Competitive Advantage

In a competitive market, profits tend to attract rivals, who compete them away. A competitive advantage helps a business protect its profits.

Advantages can come from many sources. A business might have lower costs because of scale, efficient processes or access to cheap resources. It might offer a better or more distinctive product, through quality, design, technology or brand reputation. It might have a strong location, valuable patents, exclusive contracts, a loyal customer base or a network that rivals cannot easily copy.

For example, a large supermarket chain can negotiate lower prices from suppliers because it buys in enormous quantities, allowing it to offer lower prices than smaller rivals while still making a profit.

The most valuable competitive advantages are sustainable: hard for competitors to copy or overcome over long periods. Temporary advantages, such as a new product feature that rivals soon match, may not provide lasting benefits. Investors pay close attention to whether a company's advantage is likely to last, because it strongly affects long-term profitability.