Competitive advantage and core competency are interconnected concepts that both focus on helping companies gain a better footing in the market and increase their profits. It refers to a specific set of skills or knowledge unique to a company and not accessible 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 focusing 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 is a set of unique strengths or characteristics that a company possesses that enables it to outperform its competitors.
- Core competence is a specific set of capabilities or resources that a company possesses that enables it to create and deliver value to customers.
- Competitive advantage is focused on relative performance against competitors, while core competence is focused on the specific capabilities that underlie that performance.
Competitive Advantage vs Core Competence
A competitive advantage is a specific advantage that a company has over its competitors, while core competence is a broader concept that encompasses the company’s overall capabilities and expertise. A company’s core competencies can contribute to its competitive advantage by providing values.
Competitive advantage is helpful for competitive strength against 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 concerning its rivals||The 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 a company to gain a presence in several markets|
What is a Competitive Advantage?
Many factors can be rightly referred to as competitive advantages. Everything from more significant profits, and cheaper production through outsourcing labour 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, categorized it into two types – cost and differential in his famous book’ Competitive Advantage’.
A cost advantage is achieved when a company works efficiently and reduces production costs. This increases the company’s profits as they can sell the product at the same price as their competitors but spend less on producing it.
More significant profit margins can also lead to a reduction in prices, thereby building a more extensive customer base for the company as consumers will prefer cheaper options.
Cost advantage can be achieved through techniques like finding favourable manufacturing locations and investment in R&D. Differential advantage kicks in when a company has something 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 enhancing 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 particular 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 and a Five Forces Analysis and comparing the results of the two.
The drawback of competitive advantage is that other companies can quickly adopt the factors to facilitate that advantage, so it isn’t easy 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 it can diversify its products according to the needs and changes in the market.
Secondly, the company should significantly contribute 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 easily, it will continue losing customers to its rivals.
By isolating the strengths of the company and investing in its development, the company can build the necessary skills to make them unique.
Experts even argue that a company should outsource all non-core work 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 their competencies and using them to create increased value in the eyes of consumers.
All strategies must be decided after considering these strengths to make the company work more structured.
Main Differences Between Competitive Advantage and Core Competence
- A competitive advantage is gained when a company achieves a favourable position in quality, profits, etc., over its rivals.
- Core competence is a particular set of skills or knowledge unique to a company.
- Rivals can 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 challenging 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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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.