Elizabeth teaches undergraduate courses in Business and Information Technology for the last 7 years. She is currently on course to completing a Doctorate in Information Systems
What Is Competitive Advantage?
Imagine that you own an envelope business. You're struggling to compete with another company that also sells envelopes. Both of you sell essentially the same product to the same customers.
To make your business stand out, you need a competitive advantage. A company with a competitive advantage stands out to consumers and is in a more favorable position than other businesses in the same industry. There are lots of different ways for a company to gain a competitive advantage, but most companies do it through comparison or differentiation.
A comparative advantage occurs when a company can produce products more efficiently or at a lower cost than its competitors. A differential advantage is created when a company's product is viewed as different, or better, than a competing company's products. For example, think about generic medication versus brand name medication. Generic drugs often have a comparative advantage because they are cheaper than brand name drugs. However, brand name drugs typically have a differential advantage because many consumers assume that brand name drugs are superior in quality to generic drugs.
Corporate Social Responsibility
You understand that your envelope business needs a competitive advantage, so you decide to try to differentiate your product by practicing corporate social responsibility (CSR). Corporate social responsibility is a term used to describe the initiatives a company takes to regulate its operations and take responsibility for the company's impact on environment and society.
CSR is a type of self-regulation that goes above and beyond the rules set by a government agency to regulate an industry. Your company has decided to create its envelopes from 100% recycled materials even though there is no government regulation that requires it. You are engaging in corporate social responsibility to help society by reducing the impact your company and product has on the environment. This gives you a differential advantage over your competitor.
CSR & Competitive Advantage
Companies operating in the current era are taking corporate social responsibility much more seriously than they did in the past. One reason for this is the clear link between CSR and competitive advantage. Let's take a closer look at this link to understand the justifications for CSR adoption.
1. Moral Obligation
Companies are legally obligated to comply with consumer laws, environmental laws, and employment laws, but they also have a moral obligation to society that must be upheld. Nowadays, companies face a lot of public scrutiny and can be deemed unfair or unethical even if they do not break any laws. For example, let's say your envelope company pays minimum wage to your employees. You are complying with the law, but wage advocates who feel that you have a moral obligation to pay your employees a livable wage will view you in a negative light, especially if your wages do not compare with those of your competitors. A company that considers moral obligations and ethics when developing a business strategy could end up with a clear competitive advantage.
2. Goodwill and Image
Building goodwill with governments and stakeholders is important. Companies that practice CSR are perceived as good by governments and other important stakeholders. CSR initiatives can also help a company build and enhance its reputation in industry and may have a direct impact on how investors, consumers, and employees view that company. For example, a company that sells banking solutions may be operating within an industry where other similar companies donate resources, such as financial support, to the local community. If the banking solutions company wants to maintain some competitive advantage it may need to participate in similar initiatives.
Sustainability of a company's operations is important for long-term success. For example, a manufacturing company that relies on a non-renewable resource and strips the environment of that resource without replacing it will have trouble using that resource in the future. Companies who understand and address the long-term effects of their operations on resources in the environment have a sustainable operation that gives them a competitive advantage.
4. Risk Management
Companies can also gain a competitive advantage by managing their risks better than their competition. Many companies do this by considering the impacts of their value chain, which is the process by which companies receive and alter raw materials to create and sell a finished product. For example, an oil mining company that understands the risk of its procurement operations to the environment can consider CSR policies that mitigate risk and reduce negative impact.
All right, let's now take a moment to review. A competitive advantage is when a company stands out to consumers and is in a favorable position in comparison to other businesses in this same industry. A comparative advantage occurs when a company can produce products more efficiently or at a lower cost than its competitors. A differential advantage is created when a company's product is viewed as different, or better, than a competing company's products.
One of the ways that a company can gain a competitive advantage is through corporate social responsibility (CSR), which is a term used to describe the initiatives a company takes to self-regulate its operations and take responsibility for the company's impact on environment and society.
CSR strategies that can help a company gain a competitive advantage involve the following:
- Meeting moral obligations that go beyond industry laws and regulations.
- Building goodwill with governments, stakeholders, employees, and consumers by improving image and reputation.
- Being mindful of resource use to ensure sustainable operations.
- Considering the environmental impacts of their value chain, which is the process by which companies receive and alter raw materials to create and sell a finished product, all in order to mitigate risk.
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