by Sanda Berar

Created on: November 07, 2009   Last Updated: November 19, 2009

Competitive advantage is the edge a company enjoys over other businesses; the reason why people choose to do business with this company rather than the competitors. It is the advantage a company has which is difficult or impossible to be replicated by other companies.

Michale Porter has defined five forces of competition and looked across the corporate borders to survey the competitive landscape. Gary Hamel and C.K. Prahalad looked within the company, in search of the 'core competencies' that they argued are the source of true competitive advantage.

According to the competitive advantage model of Porter, a competitive strategy takes offensive or defensive action to create its position in an industry, cope successfully with the competitive forces and generate supperior profit or return of investment.
Porter defined two basic types of competive advantage - cost leadership and differentiation. Both can be narrowed down which results in the third viable competitive strategy, focus.

#1 With the cost leadership strategy, the firm aims to create added value by delivering same benefits as its competitors, but at a lower cost. The competitive advantage, and above-the-average profit within an industry is in this case achieved through economies of scale.
Companies such as McDonald's or Toyota have been successfully achieving competitive advantage through cost leadership, by offering the best buy or lowest cost in their category of goods.

#2 With differentiation strategy, the firm is targeting a product leadership where emphasize is on innovation, superior quality and functionality. Being first on market with new, leading-edge features is the main focus of these businesses.
A differentiatior can not ignore the cost and should try to deacrese it in all the areas that do not affect differentiation features. The competitive advantage and high return of investment is achieved in this case through high margins.
This value proposition is followed by companies such as Sony or Mercedes that command high-prices, above the average in their categories, but offer high-quality and innovative products.

#3 Focus means serving a particular, niche market better than anyone else. This can be an effective technique for the small business struggling to compete against larger businesses. The focus strategy has itself two variants, the cost focus and the differentiation focus.

In a higly influential 1990 Harvard Business Review article, 'The core competence of the corporation', Hamel and Prahalad

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