Types of Competitive Advantages

Types of Competitive Advantages

Nations, regions, and economic sectors can develop competitive advantages over others. However, competitive advantages are usually not permanent since they can be gained but also lost. There are three major dimensions over which competitive advantages can be challenged:

  • Added value. A high added value implies technical or managerial expertise that is very difficult to replicate and could even be protected by patents. This implies that a product is systematically offered at a lower cost or of higher quality than a competing product.
  • Scarcity. Often related to the existing market size or the resources sector. If a market for a good is relatively small and thus scarce, potential competitors may be unwilling to enter this market. A good that has a mass-market (low scarcity) is also subject to intense competition.
  • Imitation costs. A simple product tends to have low imitation costs, and competitors can thus easily enter the market. A complex product, such as a high tech device, is much more difficult to replicate and often protected by patents.

Depending on the combination of these dimensions, an actor may find itself at some level of competitive advantage concerning its competitors. If the added value provided is high and the imitation costs are also high, an actor can be in a situation of sustained competitive advantage and achieve market dominance with high levels of profitability. On the other range of the spectrum, if a good has limited added value (cost parity or even a higher cost), is concerning a mass-market, and can easily be replicated. The concerned actors are facing a situation of competitive disadvantages that usually implies low profitability. Globalization has placed pressures on each of these dimensions by making a larger array of resources available (labor, parts, and raw materials) as well as a larger number of actors that can potentially compete.