Competitive advantage refers to the suitable position a company seeks to be more successful than its competitors.
To secure and retain a competitive advantage, a company should exhibit a higher differential or comparative value than its rivals and relay the particulars to its preferred target consumers.
For instance, a company probably has a competitive advantage if it markets a product at a lower price than the same item from a rival. This concept also applies if the item to be sold is more costly but comes with distinctive attributes that consumers are ready to pay for.
Examples Of Competitive Advantage
The difference between a flourishing and a struggling company is competitive advantage. However, the source can vary depending on the organization or sector.
Some examples of having a competitive edge include:
- Notable access to production and technology
- The team
- Reputation and brand identity
- Cost leadership: being able to produce and sell at a lesser price
- A patent or IPs laws protected product hence can’t be produced by anyone else.
While you may enter the market with a completely new idea, it won’t take your competitors long to catch up. Competitive advantage comes into play at this juncture.
Reputation and brand authority are the most advantages in sectors with multiple emulator brands like soft drinks.
Brand Specific Competitive Advantage Examples
The company was founded in 1993 and has grown to become a leading multinational tech company. Since its inception, the company has focused on producing new replicas of its GPUs (Graphics Processing Units). The leading line is the Nvidia GeForce.
Specializing on their GPUs drove the company to success instead of harming its prospects. By limiting themselves to one product, the company channeled enough resources to speed up innovation, develop high-quality customer support, and lower prices.
Specializing in one product can steer innovation and improve customer support. Focusing on a particular service or product also helps set up cost leadership. As more people began using the product, the value of Nvidia’s GPU increased—this is the network effect.
How to Use this Advantage
You can build real prowess if you’re focused on a specific part of the industry or market. As you learn, your customer service will improve. Ultimately you’ll be a pro in your industry. Additionally, there can be price benefits like purchasing more supplies from one vendor that enables you to buy your stock at reasonable prices.
Airbnb was launched in 2008 by three roommates, Nathan Blecharczyk, Joe Gebbia, and Brian Chesky. They designed it to provide temporary accommodation and breakfast for individuals who couldn’t find and book hotel rooms in time.
By 2021, the company website had an established name in the industry. Airbnb, short form for AirBed and Breakfast, is the perfect example of a market disruptor.
This business is the perfect example of differentiation. Instead of building more economical or better hotels, they completely ignored hotels. They took an entirely different route and offered what others were lacking. The business is a huge benefactor of the net effect—the more people use their app, the more their users benefit.
How to Use this Advantage
Their success results from identifying an untapped market in the hospitality field and coming up with a solution for neglected consumers. So, ask yourself this: is there a gap in your industry? If there’s a gap, is there a way you can fill it? Think outside the box, and you might just come up with something innovative that will disrupt your industry and make you a pioneer.
Although coming up with a new digital platform isn’t unfeasible, you need a lot of financial muscle and the ability to deal with multiple challenges and rapid technological advancements and changes swiftly.
However, Pinterest took a different approach. In 2009, the developers decided to grow the app’s first user base via referrals instead of leading social media platforms.
Instead of using an algorithm to suggest which content to view, they use lists that other users create. The net effect also played a considerable role in this case. When the users increase in number, the content also increases.
How to Use this Advantage
Concurrently pursuing many avenues isn’t an ideal approach. Focusing on a specific target audience and channel and coming up with a specific service or product that meets their needs can go a long way for organizations that want to stand out.
This is the first company to have a trillion-dollar capitalization, with an approximate value of two hundred million dollars. As a brand, Apple has worked to provide its users with the ultimate experience via its original software, hardware, and services.
Apart from providing a list of top-notch products, the company has also been very focused on different perspectives of consumer experience. These aspects include excellent customer support and service, helping the company gain its customers’ trust.
Apple’s success is rooted in focusing on the entire industry while fulfilling the needs of their customers who are willing to cough up insane amounts of money on Apple products. Apple invested in both customer support and product quality. The company also stands out in terms of privacy and product quality.
How to Use this Advantage
Brainstorm how you can distinctively provide quality services or products. The best place to begin would be enhancing customer service and experience. Ensure you provide an experience that will leave your consumers feeling special.
How Do I Identify My Business’s Competitive Advantage?
What do you have to offer customers that your competitors can’t?
To establish your competitive advantage, you need to determine:
- Who’s your target audience?
- Who are your competitors? How will you offer your customers benefits or value?
Your competitive edge lies in your ability to unlock the most appealing service for your target customers and provide it in a manner that no other company can.
There’s a chance that you’ll have more than one competitive edge. That said, go with the competitive advantage that will most likely have the most significant engaging potential and differentiation.
