Bethany has taught college business courses and has a master's degree in organizational and human resource development.
This lesson explores the concept of sustainable competitive advantage, or what makes a company uniquely more successful than its industry competitors. How do companies achieve a competitive advantage? And once a competitive advantage is achieved, how can it be maintained?
Definition of Sustainable Competitive Advantage
Competitive advantage exists when a particular company consistently outperforms other companies in the same industry. A company is considered to be outperforming others if profits are higher than the competition's profits. The competitive advantage is thought to be stronger when it lasts for a longer period of time. Those companies who are able to maintain a competitive advantage for many years are thought to have a sustainable competitive advantage.
If sustainable competitive advantage is dependent on maintaining a higher profit margin than other companies in the same industry, how does a company set out to develop a strategy to both achieve and maintain competitive advantage? The two main components of profit are that customers both value the goods and services and will pay for them and that a company can keep production costs related to goods and services low, so that there is a higher profit margin.
For example, if Sally's Cupcake Shop can make a chocolate cupcake for 25 cents and sell it for $1.00, the profit on each cupcake is 75 cents. Sally's customers will pay $1.00 per cupcake because the cupcakes are delicious and made with high quality ingredients. A few blocks away, Bobby's Cupcakes & More spends 40 cents making a chocolate cupcake, but can only sell the cupcake for 50 cents. Bobby's profit is only ten cents per cupcake. Customers will not pay as much money per cupcake, because Bobby's cupcakes are not as tasty and are not made with ingredients that match the quality of Sally's cupcakes.
Sally will be able to maintain a competitive advantage as long as she keeps costs lower than the amount customers will pay, allowing her to build a higher profit than Bobby. If this continues year after year, even as costs and prices change, Sally would be said to have the sustainable competitive advantage. However, Sally cannot become too comfortable with her advantage and instead must continue to find ways to maintain a competitive advantage. Bobby may become motivated to outperform Sally. If Bobby is able to increase his own profit substantially, he could potentially take away the sustainable competitive advantage.
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A well-known example of a company with a sustainable competitive advantage is Walmart. Walmart maintains a sustainable competitive advantage in part because its strategies are specific to its organization and these strategies are known for creating a gap between Walmart's performance and that of its competitors. For example, Walmart has created a complicated and detailed distribution center network, which allows it to move goods to stores more quickly and efficiently than its competitors, while maintaining prices lower than its competitors.
Another example of a company with a sustainable competitive advantage is Apple, the maker of Apple computers, as well as iPods, iPhones and iPads. For many years, Apple has been the leader in the cell phone industry, outperforming other popular phones such as Blackberry. If Apple can maintain consumer interest, as well as continue to maintain a higher profit margin, it may maintain the competitive advantage. However, if a company, such as Samsung, begins to create a higher profit margin, the advantage may shift.
Competitive advantage exists when a particular company consistently outperforms other companies in the same industry. A company is considered to be outperforming others if profits are higher than the competition's profits. Those companies who are able to maintain a competitive advantage for many years are thought to have a sustainable competitive advantage.
Companies who maintain the competitive advantage have determined how to balance the costs of goods with the consumer desire to purchase the good for a certain price. Companies who create a larger gap between expense of product creation and payment by the consumer are more likely to maintain a sustainable competitive advantage.
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