Competitive advantage and core competency are inter-connected concepts that both focus on helping companies gain better footing in the market and increase their profits. It refers to a specific set of skills or knowledge that are unique to a company and which are not easy for rivals to reproduce.
When a company has achieved an edge over its rivals due to some factor that allows it to work more efficiently, produce products of superior quality, and drive up profits, it is said to have gained a competitive advantage.
This can be done by placing focus on the pricing structure, quality control, branding, etc. Having a core competency usually, but not always, leads to the creation of a continuous competitive advantage for the company.
Competitive Advantage vs Core Competence
The difference between Competitive Advantage and Core Competence is that competitive advantage refers to a strong point of a firm to perform better than its rivals. Core competence refers to particular knowledge, skills, or technology that the competitors cannot follow.
Competitive advantage is useful for competitive strength against the competitors, whereas core competence is excellence in various businesses and products.
|Parameter of Comparison||Competitive Advantage||Core Competence|
|Definition||Conditions that place a company in a favourable position with regard to its rivals||Specific set of skills or knowledge unique to a company|
|Duration||Short term measure||Long term measure|
|Market||Places company over rivals in a particular market||Allows company to gain presence in a number of markets|
What is a Competitive Advantage?
There are many factors that can be rightly referred to as competitive advantages. Everything from greater profits, cheaper production through outsourcing labor, to brand prestige can fall under this definition.
A company will have a competitive advantage when it finds itself in a position that makes it superior to its rivals in the market.
Michael Porter, a professor at the Harvard Business School in his famous book ‘Competitive Advantage’ categorized it into two types – cost and differential.
A cost advantage is achieved when a company is able to work efficiently and bring down production costs. This increases the profits of the company as they can sell the product at the same price as their competitors but spend less on producing it.
Greater profit margins can also lead to a reduction in prices thereby building a larger customer base for the company as consumers will prefer cheaper options.
Cost advantage can be achieved through techniques like finding favorable manufacturing locations and investment in R&D. Differential advantage kicks in when a company has something to offer that is unique or superior to the goods and services offered by rivals.
The product must be such that consumers must be able to recognize its superiority and find it worth paying a premium price for it.
Improving the durability of products, providing quality customer service, and enhanced safety levels are a few examples of how a differential advantage can be achieved. Besides this categorization, Porter also defined three generic strategies by which companies can achieve a competitive advantage.
- The first one is cost leadership which involves reducing production costs and increasing market share through lower prices.
- Second is the differentiation strategy which requires companies to make their goods and services unique from their rivals by providing better specifications, customer care, etc. and using innovative marketing techniques.
- The third strategy advocated by Porter is the Focus strategy which involves concentrating the company’s efforts on understanding a certain niche market and all its requirements.
Then a cost or differentiation strategy tailored towards that market can be adopted. Companies are advised to calculate which strategy works best for them by conducting a SWOT as well as a Five Forces Analysis and comparing the results of the two.
The drawback of competitive advantage is that the factors to facilitate that advantage can easily be adopted by other companies as well so it is difficult to sustain.
What is Core Competency?
In an article in the Harvard Business Review of 1990, the concept of core competence was introduced by professors Gary Hamel & C.K. Prahalad who defined it as ‘a harmonized combination of multiple resources and skills that distinguish a firm in the marketplace’.
In essence, core competence refers to a particular set of skills or strategies that set a company apart from its rivals. According to Hamel and Prahalad, there are three characteristics that can be used to identify a core competence.
Firstly the company must be able to provide potential access to a wide variety of markets. The skills and technologies developed by the company must be such that the company is able to diversify its products according to the needs and changes in the market.
Secondly, the company should make a significant contribution to the perceived customer benefits of the end product. At all times, the needs of the customer and the necessity of making the product visibly unique and superior to them should be kept in mind.
And thirdly, it must be difficult for competitors to imitate. Uniqueness is a fundamental necessity to achieve core competence because if the company’s product can be reproduced with ease, they will continue to lose customers to their rivals.
By isolating the strengths of the company and investing in their development, the company can build the necessary skills to make them unique.
Experts even argue that a company should outsource all non-core work in order to focus more thoroughly on core competencies. It is essential to keep working on them in order to leave no space for competition.
Companies can create a sustained, continuous competitive advantage by figuring out what their competencies are and using them to create increased value in the eyes of consumers.
All strategies must be decided after taking into account these strengths in order to make the work of the company more structured.
Main Differences Between Competitive Advantage and Core Competence
- A competitive advantage is gained when a company achieves a favorable position in terms of quality, profits, etc. over its rivals.
- Core competence is a particular set of skills or knowledge that is unique to a company.
- Rivals can also adopt the same methods to achieve a competitive advantage so it is only a short term measure to gain success.
- A company’s core competence is marked by its uniqueness and is difficult to imitate so it is a long term measure to gain success.
- Core competencies can be used to create sustained competitive advantage.
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