Definition: A competitive advantage is a distinguishing attribute that empowers a company to surpass its competitors in the marketplace through superior product quality, better brand appeal, or cost-effectiveness. In the long run, this can give the company an edge over its competitors and help secure market share.
Some of the popular examples of competitive advantage are –
- Apple’s focus on design has been one of its main competitive advantages – its products are always sleek and attractive to consumers.
- Amazon’s use of technology to streamline its delivery process has allowed them to cut costs and offer competitively priced products.
- Walmart’s large network of stores across the US gives them a significant edge over other retailers in terms of convenient access for customers.
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What is Competitive Advantage?
Competitive advantage is the ability of a business to gain an edge over its competitors in the marketplace. It refers to a set of unique features that gives a company or product an advantage over others in the market. Competitive advantages can come from cost advantages, differentiation strategies, or strategic advantages.
Cost advantage refers to when a company has lower costs than its competitors, allowing it to offer products at lower prices. Differentiation business strategy involves offering unique features or advantages that competitors cannot copy. Strategic advantage is when a company has access to resources, technology, or information that its competitors do not have access to. Strategic management of all these attributes ensures a competitive edge and ultimately a business success.
Components of Competitive Advantage
- Value Proposition: A value proposition is the core of your competitive advantage. It’s what sets you apart from your competition and makes customers choose your product or service over another. This is often a unique feature, benefit, or combination of features or benefits that no one else can offer.
- Target Markets: Who are you targeting with your business model? You need to identify the right people and tailor your value proposition to meet their needs. Who are they, what do they want, and how can you serve them better than anyone else?
- Competitors: Competitive advantage is achieved when you beat out the competition. To do this, it’s important to understand who your competitors are, what they offer, and what they do better than you. Knowing this information allows you to identify areas where you can create a real advantage over them.
Types of Competitive Advantages
In 1985, renowned Harvard Business School Professor Michael Porter released Competitive Advantage, a benchmark business textbook that provides companies with the necessary tools to create and maintain an advantageous edge over their competition.
Through his comprehensive research across countless companies, Porter was able to identify three principal methods of creating sustainable advantage: cost leadership, differentiation, and focus –
1. Cost Leadership
Cost leadership, as the term goes by, is all about working on the costs. The primary prerogative for a business is to strive hard to lower costs and lead the rankings amongst the lowest-cost producers. It is brought about by reaping the benefits of economies of scale once production reaches a large scale.
Additionally, businesses are constantly improvisations of their operational efficacy. Varied means are adopted as compensatory measures to bridge the gap between lower wages. These could be intangible benefits from stock options to promotional changes as well as certain benefits.
It is where businesses or organizations need to chalk out a plan. The plan for utilizing the economies of scale in production as well as surplus figures of unskilled labor. Thereby setting up selling prices to bare nominal so that it negates replicating by any competitors in the same field. Cost leadership offers that profits can be maximized by gaining cost advantages over rivals.
The second strategy in the competitive advantage process questions how. It is the process that differentiates a product or a service from the rivals in the biz.
A high-quality product or a service needs to be worked upon as a deliverable in the target market. This product should be all about innovation at its best. A company or organization must have a proposition to differentiate the product/service from the rest. The final call should be to determine a price tag.
The process of focus throws light on narrowing down segments of the market. It is done to filter out the customer base’s probability of interest in the product/service. The focus strategy caters to these very needs through two of its variables. The first is the cost focus and the second is the differentiation focus.
- Cost Focus: Businesses’ cost-focus strategy is built up over a tiny niche or segment of a determined market through deep understanding. It is the very niche that is often left out by bigger companies. The key lies here to serve as the lowest-cost producer for this narrowed-down market segment.
- Differentiation Focus: A differentiation focus offers a personal touch to the specified niche demarcated through the focus strategy. It is what assists in earning more money as service emoluments.
How Competitive Advantage Works
Competitive advantage is a unique feature or quality that sets a business apart from the competition and helps it gain an edge in the market. It can be achieved by having a cost advantage, offering something different than competitors, or providing better customer service. Competitive advantages are used to attract customers and stand out from the crowd.
It mainly works in two ways- through cost and differentiation. A cost advantage is achieved by a business having lower costs than its competitors, making them more attractive to customers. A differentiation strategy focuses on creating unique offerings that set the company apart from its competitors, such as offering superior customer service or providing a unique brand experience.
A business’s geographic location can also affect its competitive strategy. For example, a company that is located in an area with many direct competitors may have to focus more on differentiation strategies to stand out from the crowd. On the other hand, a business located in an area with less competition may be able to focus more on a cost-advantage strategy.
How can you identify the Competitive Advantage of a business?
