What is competitive advantage? Competitive advantage is a company's ability to outperform its competitors.

Competitive advantage can be achieved through low cost and differentiation. A c ompany is said to have achieved competitive advantage when its profit rate is hi gher than the average for its industry. The profit rate is based on return of sa les (ROS) or return of assets (ROA). The most basic determinant of a firm's profit rate is the gross profit margin. There are three reasons why a firm's gross profit margin may be higher: the unit price is higher, unit cost is lower, or it has both a higher price and a lower unit cost. When a firm charges a premium price or differentiates its product, it is using generic business-level strategies, according to Michael Porter. The building blocks of competitive advantage are efficiency, quality, innovatio n, and customer responsiveness. These building blocks are generic in that they p rovide four basic ways to lower cost and achieve differentiation. Any firm can a dopt these no matter what industry it is in or what product or service it provid es. Efficiency Efficiency is based on the cost of inputs required to produce a given output. T he more efficient a firm, the lower the cost of its inputs required to produce a given output. Efficiency helps a firm attain a low-cost competitive advantage. Employee productivity can be the key to efficiency. Quality The impact of high product quality on competitive advantage is the creation of a brand name reputation, greater efficiency and, thus, lower costs. This enhance d reputation allows the firm to charge a higher price. At the same time the cost s are down so profits are much higher, thus a higher competitive advantage. Qual ity has become imperative for survival in some firms. Innovation Innovation is defined as anything new or novel about a firm's operation or prod uct. Innovation gives a firm something unique. When a firm is the pioneer in its industry it can charge a higher price because of a lack of competition. Later, when there is competition, newcomers must deal with the pioneer's reputation. Customer responsiveness To achieve customer responsiveness a firm must deliver exactly what the customer wants when the customer wants it. A firm must do everything it can to identify and satisfy customer needs. Steps taken to improve quality and efficiency are co nsistent with the goal of high customer responsiveness. There may be a need to c ustomize goods and services to meet the demands of individual customers. Custome r response time has become a big factor in increasing customer responsiveness. O ther areas that aid in achieving higher customer responsiveness are superior des ign, superior service, and superior after-sales service and support. Distinctive competencies come from two sources: resources and capabilities. The se sources are both tangible and intangible. To achieve distinctive competency, a firm's resources must be both unique and valuable. A company's capabilities re fer to its skills at coordinating resources and putting them to productive use. A company needs to develop strategies that build on existing resources and capab ilities as well as build additional resources and capabilities. The durability of a firm's competitive advantage depends on three factors: the height of barriers to imitation, capability of competitors, and dynamism of the industry. Barriers to imitation are the factors that make it difficult for a com petitor to copy a firm's distinctive competencies. The major determinant of the capability of a competitor is its prior strategic commitments. A dynamic industr y changes rapidly, thus it has a high rate of product innovation. Companies fail for three related reasons: inertia, prior strategic commitments,

and the Icarus Paradox. The inertia argument is that firms find it difficult to change their strategies and structures to adapt to changing competitive conditi ons. Prior strategic commitments not only limit a firm's ability to imitate its competitors but may also put it at a competitive disadvantage. The Icarus Parado x occurs when a firm becomes so dazzled by its early success that its believes m ore of the same effort is the way to future success. To avoid failure a firm must focus on the building blocks of competitive advant age. A firm must identify the best industrial practice and adopt it. The best wa y to determine the best industrial practice is through benchmarking. Finally a f irm must overcome inertia to survive.