Competitive advantage refers to an advantage availed by a company that has remained successful in outdoing its competitors belonging to the same industry by designing and implementing effective strategies that allow the same in offering quality goods or services, quoting reasonable prices to its customers, maximizing the wealth of its stakeholders and so on and as a result of which the company can make more profits, build a positive brand reputation, make more sales, maximize return on assets, etc.
Competitive advantage is not something that can be vested. Rather it can only be earned through the hard work, dedication, and ethical performance of an organization. It does not come easy, and an organization might need to dedicate years and sometimes decades to earning this advantage over its arch rivals belonging to the same industry. The key to earning it is excellent and ethical performance, and one cannot earn the same through degrading or defaming rival companies operating in the same domain.
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Types of Competitive Advantage
Cost Advantage – This is a type to sell similar products at lower prices. The companies seeking cost advantage will focus on following a cost leadership strategy. Here, the company chooses to sell its products or services at a price similar to its competitors, but at the same time, it will reap higher profit margins due to lower costs of production.
Differentiation Advantage – This type can only be achieved using offering products or services that are unique. The companies willing to pursue differentiation advantage are more likely to focus on advertising, branding, quality, design, and development of a new product. Thus, the companies can charge an exclusive price for providing such products or services.
Comparative Advantage – It can be defined as the ability of an organization to effectively produce goods or services better than its competitors, which ultimately results from higher profit margins for the company and ultimately paves the way for the company to earn a comparative advantage.
How does it Work?
Competitive advantage enables an organization to easily generate a higher value for itself and its equity holders. An organization with a sustainable advantage can easily outdo its competitors, while the latter will find it difficult to neutralize the strengths of the former.
Examples of Competitive Advantage?
- High skilled workforce
- Gaining exclusive access to resources
- Gaining exclusive access to new technologies
- Gaining exclusive access to proprietary technologies
- Cost leadership strategy
- Offering unique products or services·
- Recognition of brand image, and so on
Strategies
Companies can pursue a cost leadership strategy through which they can offer similar products at similar prices as compared to the competitors but at the same time earn more profits due to lower cost of production.
Companies can also use a differentiation strategy by offering unique products or services that none or just a few of their competitors have to offer. This way, it can set premium prices on its products or services and earn more profit margins.
The companies can even use information advantage, adaptability, technology-based competitive advantage, operational effectiveness strategy, and innovative strategy.
How to Gain Competitive Advantage?
A company can gain a competitive advantage by following either all or a few of the mechanisms where it can choose to sell a similar product at the lowest possible price and that too without compromising on the quality of the same, different and unique products or services with different and unique attributes, pooling resources through strategic alliance, maximum utilization of resources, hiring high skilled labor, designing and implementing defensive strategies and so on.
An organization can even maximize the wealth of its shareholders.
Importance
Attaining a competitive advantage does not necessarily mean that the same shall remain for the lifetime as the company will need to sustain the same for its entire lifetime. The importance is discussed below –
- It helps companies in enhancing their profit margins. Customers will like the products or services that the companies with competitive advantage have to offer, and they will readily want to buy more from them without a question of doubt in their mind. If they like the products or services offered they will go on and recommend the product in their contacts which means an enhancement in sales and with this, there shall be a rise in profits too.
- It enables an organization to leverage its sales figures significantly.
- This advantage will enable the company to have its brand name recognized in the industry.
- An organization can dictate its pricing after gaining a competitive advantage for its products or services.
- An organization can have a greater ROA or return on assets in the industry.
Conclusion
Competitive advantage can be applied to a company, country, or individual. It is mainly of three types- comparative advantage, cost advantage, and differentiation advantage. The strategies with which an organization can earn are:
- Information advantage
- Cost leadership strategy
- Adaptability
- Differentiation strategy
- Operational effectiveness strategy
- Technology-based competitive advantage
- Innovative strategy
Recommended Articles
This has been a guide to Competitive Advantage and its definition. Here we discuss examples of competitive advantage, how it works, along with its types, strategies, and importance. You can learn more about from the following articles –
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.
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.