Identifying a competitive advantage for an organization or a business firm begins with mapping out the offerings. It could be related to the deliverables in terms of value-added services/products/benefits, followed by knowing the targeted audience or market and knowing the competitors. Some of the steps to Identify Competitive Advantage are-
1. Understand the Industry: Get a keen understanding of your industry’s dynamics, including trends, key players, and emerging technologies. This provides a broader context for identifying where your business could gain a competitive edge.
2. Define Your Unique Selling Proposition (USP): What makes your business special? Your USP is what sets you apart from the competition. It could be anything from proprietary technology to exceptional customer service.
3. Identify Key Competitors: Knowing who your main competitors are, their strategies, strengths, and weaknesses, is crucial. This information can highlight potential areas where your business could outperform.
4. Analyze Customer Needs: Understand your customers’ needs and preferences. Doing so can reveal opportunities to meet their needs in a unique way, which can be a powerful competitive advantage.
5. Evaluate Your Resources and Capabilities: Consider your company’s resources and capabilities. You may have in-house skills, partnerships, or assets that competitors lack, and these can be leveraged for a competitive advantage.
6. Monitor and Adjust: Keep an eye on industry changes and adjust your strategies accordingly. Remember, competitive advantage is not a one-time achievement. It’s a dynamic process that requires ongoing attention and refinement.
Here is a video by Marketing91 on Competitive Advantage.
Competitive Advantage Examples
- McDonald’s: The competitive advantage of McDonald’s is associated with the cost leadership strategy. It utilizes economies of scale and produces products comparatively at a lower cost. This lets the brand offer its products and services at a lower selling price compared to its competitors.
- Louis Vuitton: Its competitive advantage involves differentiation as well as a differentiation-focus strategy. This makes it a leader in the luxury market. This way, Louis Vuitton commands premium prices by using product uniqueness.
- Walmart: Working of Walmart is related to a cost leadership strategy that lets it offer “everyday low prices” using economies of scale.
Competitive Advantage vs. Comparative Advantage
A Competitive Advantage and a Comparative Advantage are two ways to get ahead in business.
Competitive Advantage is when a company has something that its competitors don’t, such as better products or services, lower prices, or more efficient production processes. This can be used to gain an edge over the competition and win customers.
On the other hand, Comparative Advantage is when a company has something that its competitors don’t, but it isn’t necessarily better than what the competition offers. It could be a cost advantage, such as access to cheaper inputs or labor.
Competitive Advantage vs. Differential Advantage
The main difference is that Competitive Advantage focuses on gaining an edge over your competitors, while Differential Advantage looks at how you can differentiate yourself from them.
For example, if you have a competitive advantage in the form of lower pricing than your competitors, that would be a way to get an edge over them. But if you then used this as a way to differentiate yourself from them and offer something they don’t, such as unique services or features, that would be an example of using differential advantage.
Differential advantage stems from various factors including advanced technology, products or processes protected by patents, exceptional personnel, and a robust brand identity.
Frameworks of Competitive Advantage
1) Resource-Based View (RBV)
The Resource-Based View, or RBV, is a framework for understanding competitive advantage that focuses on the internal resources of an organization. This perspective holds that it’s not only industry conditions, but also a firm’s resources and capabilities that are key determinants of strategic advantage. Here are some of its key points:
- RBV posits that the resources owned by a company are a primary consideration in strategizing.
- It emphasizes the need for a fit between the external market context and internal resources.
2) VRIO Competitive Advantage Framework
The VRIO framework is a tool for analyzing a firm’s internal resources and capabilities to see if they can be a source of sustained competitive advantage. The acronym stands for Value, Rareness, Imitability, and Organization. Let’s break these down:
1. 1. Value: Resources must be valuable in order to provide a firm with relative advantages.
1.2. Rareness: Valuable resources that are rare can provide a temporary competitive advantage.
1.3. Imitability: Resources that are difficult to imitate or substitute could provide a sustained competitive advantage.
1.4. Organization: The firm must be organized to exploit the full competitive potential of its resources and capabilities.
What is sustainable competitive advantage?
Sustainable competitive advantage is the ability of a company to maintain its edge over its competitors in the long term. Companies can achieve sustainable competitive advantage by leveraging their unique resources and capabilities, such as natural resources or core competencies, that are not easily replicated by rivals.
How to increase competitive advantage?
There are several ways a company can increase its competitive advantage. These include developing new products or services, expanding into new markets, optimizing operations with technology, improving the customer experience, and investing in research and development. Additionally, firms can also develop strategic alliances with other businesses to gain access to resources that they wouldn’t otherwise have.
How to know if a business has a competitive advantage?
A business can discern if it possesses a competitive advantage by evaluating its efficiency and productivity rates in relation to those of its competitors. If a business has the capacity to augment its market share by becoming more efficient or productive, it’s a clear indicator of a competitive edge.
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