its resources effectively. An example of a capability is the capability to bring a product to market quicker than competitors. Such capabilities are incorporated into the routines of the business and aren't easily documented as procedures and therefore are difficult for competitors to replicate. The firm's resources and capacities together form its distinctive competencies. These competencies enable innovation, efficiency, quality, and client responsiveness, all of which can be exploited to create a cost benefit or a distinction advantage.

Cost Edge and Differentiation Edge:


Competitive benefit is created by using resources and capacities to achieve a lower price structure or a differentiated product. A company positions itself in its sector through its choice of cost effective or differentiation. This choice is a central component of the company's competitive strategy. Another important decision is how wide or small a market section to target. Porter formed a matrix with cost advantage, differentiation benefit, and a broad or narrow focus to identify a set of generic approaches that the company can pursue to create and maintain a competitive advantage. Value Generation - The firm creates value by executing a series of activities that Porter recognized as the value chain.


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