Competitive Advantage and Comparative Advantage are concepts of economics. Both the concepts play an important role in the decision-making of a country (and company) when deciding on exports, products, or services to offer or devising a business strategy. It is important for a country (and company) to understand the products in which it has a competitive as well as comparative advantage. People often use both these terms interchangeably because they look and sound very similar. But, the two concepts are very distinct from each other. To know these two concepts clearly, it is important that we know and understand the differences between competitive advantage vs comparative advantage.
Before we detail the differences between competitive advantage vs comparative advantage, let’s get an idea of what the two concepts mean.
- Competitive Advantage vs Comparative Advantage – Explanation
- Competitive Advantage vs Comparative Advantage – Differences
- Competitive Advantage vs Comparative Advantage – Which is Important?
- Final Words
Competitive Advantage vs Comparative Advantage – Explanation
Comparative advantage is a relative term and not the absolute one. And comparative advantage refers to the ability of a country (or company) to manufacture certain products at less than the opportunity cost for others. Opportunity cost is the cost that one forgoes by selecting one option over another. For example, the opportunity cost of working overtime is not able to spend the same time with family. Suppose two products use the same raw material, and that is in short supply. And if we choose one, we are dropping the other one as the raw material has already been consumed. That will be the opportunity cost.
In simple words, comparative advantage means the efficiency in manufacturing one product. Or the ability of one country to manufacture a product efficiently from all other products that it could produce. This concept helps to explain why a monopolistic trade is possible even if one country can produce all products with fewer resources in comparison to other products.
For example, UAE and China produce diesel oil. UAE, however, has easy access to oil, but China first needs to import oil and then produce diesel oil. Between the two countries, UAE has a comparative advantage over China.
Competitive advantage, in contrast, refers to any benefit or advantage that one country (company) has over others. This benefit or advantage could be lower cost of material, lower cost of labor, easy access to raw material,s and more. Or, we can say that one company has a competitive advantage if it is able to offer greater value to customers, either by means of lower prices or offering more benefits and services at the same price. A business or a company always strives to achieve a competitive advantage.
As per Michael Porter, a firm can have two types of competitive advantage. The first is – offering the same product or service as others but at a lower cost. And second is by offering a better product or service, but at the same price as others.
Now that you have an idea of what the two concepts mean let’s look at the differences between competitive advantage vs comparative advantage.
Competitive Advantage vs Comparative Advantage – Differences
Following are the differences between competitive advantage vs comparative advantage:
Comparative advantage helps a country (or company) understand how it could benefit due to lower opportunity costs by selecting one product over another. Competitive advantage, in contrast, helps a company (or country) to understand how it could benefit by having a distinctive advantage over others in offering the same type of product or service.
Economics or Business Concept
The comparative advantage is more of an economics concept and helps to facilitate trade between two nations. In contrast, competitive advantage is more of a strategic management concept. This is because it helps companies to beat the competition. Many experts, however, argue that a nation can have both a competitive advantage as well as a comparative advantage.
What do They Indicate?
Comparative advantage helps in understanding patterns and gains from international trade. This could be due to the availability of natural resources, skill set, etc. On the other hand, competitive advantage explains which companies or countries are in a better position to win the competition.
How One Achieve?
A country (or company) gets a comparative advantage if the economies of scale allow it to produce a product more efficiently than others. When a business strategy helps a company (or country) to differentiate its product or service from others, then that company (or country) is said to have a competitive advantage.
Having a comparative advantage doesn’t mean differentiation; instead, it primarily suggests cost efficiency. However, having a competitive advantage does mean that a company is able to differentiate its product or service from others. The differentiation could be in terms of cost or any other feature.
Competitive Advantage vs Comparative Advantage – Which is Important?
Comparative advantage is less significant nowadays because of globalization. Now, any company can get a comparative advantage by outsourcing the inputs, such as raw materials, capital, and others. That is why companies nowadays focus more on the competitive advantage by differentiating their products from others. The differentiation now is mainly on non-cost aspects, such as quality, features, and more.
For example, Apple and Samsung both offer high-end phones. But, Apple’s iPhones are perceived to be of higher quality.
Both competitive advantage and comparative advantage play a crucial role in helping countries (companies) decide on the products they should produce. Both these advantages may appear very similar to each other because the comparative advantage is a component of the competitive advantage. But, by understanding the two, a country (or company) is in a better position to make a decision.