Competitive Advantage

by Investing School on October 27, 2010

Competitive advantage refers to the position that a company has that will allow it to earn more of a return on its investments than it puts in. It was a theory proposed in 1990 by Michael Porter in reaction to the concept of comparative advantage.

Competitive advantage recommends that a company should pursue policies that will create superior quality goods which can be sold at high prices in the marketplace. Michael Porter emphasizes in his theory that productivity growth should be a main focus of the company’s strategies. He also asserts that cheap labor can be found everywhere and that it is not necessary to have natural resources to have a stable and thriving economy.

Competitive advantage may occur when a company has or creates the ability to outperform its competitors. These abilities might come from having access to natural resources or inexpensive power. You can also include information technology, a highly skilled workforce or new technologies as resources. If these give you the opportunity to outperform your competitor then you have the competitive advantage.

When you have excellent performance that is achieved through competitive advantage then you will have secured market leadership. The theory purports that businesses should manipulate their resources in a way that will make it possible to have the edge on the marketplace and thereby achieve the competitive advantage.

Once you have the competitive advantage, you will achieve superior performance. The foundation of such performance will come from achieving competitive advantage. Having superior performance should be the topmost goal of a company.

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