What is a Competitive Advantage?

Definition: A competitive advantage is the unique ability of a firm to utilize its resources effectively, managing to improve customer value and position itself ahead of the competition. In other words, it’s something that a company does better than its competitors because of some proprietary process, service, or brand.

What Does Competitive Advantage Mean?

What is the definition of competitive advantage? A firm gains a competitive advantage either through lower cost offerings (cost advantage) or through product differentiation (differentiation advantage). The firm exploits its resources, such as brand equity, brand recognition, distribution network or patents and trademarks, to create a cost advantage.

The effective utilization of its resources develops the firm’s distinctive competencies, which facilitate innovation, efficiency, and product quality, thus improving customer responsiveness and customer satisfaction. In the same way, a firm that seeks to achieve a competitive advantage targets larger markets, aiming to differentiate its offerings, increase its market share, and strengthen its brand recognition.

Let’s look at an example.


There are several great examples of differentiation comparative advantage, such as Nike, Google, and Honda. All these brands achieve important economies of scale by their strong brand name that increases customer loyalty and customer satisfaction.

Nike offers a great variety of sports goods that can satisfy any consumer, and in turn, consumers are willing to pay a premium for the Nike products because they trust the company, and they like its offerings. Thus, through differentiation, Nike gains a competitive edge against other sports goods brands.

Google is the number one search engine and the best website for optimization searches that returns the most accurate results in no time. Google has achieved a competitive advantage by offering innovative services, such as Google Search, Gmail, Google Finance, Google Docs, and more, maintains an incredibly powerful infrastructure and occupies 70% of the Internet market.

Honda capitalizes on its strong brand reputation to offer reliable vehicles, which consistently rank very high in terms of fuel efficiency, value for money, and quality. In addition, Honda is one of the first car companies to release a hybrid vehicle and continues to be a leader in the field.

Therefore, in the real business world, firms gain a competitive edge by capitalizing on their know-how, technological infrastructure, the cost of production, and overall resources to be able to offer customer value and high-quality products.

Summary Definition

Define Competitive Advantage: A competitive advantage is when a company is able to out perform its competitors by running its operations more efficiently, making better, less expensive products, and becoming more appealing to consumers.