A competitive advantage is a resource that enables a business to gain an advantage over its competitors, whether it's something that reduces costs, increases efficiency or introduces a superior technique or process. In creating a competitive advantage analysis, one might look at potential threats from others in the market. Looking at the political, economic, social and technological (PEST) aspects of a market also can be beneficial. While that looks at such advantages from an external perspective, an analysis of a company's strengths, weaknesses, opportunities and threats (SWOT) can consider a company's advantages from an internal perspective.
An analysis that considers a business's competitive advantage can look at threats arising from other players in the market. Such an analysis might take into account the possibility of new entrants in the market and consider any barriers to entry that might make this unlikely. The bargaining power of the suppliers in the market is another factor that could be a problem or advantage to an enterprise, because the need to make concessions to suppliers could drive up production costs. The potential threat of substitute products making inroads into the market is another possibility that must be assessed in a competitive advantage analysis.
Another aspect of a competitive advantage analysis could be a PEST analysis. Such an analysis looks at political, economic, social and technological factors in relation to the market in which the enterprise is operating. The company’s competitive advantage could disappear or be rendered less effective if an enterprise operates in an unstable political environment with a threat of nationalization and expropriation. A volatile economic environment with a high inflation rate, fluctuating currency and interest rates or low or negative economic growth also could take away a competitive advantage. Social factors such as taste and fashion can easily affect demand for products, while technological change also may challenge a company’s leading position in a market.
Other competitive advantage analysis techniques might include a SWOT analysis that examines the strengths, weaknesses, opportunities and threats facing an enterprise. A competitive advantage analysis also could look at the features of the enterprise that differentiate it from its competitors and consider the extent to which these advantages are sustainable. These features might include the quality of management, the resources available in the company’s location, the level of training of the workforce or the interrelationships with other enterprises and innovative networks. The company’s ability to produce at low cost also could be analyzed in terms of economies of scale, utilization of assets, integration of the supply chain or skills of the workforce and the sustainability of these advantages.