A competitive advantage is what separates a firm from its competitors in the marketplace and makes it attractive to its customers. There are two types of competitive advantages — comparative and differential.
A comparative advantage is mainly a price difference. While any firm can lower its prices, not all can do so without greatly decreasing profits. Firms that have a comparative advantage are able to produce products more efficiently than their competitors. This results in a lower cost of production, often due to the use of technology. Such firms are able to maintain a higher profit margin than that of their competitors. Because profit margins are higher, these firms have higher returns as well.
A comparative advantage can also be the result of the firm’s location. For example, a firm operating in China is able to take advantage of lower labor costs. A comparative advantage doesn’t mean that a firm creates a better product. Instead, it means a firm creates the same product at a better value (i.e., lower price).
A differential advantage means a firm's products are viewed as higher quality and more unique compared to its competitors. These firms often have a strong brand. They have superior products and can charge premium prices. Apple is a great example of a company that has a differential advantage. It has a well-recognized brand, creates high-quality products, and charges premium prices.
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