Quality
Cost advantage is typically calculated for comparable items and doesn't apply when there is a large difference in quality. For example, an economy car with poor build quality can't have a cost advantage over a luxury car with superior build quality. For this reason, the term cost advantage is typically applied to commodity products and services where customers usually choose the lowest price item.Price
A cost advantage doesn't necessarily mean that a firm offers the lowest price. For example, a firm with a cost advantage may be a dominant competitor that sets a relatively high price despite their low costs.Commodities
In a commodity industry, competitors must all accept a market price and there is no reward for higher quality. In this context, a cost advantage is the only type of competitive advantage possible.Scale
A cost advantage is often due to economies of scale whereby the producer that sells the most units has the lost cost per unit. It can be very hard to compete with a competitor that is in this position.International Competition
Competition from global competitors that may have fundamentally lower costs for things such as labor, land and materials.Barriers to Trade
International firms that have an unfair cost advantage due to government subsidies and indirect subsidies. Alternatively, local firms may have a cost advantage due to tariffs.Automation
Firms that have achieved a higher level of automation that is potentially faster, cheaper and more accurate than manual labor.| Overview: Cost Advantage | ||
Type | ||
Definition | A firm that can offer a particular product or service at a lower cost than the competition. | |
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