Competitive Advantage; Strategies, Theories, and Examples
Are you a beginner and want to establish a lasting business in this extremely competitive marketplace? Give this article a read to learn how you can earn an edge over your rivals in the business.
Not more than now has the importance of learning sophisticated knowledge about business ever become needed. In the world of complex business, those who are still struggling to establish their name in the market need to learn to put smart strategies ahead. For that, it is important to have comprehensive knowledge about the competitive advantage and its strategies, theories, and examples so that to have a great insight for developing their business in this cutthroat competition.
Attaining competitive advantage has crucial importance for the companies by applying appropriate strategies and investing in the right plans so that they can pay them off to the maximum level. Learning about competitive advantage will surely give them a great chance to make better decisions.
What is a competitive advantage?
In the business world, competitive advantage refers to all the factors that help a company to enhance its business by producing more goods and offering more qualitative services in comparison to its rival. Competitive advantage can be acquired by the confluence of factors that come to play their role for instance cost structure, quality of their good offerings, branding, customer service, the distribution network, intellectual property, etc.
Competitive advantage generates more value for a company that can enhance its market position and stabilize its place. The more the firm is stabilized the more it lessens the chances of the rivals to neutralize the advantages hence keeping the company at the edge. In order to gain and maintain a competitive advantage, a company has to demonstrate greater comparative and differential values than its market rival. For instance, if a company advertises a lesser price for a product that has a higher cost in the market, it will definitely attract more consumers and will gain a comparative advantage but if it is advertising higher prices but the features of the product are unique that the competitive product, it can still gather more customers that will be willing to pay more.
To keep the momentum of competitive advantage, companies should remain updated with the new technology and changing dynamics in the business world. To create a competitive advantage, for example, a business must provide vivid benefits for the products they launch in the market that have no ambiguity and provide a clear benefit to its target market that is better than what the competitor has offered.
Consider that your company is launching a new product or bringing modifications to an already available product, try to convey it clearly through a targeted advertisement that it must be something that your customers are in need of or it must offer real value. For that businesses need to remain up to date with new trends introduced in the market that affect the product including new technology.
Similar was the case in the advent of the internet where newspapers didn’t pay heed to the potential impact of the availability of online news. They considered that people will keep on paying for the newspaper once a day but the sweeping increment of the online newspaper has nearly replaced the demand for the paper news. They just allowed their competitive advantage to slip away.
To maintain their competitive advantage, businesses must remain attuned to create demand of their target market which makes them updated on who their customers are and how they can bring betterment to their consumers’ lives. In the aforementioned scenario, for example, the target market of the newspaper shrank to an old population who didn’t have easy access to news or they were not too comfortable getting it.
Finally, getting to know your competitors in full capacity is very important. It is not necessary that your competitor can only be similar products or companies. You can attain a competitive advantage by fulfilling the needs of your own target market by bringing timely updates to your goods and services. It is also important to reinforce the message in every communication channel to your customer from advertising to public relations, sales ads, and even from your storefront.
Constructing competitive advantage
Establishing a competitive advantage can be a decisive move in the success of your business, but before planning to develop it, you need to know the:
- Benefit: The company should envisage the potential benefits it can offer to the targeted market. It must be clear about the possible benefits their products and services will provide. According to that they should work on providing real value and generate interest in their user base.
- Target market: Based on the Resource Based View, the company should determine their target market that they can adequately cater to according to the resources that they control. They should make strategies based on the target market.
- Identify competitors: In the competitive landscape, it is important to understand the potential competitors. The organizations must do their SWOT analysis on a regular basis that will keep them giving a reality check while preparing them for future opportunities.
In his book, “Competitive strategy: techniques for analyzing industries and competitors, Porter states that there are five competitive forces which if identified on time can benefit an organization to direct its efforts in the right direction. Those factors are:
- The threat of new entrant: determining the factors that can facilitate a new entrant to enter the market.
