Absolute cost advantage
DESCRIPTION
A concept referring to the beneficial state where an incumbent firm is able to achieve and sustain lower average total costs for its products or services relative to that achievable by newer entrants.
KEY INSIGHTS
Influential early research on the concept by Bain (1956) suggests that an absolute cost advantage can be achieved as a result of certain actions of the firm including, but not limited to: obtaining access to lower costs of capital, securing exclusive access to scarce raw materials or other inputs, implementing low-cost production techniques through experience, and/or superior management skills. Once obtained, an absolute cost advantage can create a form of entry barrier to the extent that new firms will experience higher costs in comparison to the firm with the absolute cost advantage.
KEYWORDS Entry barriers, competitive advantage
IMPLICATIONS
While the concept of this type of firm advantage is ultimately linked to costs achievable by newer entrant firms, research on the concept suggests that an absolute cost advantage does not automatically accrue to an incumbent firm but rather is a result of the firm successfully acting upon opportunities to achieve such an advantage. Firms must also consider the extent that changes in the macroenvironment and microenvironment may lead to the lessening of any absolute cost advantage over time, for example, as a result of a new, lower-cost production technology available for adoption by newer entrants that may be costlier for incumbent firms to adopt due to their previous investment in an existing technology.
APPLICATION AREAS AND FURTHER READINGS
Marketing Strategy
Schmalensee, Richard (1974). ‘Brand Loyalty and Barriers to Entry,’ Southern Economic Journal, 40(4), April, 579–588.
Agarwal, Rajshree, and Gort, Michael (2001). ‘First-Mover Advantage and the Speed of Competitive Entry, 1887–1986,’ Journal of Law and Economics, 44, 161–177.
Kerin, Roger A., Varadarajan, P. Rajan, and Peterson, Robert A. (1992). ‘First-Mover Advantage: A Synthesis, Conceptual Framework, and Research Propositions,’ Journal of Marketing, 56(4), October, 33–52.
New Product Development
Golder, Peter N., and Tellis, Gerard J. (1997). ‘Will It Ever Fly? Modeling the Takeoff of Really New Consumer Durables,’ Marketing Science, 16(3), 256–270.
BIBLIOGRAPHY
Bain, Joe Staten (1956). Barriers to New Competition: Their Character and Consequences in Manufacturing Industries. Cambridge, Mass.: Harvard University Press.