Competitive Advantage vs. Comparative Advantage
A comparative advantage emerges when a company can produce goods and services more effectively than its rivals leading to higher profit margins. Shrewd consumers will pick the more economical of any two great substitutes provided.
For instance, you’ll get gasoline from a service station that’s 5 cents less than other gas stations in the region. More significant margins for the lowest-cost manufacturers can ultimately bring loftier returns for imperfect substitutes like Coke vs. Pepsi.
Comparative advantage doesn’t implicate a better service or product. It only implies that the company can provide a service or product of equal value at a better price. Geographic locations, effective internal systems, and economies of scale can also generate comparative advantage.
For instance, an enterprise manufacturing something in China can acquire cheaper labor than a firm with production operations in the U.S; therefore, it can sell a similar product at a lower price. Opportunity cost dictates comparative advantages in international trade economics.
An example of an enterprise attentive to developing and sustaining a comparative advantage is Amazon (AMZN). The level of scale and efficiency in the e-commerce platform is challenging for retail competitors to replicate—this has enabled it to rise to greatness majorly through competitive pricing.
Competitive Advantage vs. Differential Advantage
A differential advantage arises when a company’s services and products vary from its rivals’ and are deemed superior. Drivers of differential advantage include powerful brand identity, superior personnel, advanced technology, and patented processes or products. These features support large market shares and wide margins.
Apple is renowned for manufacturing novel products like iPhones and using astute marketing campaigns to develop a first-class brand. Since they’re patented, pre-eminent drug firms can also market their branded drugs at greater price points.
Competitive Advantage Strategies
1. Cost Leadership
Companies use this strategy to offer services and products similar to their rivals but cheaper.
You can achieve this through constant operational efficiency improvement. To adopt this approach, you can reduce the workforce, outsource particular business functions, or focus on high skill areas.
Additionally, you can attain this by exploiting economies of scale, which would give you the capacity to offer products and services at a cheaper cost because you sell more. Whether you achieve cost leadership, it’s a sure way to stand out among your competitors.
Differentiation is the service or product quality—the feature differentiating your products from competitors’.
It can be linked to attributes like mode of delivery, features, or quality, among others. Differentiation materializes when a company develops or secures complete access to proprietary or new technology. This disrupts the industry creating a sustainable advantage.
3. Operational Effectiveness
Some firms perform their duties better than any other. FedEx set off with an innovation master plan. But it maintained its leadership as one of the best shipping companies even after several companies embarked on the overnight shipping business with precision and expertise.
Operational effectiveness can mean developing operating systems or novel techniques to analyze data for individuals. When you conduct your operations exceptionally well, you acquire a competitive advantage over people using slower or less efficient techniques.
Focus approach bounds both differentiation and cost leadership. Its sole targets are niche markets such as organic pet food, cosmetics created for specific LGBTQ+ community subgroups, or vegan shoes.
Niche markets frequently underserve consumers since they’re small, implying they’re less sensitive to cost. This makes them very attractive to upcoming businesses that are normally unable to hold out against competition from greater companies in more significant market segments.
Putting a focus on smaller markets also signifies more significant profit margins. Competition is often low, and consumers are usually willing to pay higher prices for products they need or want but can’t find elsewhere.
From the auto industry revolution with the assembly line by Henry Ford, firms have been looking for a competitive edge using advanced technology or deploying existing technology in a novel way.
Applications and computers continue to give firms an advantage over rivals. Employees who use advanced technology and master it almost always increase or redefine their competitive advantage over the resistant ones.
More Strategies Relevant Today
A lot has changed since the 80s, and while the categories above are valid to date, others have become highly relevant in the digital age:
- Network effect: When a service or product gains more value, the more consumers use it. A network effect is powerful when attained early as people become reluctant to shift to better options afterward since it’s a bother. A great example is a digital platform like WhatsApp.
- Brand: A powerful positioning strategy and brand image can boost customer loyalty and is one of the greatest competitive advantages. To build a strong brand, you can use social media presence, visual design, and blogs, among others.
- Barriers: Enterprises usually employ various barriers to prevent others from getting into the market (or make it challenging). Barriers comprise regulatory hurdles, patents, trademarks, access to supply, and high start-up cost.
- Deep pockets: A good budget enables businesses to offer high-quality or low-price services and goods, making it hard for financially constrained firms to respond the same way.
A lasting competitive advantage will make you sell more. It can:
- Help you be more profitable
- Enable you to gain customer loyalty
- Promote fast growth without investing too much
Luckily, you can employ three solid strategies to improve your competitive advantage: focus, differentiation, and cost leadership. Finally, it’s time to examine your business set-up and choose a suitable approach or combine two or all—whatever works best for you.