- Rivalry among existing competitors: need to check and analyze how many competitors offer similar products at a similar price. This will help your strategy to be more innovative and more research-based that can remain stand out and attract a different segment of the market.
- The threat of substitute products or services: Finding out the likelihood of a customer to turn to a similar product. This way can indicate to bring most needed changes that are still not meeting the demand of the people.
- Power of buyers: See how easy it is for the buyers to drive the prices down and how you can maintain a reasonable price to make a profit.
- Power of suppliers: See how easy it is for suppliers to drive the prices up.
Competitive advantage vs. Comparative advantage
An organization’s ability to produce goods or services at a cheaper price with more efficiency and better quality than its competitor in the market creates an environment of competitive advantage for the company. Comparative advantage on the other hand is attained by the consumers when they get the cheaper of the available substitutes.
The comparative advantage does not imply a better product or service instead the focus is on gaining goods or services of the same value at the lower price. For instance, a car owner will buy gasoline from a gas station that sells 5 cents cheaper than the other station in the area. The product is the same but the consumer is naturally inclined to the cheaper one because he sees comparative advantage in doing so.
For example, a firm that manufactures a product in China with having lower labor costs than the company that is manufacturing the same product in the US so can eventually offer the same product at a lower price. In international trade comparative advantage is determined by the available opportunity cost.
Competitive advantage vs. Differential advantage
A differential advantage is attained when your goods and services differ from your competitors in a better way and they are looked at superior by customers. Advanced technology, patent-protected products or processes, brand identity, superior personnel are all the drivers of creating a differential advantage over your rivals.
Competitive advantage strategies
In 1985, Michael Porter wrote a book in which he identified three strategies that can be adopted by any firm to tackle the possible competition in any marketplace. These strategies are also called porter’s generic strategies that can be applied by big of small businesses whether they are product-based or services-based. These strategies include cost leadership, differentiation, and focus. If applied with proper planning, the companies can attain and maintain a competitive advantage over their competitors.
Cost leadership strategy
Lower costs with good quality are what remain one of the most pertaining demands of customers all over the place. Cost leadership strategy refers to the same idea where companies can be able to produce a product that has a lesser price than what the other competitor is offering. The provider has to maintain the quality and meet the demand of the customers which will give him a competitive advantage over its competitors and provide price value to its customers.
Lower costs will eventually generate more revenue that can as businesses are still able to make a profit over every goods or service sold. If businesses are not able to make more profit in another way, peter suggested that they should find a lower-cost base such as labor, facilities, materials, etc. which can lower the manufacturing cost over the other competitors and can provide cost-benefit to the customers.
To attain differential advantage, the companies need to make the different products that stand out from that of their competitors and provide the customers with more facilities. For that businesses need to do more research, development, and design thinking to produce new ideas that attract the consumers’ attention and provide more facilities with the same product.
Bringing these improvements to the product or service means you have to deliver high quality to customers. If your customers see your product being different and more beneficial from others, they will be willing to pay more to gain it. For instance, companies that are now launching wireless chargers are working exactly on differential strategy. Their product is more attractive and more facilitative that hoards a larger audience their innovative ideas are resolving problems of the customers.
In order to apply the differential strategy, you can use many ways to get your goods and services reach in the market which makes them look apart. Such as:
- Better customer service
- Faster or cheaper shipping
- More variety
- Color and aesthetic
- Brand identity
- The atmosphere of a brick-and-mortar location
- Source of goods
Focus strategy aims at targeting a smaller portion of the market rather than targeting everyone. This strategy is usually applied by small businesses that don’t find enough resources to spend on a large span of population. Businesses that work on this strategy look for the demands and needs of their target population and how their goods or services can improve their daily lives.
This strategy is also called “segmentation strategy” where businesses break down their target population into segments based on the geography, demography, behavior, and psychological intent of the population. Based on these segments, businesses decide distinct groups with specialized needs that they try to meet by applying cost leadership strategy or differential strategy based on the selected needs of the segments.
