Which of the following terms best represents a firms ability to achieve market superiority *?

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.

• 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.

Competitive advantage is the favorable position an organization seeks in order to be more profitable than its rivals. To gain and maintain a competitive advantage, an organization must be able to demonstrate a greater comparative or differential value than its competitors and convey that information to its desired target market. For example, if a company advertises a product for a price that's lower than a similar product from a competitor, that company is likely to have a competitive advantage. The same is true if the advertised product costs more, but offers unique features that customers are willing to pay for.

In the 1980s, professor Michael Porter from the Harvard Business School looked at successful businesses and created a framework for how leaders could think strategically about beating the competition. Porter suggested that companies analyze five important criteria, which Porter called the Five Forces, to gain an understanding for the competitive landscape. Once that had been achieved, he recommended the use of three generic strategies to help leadership make the best choice about which type of competitive advantage they should pursue.

Porter's Five Forces is an alternate model to SWOT (Strengths, Weaknesses, Opportunities, Threats) an analysis tool which is credited to Albert Humphrey at the Stanford Research Institute to help companies get a sense of their position within a competitive landscape. Porter taught his students at Harvard about SWOT analysis, but felt the tool had limitations because it placed too much focus on individual companies rather than on industries. Porter saw the need for a framework that also looked at the competitive landscape holistically, in the context of an entire industry. The simple framework that Porter developed for achieving a competitive advantage in the marketplace is still being taught in business schools today.

Porter's techniques for analyzing competitors

In his 1980 book, Competitive Strategy: Techniques for Analyzing Industries and Competitors, Porter maintains that the attractiveness of a market segment is determined by five competitive forces:

1. Threat of new entrants - How easy is it for a new competitor to enter the market?

1. Rivalry among existing competitors - How many competitors offer a similar product at a similar price?

1. Threat of substitute products or services - What is the likelihood a customer will switch to a similar product?

1. Power of buyers - How easy is it for buyers to drive prices down?

1. Power of suppliers - How easy it is for suppliers to drive prices up?

The first three forces are sometimes referred to as horizontal competition. Variables in horizontal competition include the possibility of new competitors entering the market, the rivalry among existing competitors and the threat posed by substitute products or services. The last two forces are sometimes referred to as vertical competition. Vertical competition is dependent upon supply chain, the price of raw materials, the cost of labor and the customer's relationship with a product, brand or company.

Porter's techniques for creating superior performance

In his 1985 book, Competitive Advantage: Creating and Sustaining Superior Performance, Porter proposed that once the potential for profitability in a market has been established, the next step toward gaining a competitive advantage is to decide whether to use a low-cost approach or a differentiation approach. And once this too has been decided, a third element that Porter calls focus needs to be nailed down; this part of the framework identifies who the product or service should be marketed to.

1. Cost leadership strategy - Should the product or service be offered at a lower price than the competitors'?

1. Differentiation strategy - Should the product or service have unique features or benefits that are so appealing that customers are willing to pay a premium price?

1. Focus strategy - Should the product or service target niche markets that are overlooked or underserved by competitors?

Porter also looked at competitive strategies from a long-term, sustainable angle and maintained that creating a sustainable competitive advantage not only helps boost a company's image in the marketplace, it also affects valuation and the potential for future earnings.

How to create a sustainable competitive advantage

Sustainable competitive advantage refers to maintaining a favorable position over the long term, which can help boost a company's image in the marketplace, its valuation and its future earning potential.

Strategic management expert Jay B. Barney published an article in 1991 that took Porter's ideas and expanded upon them, adding an element for sustaining a competitive advantage over time. Barney's article, entitled "Firm Resources and Sustained Competitive Advantage," suggested that instead of just looking at outside influences when analyzing the competitive landscape, companies should also look inward to achieve sustainable competitive advantage.

Barney wrote that previous frameworks, including Porter's, were based on the incorrect assumption that all companies within the same industry shared the same attributes. It is each company's differences, Barney pointed out, that should be exploited to gain a competitive advantage.

Resource-Based View (RBV) and VRIN

Barney proposed using a framework called the Resource-Based View (RBV). This competitive advantage framework places emphasis on a company's core competencies, the combination of skills and resources that make a company unique compared to the competition.

Barney maintained that for resources to hold potential as sources of sustainable competitive advantage, they should be valuable, rare, inimitable and non-substitutable (VRIN). Barney categorized resources as either being tangible or intangible. Tangible resources, such as technology, can be bought by other competitors to gain a competitive advantage. Intangible resources, such as positive brand recognition, however, cannot be bought and are the main source of sustainable competitive advantage.

Valuable - Does the resource have greater value, in terms of costs and benefits, than similar resources in competing companies?

Rare - Is the resource scarce when compared to the relative demand for its use or what it produces?

Inimitable - Can the resource be imitated or copied easily?

Non-substitutable - How difficult is it to replace the resource with a substitute?

To leverage their core competencies, companies can start by identifying their key resources and then use the VRIN framework to determine if the resource is robust enough to provide sustainable competitive advantage.