When a company determines that a competency provides a competitive advantage it is referred to as?

Competitive advantage refers to factors that allow a company to produce goods or services better or more cheaply than its rivals. These factors allow the productive entity to generate more sales or superior margins compared to its market rivals. Competitive advantages are attributed to a variety of factors including cost structure, branding, the quality of product offerings, the distribution network, intellectual property, and customer service.

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Criteria for Determining Core Competencies
Competitive Advantage Strategies
How Core Competencies Benefit Companies
How Ohio University Can Help
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Competitive advantage is what makes an entity's products or services more desirable to customers than that of any other rival.
Competitive advantages can be broken down into comparative advantages and differential advantages.
Comparative advantage is a company's ability to produce something more efficiently than a rival, which leads to greater profit margins.
A differential advantage is when a company's products are seen as both unique and of higher quality, relative to those of a competitor.

Competitive advantages generate greater value for a firm and its shareholders because of certain strengths or conditions. The more sustainable the competitive advantage, the more difficult it is for competitors to neutralize the advantage. The two main types of competitive advantages are comparative advantage and differential advantage.

The term "competitive advantage" traditionally refers to the business world, but can also be applied to a country, organization, or even a person who is competing for something.

A firm's ability to produce a good or service more efficiently than its competitors, which leads to greater profit margins, creates a comparative advantage. Rational consumers will choose the cheaper of any two perfect substitutes offered. For example, a car owner will buy gasoline from a gas station that is 5 cents cheaper than other stations in the area. For imperfect substitutes, like Pepsi versus Coke, higher margins for the lowest-cost producers can eventually bring superior returns.

Economies of scale, efficient internal systems, and geographic location can also create a comparative advantage. Comparative advantage does not imply a better product or service, though. It only shows the firm can offer a product or service of the same value at a lower price.

For example, a firm that manufactures a product in China may have lower labor costs than a company that manufactures in the U.S., so it can offer an equal product at a lower price. In the context of international trade economics, opportunity cost determines comparative advantages.

Amazon (AMZN) is an example of a company focused on building and maintaining a comparative advantage. The e-commerce platform has a level of scale and efficiency that is difficult for retail competitors to replicate, allowing it to rise to prominence largely through price competition.

A differential advantage is when a firm's products or services differ from its competitors' offerings and are seen as superior. Advanced technology, patent-protected products or processes, superior personnel, and strong brand identity are all drivers of differential advantage. These factors support wide margins and large market shares.

Apple is famous for creating innovative products, such as the iPhone, and supporting its market leadership with savvy marketing campaigns to build an elite brand. Major drug companies can also market branded drugs at high price points because they are protected by patents.

If a business can increase its market share through increased efficiency or productivity, it would have a competitive advantage over its competitors.

Lasting competitive advantages tend to be things competitors cannot easily replicate or imitate. Warren Buffet calls sustainable competitive advantages economic moats, which businesses can figuratively dig around themselves to entrench competitive advantages. This can include strengthening one's brand, raising barriers to new entrants (such as through regulations), and the defense of intellectual property.

Competitive advantages that accrue from economies of scale typically refer to supply-side advantages, such as the purchasing power of a large restaurant or retail chain. But advantages of scale also exist on the demand side—they are commonly referred to as network effects. This happens when a service becomes more valuable to all of its users as the service adds more users. The result can often be a winner-take-all dynamic in the industry.

Comparative advantage mostly refers to international trade. It posits that a country should focus on what it can produce and export relatively the cheapest—thus if one country has a competitive advantage in producing both products A & B, it should only produce product A if it can do it better than B and import B from some other country.

There are many avenues for companies to pursue to gain an edge against other businesses in their industry. In order to stand out, companies look to promote unique aspects of their business that make them better than the competition and more attractive to consumers. These differentiating characteristics of a company are referred to as core competencies. Core competencies are proficiencies or resources that give businesses a competitive advantage. If companies are able to develop their core competencies, they have a greater shot at beating out the competition and reaping the benefits.

Criteria for Determining Core Competencies

There are three main criteria that organizations can follow to determine the strategic strengths that will give them a competitive advantage. First, a core competency must bring with it the potential for accessing a wide variety of markets. This ensures that the product or service has an initial value with the added potential for even greater value. The second trait requires that the core competency adds to the customer benefit of the end product or service, which means that it is essential to the company’s final output and is not substitutable. The third criterion requires that the competency be difficult and costly to imitate. If a company’s core competency is unique and rare enough that competitors are unable to reproduce it, competing businesses will be unable to match their success.

Most successful companies have strong core competencies that they exploit to maximize business and profits. For instance, Amazon’s goal of being the “most customer-centric company on earth” embodies the core competency that gives them competitive advantage over numerous other retailers. Companies should be aware that just because their core competency has brought them success once, they may not always have the advantage when markets and consumers change. They must be able to change and adapt by developing new, updated core competencies that can help them retain their edge.

Competitive Advantage Strategies

Companies can achieve a competitive advantage a number of ways. Three common and effective strategies which companies have used to find success are cost leadership, differentiation, and market segmentation. Cost leadership refers to bringing consumers goods at a lower price. Companies can achieve cost leadership by improving efficiency in their operations. If they can lower overhead costs in manufacturing, labor, resources, and every other aspect that goes into the production of their goods or services, they can give consumers the greatest value, which can lead to increased sales and customer loyalty.

Differentiation refers to providing better or unique products. Companies can do this by making the highest-quality products, delivering services faster than competitors or reaching more customers quickly and conveniently. Companies achieve differentiation by using creativity and innovation to fill a need or solve a problem that no other company has been able to solve. Since these companies are able to make a higher-quality product, they are able to charge more, which increases their profit margins.

Market segmentation, which is also referred to as focus, is another strategy for achieving competitive advantage. It requires that companies understand the specific needs of their target market better than their competitors. This often involves focusing on a particular niche market that larger corporations overlook. This strategy can be combined with the cost leadership or differentiation strategies. For example, some companies differentiate themselves by providing a unique, personalized service to a select group who they know will be willing to pay more for the ease of the one-on-one service.

How Core Competencies Benefit Companies

Developing core competencies enables organizations to gain a competitive advantage with the express benefit of increasing sales and profits. Companies achieve this through innovation in developing products and services. While seeking ways to fill niche target markets, deliver services quickly and efficiently, and increase product quality, companies are bringing consumers better products and better values. This is something that customers recognize and payback with loyalty. Another benefit of developing core competencies is that it helps organizations establish the essence of their brand. If a company’s core competency lies in its outstanding customer service, then that is also an excellent attribute that can be used for marketing its brand.

Whether launching a new business idea or rebranding a product to fit the current market, developing core competencies can lead to a competitive advantage. Companies need to exploit the special strengths that make their product or service stand out among others in the industry. Understanding these concepts will set resourceful and strategic companies apart from the rest.

How Ohio University Can Help

At Ohio University, we understand how important an MBA can be to advancing your career. We also know that your MBA should be affordable, engaging, and academically-rigorous. That’s why we have designed an online MBA that is comprehensive and challenging, yet flexible to fit your lifestyle. When you earn your MBA online from Ohio University you are making a conscious decision to improve your professional value and position yourself for current and future business opportunities.