Theories of competitive advantage
The SCP framework
The Structure, Conduct, Performance framework states that the external forces (market or industrial structure) are determining factors that dictate the larger actions of the company. It is a market structure that allows the companies to perform in a certain way and follow the particular strategies that are suitable under that environment.
- Market structure: consists of the degree of concentration, barriers to entry and exit, product differentiation, diversification, and vertical integration.
- Conduct: Goals of the organization, research, strategies, anti-competitive practices, advertising, innovation, etc.
- Performance: performance indicators such as sales revenue growth, output growth, technical progress, employment, efficiency, profitability shareholder value, and economic value.
So, the SCP framework argues that the structure of the industry is the key parameter in determining the right direction for the success of an organization. Not all strategies are appropriate and going to work for all types of industries. It can be the case that successful industries may fail if they are applied in not so feasible environment.
Resource Based View (RBV)
Resource Based View suggests that the organizations within an industry possess identical resources and pursue similar strategies that’s this kind of environment does not accelerate competitive advantage as the resources even heterogeneous in nature are mobile so can be easily bought and sold.
This Resource Based View suggested by Barney will substitute this assumption as he states that resources can be heterogeneous and may not be mobile. The resources of an organization include capabilities, processes, assets, information, attributes, knowledge, etc that are controlled by the organization and rightly implemented to promote efficiency and enhance competitive advantage.
He defines that in order to enhance competitive advantage these resources should have these four attributes that make them sustained for a longer period of time and help the organization remain to stand out.
- It must be valuable, neutralizing threats and exploiting opportunities
- It must be imperfectly imitable. Valuable and rate resources can only source of sustained competitive advantage, competitors have to possess them in order to attain them.
- It must be rare in its nature so that every competitor has no access to it. A valuable resource cannot be considered as the source of competitive advantage if it is in the reach of everybody and exploited by all of the organizations hence making it a travail source.
- They cannot be strategically equivalent substitutes. Organization resources are strategically equivalent when they are used in a separate way to implement the similar strategy
In other words, the Resource Based View states that resources that are heterogenic and immobile within an industry make the organization resources to be valuable, imperfectly imitable, rare, and not easily substitutable. Such resources lead the organization on the path to success by maximizing its competitive advantage.
Phahalad and Hamel took the RBV framework a step further by enforcing the value of core competence as the leading factor in the advancement of the competitive advantage. They state that some capabilities that are much less visible and more difficult to imitate and establish competitive advantage, must be the center of focus for the organizations to lead in the business world.
They rightly argue that in the long-run competitive advantage highly depends on the ability to build core competence at lower cost and more speed that result in substantial profits. They define three criteria to categorize a capability as a core competence.
- It should make a considerable contribution to the potential market population’s benefits of the end product.
- A core competence should open the ways for the organizations to the wider variety of markets.
- It should be difficult for the competitors to imitate and easily adapt to their own strategy.
Examples of Competitive advantage
In the huge industry of social media, launching a new social media platform requires extraordinary efforts and developmental ideas if one wants to remain to stand out. Pinterest, instead of following the same patterns, chose to take a different tack in 2009. Its founders decided to go the niche route and develop the platform’s initial user base through referrals instead of developing a fool-proof strategy to take on to the social media’s juggernauts.
One of the important reasons for its success is its ability to focus on a contingent of specific repeat customers rather than trying to hoard all the audience of different niches. This strategy is called need-based positioning where Pinterest only targets the specific population of the market. Most of its users are the people already inclined for the niche of fashion, arts and crafts, and ideas for interior designs.
Rather than going toe-to-toe with its competitors, Pinterest accepted its core user base and strategized its business accordingly. Following this strategy today, Pinterest has:
- Over 450 million active users
- The user base is mostly millennials and zoomers
- Roughly 25% of the time spend on the platform is shopping
- 98% have tried something they have seen on the platform
- 89% of them get inspired for new purchases
- 85% buy something based on Pins they have seen from brands
With the trillion-dollar market cap, Apple is the brand of the 21st century that always aims at “bringing the best user experience to its customers through its hardware, software, and services” it has not only kept the focus on launching a catalog of top quality products but it has also remained hyper-focused on other aspects of user experience that has made the company more reliable in the opinion of its consumer market that has earned their trust over time.
