NAME: DATE:

Competitive Advantage

Competition is a familiar idea. People compete in sports, in talent

contests, and to get into good schools and jobs. Businesses compete too—they
compete for your money. A business that makes more money than the average
for their field or type of business has what’s called a competitive advantage.
The term can also be used more generally to mean a business that appeals to
customers more than its competitors.

There are different kinds of competitive advantage. One is a cost

advantage. This is when a business offers the same product as its competitors
at a lower cost. When they sell their product, they make more money than their
competitors even if they charge the same or even a lower price. An example of
cost advantage would be if a restaurant buys local food their shipping costs are
lower. They then can keep more of the money from their sales.

Another kind of competitive advantage is differentiation advantage. This

advantage is often based on perception and marketing. Differentiation
advantage occurs when a product’s sales increase compared to a similar
product’s sales. Whether the business makes a better quality product, or it is
more popular due to marketing, or relies on a brand loyalty, the differentiation
advantage is not based on cost. An example of differentiation advantage is
Apple’s production of the first iPod in 2001. Other electronics companies
rushed to make their own MP3 player. But the iPod was seen as a much better
product than all the others that most of the competition vanished quickly.

Differentiation advantage often markets a company’s policies to make

their brand appealing to the consumer. For example, an ice cream company
that uses organic ingredients, or donates part of their profits to environmental
groups, will appeal to consumers even if their prices are higher than less
socially-conscious competitors.

©PBS LearningMedia, 2015 All rights reserved.

 To get either type of competitive advantage, a business needs to look at
three factors: the product or service, target market, and the competition. It’s
important to consider the whole product or service that the company provides
including what resources go into it, and how much those resources cost. A
business also needs to know who will be buying their product, how to market it
to their customers, and how to increase demand for their product. Finally, it’s
important for a business to know their competition. They should look at what
their competition does well, and try to do it better. Perhaps most importantly,
they need to see where their competition falls short, so they can fill the gap and
take control of the market.

Instructions

In this activity, you will read a scenario describing two businesses.

Identify which business has the competitive advantage, and explain why.

Toyota vs Hummer

In the late 1990s and early 2000s, the Hummer was an incredibly
popular SUV to drive. Based on military vehicles, they were huge, and
tough, with action-hero appeal. Arnold Schwarzenegger was the first
civilian to own a Hummer. They were also gas-guzzlers, only getting
about 10 to 12 miles to a gallon. But people still bought and drove them,
not caring about the low mileage since gas was relatively cheap. 30,000
Hummers were sold in 2004.

In July of 2008, gas prices hit a record high—over $4 per gallon.

Suddenly, the Hummer didn’t seem quite as cool. People could no longer
afford to fill them up at the pump. Instead, drivers turned to a new car
made by Toyota. The Prius, a hybrid car that ran partly on gas and partly
on an electric motor, used almost half as much gas as a regular car, and
far less than the Hummer. It was also distinctively shaped, so it was easily

©PBS LearningMedia, 2015 All rights reserved.

distinguished from other cars, including other hybrids. In a time of high
gas prices, driving a Prius was not only seen as thrifty, but
environmentally conscious.

In the post-2008 period, which company has the competitive advantage?

______________________________________________________________________________

What type of competitive advantage does this company have, and why?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

©PBS LearningMedia, 2015 All rights reserved.