A competitive advantage denotes the ability of a business, product or service that allows it to have more market presence, same value at lower prices, more profit, and superior margins than its competitors. Every market in the current capitalist economy has multiple products and businesses that compete with one another. And thus, each of them tries to gain and sustain a competitive advantage in order to succeed.
It creates industry leaders and places a brand on top of others and allows for further increment in size and business quality. There are various types of competitive advantages each with its unique nuances and strategy.
In this article we discuss all there is to know about competitive advantages, the benefits they provide, how to achieve them and also some examples of how they exist in the real world.
Table of Contents
Competitive Advantage Definition
“Competitive strategy is about being different. It means deliberately choosing to perform activities differently or to perform different activities than rivals to deliver a unique mix of value.” – Michael E. Porter
Key Determinants of Competitive Advantage
A competitive advantage is based on three primary determinants. These are:
Product
The pain points of the target market are crucial towards the setting up of a competitive advantage. This is achieved through creating a product that acutely serves the pain points. If a product serves the right needs of the consumer then a steady relationship is established.
Competition
A competitor brand is not always one that creates a similar product. It can be any product that the consumer uses to fulfill their needs. Competitive advantages are based on the competition that a brand is trying to overcome and thus they are unique to each industry and market.
Target Market
Every target market has its own nuances. These consist of age groups, personal preferences, economic conditions, etc. All these factors are to be considered while developing a competitive advantage such that it can be tailored to fit the target market.
“The only sustainable competitive advantage is an organization’s ability to learn faster than the competition.” – Peter Michael Senge
Importance of Competitive Advantage
Competitive advantage provides multiple benefits towards a brand or a product apart from the industry leadership factor. Some of the major ones are –
Marketing
If a brand achieves competitive advantage that means its marketing processes will deliver twice the success. This is absolutely true for all markets. Through competitive advantage a strong brand value is created which can be further enriched through marketing.
Resources
A brand with competitive advantage is sure to attract businesses towards them. Once you reach the top rung of the industry, other small vendors and businesses will treat themselves as resources towards your cause. This allows the brand to control a larger portion of the market.
New Markets
Competitive advantage is a growth inducer. And with this growth comes new horizons that a brand can spread themselves into. Once a company achieves competitive advantage they can venture out into unforeseen markets and establish their dominance.
Pricing
Competitive advantage allows a brand to step out of the shadow of industry pricing and create their own price categories. Since, they can now call themselves as the industry leaders their pricing will set the standard for the market. Also, allowing for better products can help increase the price of it.
“If you don’t have a competitive advantage, don’t compete.” – Jack Welch
Types of Competitive Advantage
Competitive advantage is a time bound benefit that companies achieve. Since each brand within a target market is trying to achieve the same, chances are that one single company will not be able to retain their competitive advantage for long.
Professor Michael Porter of Harvard Business School points out three methods by which a company can achieve sustainable competitive advantage –
Cost Leadership
Cost leadership refers to the ability of a brand to provide quality products at a rate that is considerably lower than the market standard. One of the best examples of cost leadership would be Costco Wholesale. They provide products at a rate lower than their competitors such as Walmart and Amazon.
Cost leadership is achieved through increasing operations efficiency, hiring unskilled labor, providing benefits instead of higher wages, etc. These processes allow a brand to cut down on their manufacturing costs and thus decrease the pricing of their products.
Differentiation
This is when a company concentrates solely on the quality and benefits of their product or service in order to gain an upper hand against their competitors. These can include better services, faster delivery, better market reach, etc. Amazon’s one-day delivery service is one of the primary examples of differentiation strategy.
Furthermore, differentiation allows a brand to price its products and increase its profit margin. This does not allow the consumer base to fall since the product or service they offer provides an advantage that competitor brands cannot.
Focus
Focus strategy is a concept whereby company leaders try to focus their marketing efforts on a niche market that holds less or zero competition. It can also lead to a higher understanding of the target market as a whole and thereby approach it with a better strategy. It usually makes use of cost leadership or differentiation tactics or a combination of the two.
Localized banks are a great example of focus strategy. Even though they might charge higher for their services many communities feel comfortable in transacting with a local business than a larger one.
Other Competitive Advantages
In Today’s modern era businesses, to gain sustainable competitive advantage, cannot rely on the above three types and entrepreneurs should consider the following as well.
Innovative Competitive Strategies
Innovation is crucial for business growth and competitiveness. It can help a business to reduce cost, improve productivity that can positively affect the profitability. Firms can achieve competitive edge as long as they find out new ways of performing things.
Operational Efficiency
Some companies are known for doing certain things very well. FedEx is a good example. Since the inception of FedEx, there are dozens of other companies started overnights shipping business, no one was able to outperform FedEx.
Technology as Competitive Advantage
When a company provides a similar product or service in such a manner that customers get more value and satisfaction than with a competitor. Keep in in mind, it is not Information Technology that gives a firm competitive edge, it is how they use information Technology and create a whole difference. Facebook is a good example. Facebook have gain competitive edge by adding more value to the existing technology.
Adaptability of Competitive Change
The business environment is dynamic and rapidly changes over time. Those companies who can change and adapt with the change environment have a district advantage. For example, Amazon started an online marketplace for books but over the time changed and now offering millions of products and even planning to deliver packages using drones.
Examples of Competitive Advantage
There are many examples of cost leadership and differentiation strategies i.e. Walmart, Apple and Google. These companies have achieved competitive advantage by offering low pricing, unique products and services, brand loyalty and customer satisfaction.
Walmart
Walmart has been the go-to place for wholesale shopping needs of the entire United States. The reason they have been able to do this is due to cost leadership. They provide goods that are priced cheaper than the regular supermarket and also allow wholesale product ranges. Thus, consumers prefer to shop at Walmart and allow them to retain their status as industry leader.
Apple
Be it laptops, smartphones, music players, etc.; Apple has been a constant dominator in every tech field. Their product differentiation capabilities far supersede that of the competitive brands such as HP, Samsung, etc. Apple products are known for serving higher quality and thus they are also priced higher than the industry standard. This competitive advantage allows Apple to continue their innovative marketing process and remain a global industry leader.