Apple enjoys a competitive advantage over its competitors in:
- Having heavy investments into custom silicon has helped it to develop lockstep with hardware, software, and silicon engineering. This is a competitive advantage that its competitors simply do not have to enjoy.
- Having a strong commitment to privacy. They only harvest users’ data to improve the quality of their products and better the delivery service and not for gaining personal economic benefits.
The main competitive advantage that McDonald’s enjoys is through its cost leadership strategy which has made it able to utilize economies of scale and produce the products at low cost has gathered more consumers for it than its competitors.
Starbucks is the world’s largest coffeehouse chain that stands out way ahead of its competitors such as McCafe and Dunkin’s Donuts. What has kept its style unique and made its business prominent is its use of innovative strategies and put great ideas for keeping the customers happy with its services. Studies suggest that Starbucks’ competitive advantage is due to its strategy of product differentiation which helps it out to remain distinct among its rivals and keep on attracting more audience at its place.
The strategies include the use of the third-party environment, constant innovation with new menu items, quality products, and the use of technology to stay connected with its customers. There are other strategies too that help the company maintain its business alive and up-to-date such as:
- Starbucks locates its centers at strategic positions such as in neighborhoods, high traffic areas like downtown, busy streets, and shopping malls.
- Starbucks keeps on updating itself on new innovations and bringing new ideas to the table for customers. It constantly innovates its menu of coffee, food, and drinks. Drinks like Pumpkin Spice Latte, Frappuccino, cold brews, refreshers, and more offer customers the new taste very often.
- It uses technology to better connect with its customers and bring new ideas to keep engaging its user base. For instance, the Starbucks Rewards Loyalty program has 11 million members. Through this program, customers can order ahead using their accounts which cuts their waiting time in the coming drive-thru. Customers can join the program online or using their app.
- Its global supply chain is vertically integrated which means that they have full control of every stage from moving the coffee beans from the farm to the store and there is no middleman in between.
- The company greatly invests in its employers by giving them good wages and other benefits. In fact, they spend more on the healthcare of the employers than on the coffee beans. This investment however eventually pays the company off. They also invest a lot in training the employers when they initially join the company and throughout their career hence providing the company a skilled and committed workforce.
- What is a competitive advantage?
Competitive advantage is the capacity of the company to strategize its business in a way that stands out its position in the market and pays it off for the loner and sustained way than to its competitors. The companies have to watch out for the new changes that are being introduced in the market and remain updated to the new technologies to drive their business in the right direction.
- What types of competitive advantage are there?
Michael E. Porter in his book introduced three types of strategies that if followed in the proper way can make the business outclass which are cost leadership, differentiation, and focus. However, since then, there are other types of strategies that have also appeared such as brand image, network effect, barriers to entry, and competition.
- Why is competitive advantage important?
Today businesses have become a complex phenomenon due to the emerging variety of stuff in the market and “picky” customers. In that scenarios, organizations have to be sharp to give tough competition to the rivals in the markets in order to gain maximum out of their sales. At the end of the day, it is the sustainability of the business and profit that matters the most.
- How to establish a competitive advantage?
The most pertinent method to establish competitive advantage depends on the company, the market environment, and target audience which requires a good deal of research and innovation. Companies have to define the potential benefits that their product can provide to the target audience that their competitors won’t be able to do. In this process, keep looking at the issues in your goods and services or the strategies you apply, and try to fix them in a proper manner.
In the world of competition in businesses, there is a dire need of remaining relevant and sustained over time. Competitive advantage is what dictates businesses in this direction by providing companies the advice and strategies to become a unique and distinct provider in the market.
Businesses have to realize their potential and target the right audience with proper strategies. There are multiple theories and examples of the highly established brands in the world from where the new beginners in the market can learn to grow and remain relevant over a period of time.