Competitive Advantage; Strategies, Theories, and Examples

In the fiercely competitive business landscape, an advantage is vital for organizations to thrive. It encompasses unique attributes and resources that allow a company to outperform rivals and gain market superiority. This article concisely overviews competitive advantage strategies, theories, and real-world examples.

We explore key theories like the Resource-Based View (RBV), emphasizing industry dynamics and internal capabilities. Strategies such as cost leadership, differentiation, innovation, focus, and strategic alliances are discussed, revealing how companies differentiate and create unique value propositions.

To illustrate these concepts, we highlight examples from various industries like Apple’s product design and branding and McDonald’s customer-centric approach to demonstrate successful competitive advantage applications.

Understanding competitive advantage, its strategies, theories, and real-world examples is crucial for long-term success. By implementing effective strategies and harnessing unique resources, businesses can position themselves ahead of competitors, sustain growth, and thrive in today’s dynamic business environment.

What is a competitive advantage?

Competitive advantage refers to all the factors that help a company enhance its business by producing more goods and offering more qualitative services than its rival. Competitive advantage can be acquired by the confluence of factors that play their role, for instance, cost structure, quality of their excellent 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 on the edge. To gain and maintain a competitive advantage, a company has to demonstrate greater comparative and differential values than its market rival.

Understanding competitive advantage

Let’s look at some examples to understand the concept of competitive advantage thoroughly. For instance, if a company advertises a lesser price for a product with a higher cost in the market, it will attract more consumers. It will gain a comparative advantage, but if it is advertising higher prices but the product’s features are unique to the competitive product, it can still gather more customers 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 offer clear help 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 clearly through a targeted advertisement that it must be something your customers need or offer real value. For that, businesses must remain current with new market trends affecting the product, including new technology.

Similar was the case with 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 would keep paying for the newspaper once a day, but the sweeping increment of the online newspaper has nearly replaced the demand for paper news. They just allowed their competitive advantage to slip away.

To maintain their competitive advantage, businesses must remain attuned to create demand in their target market which makes them updated on who their customers are and how they can bring betterment to their consumers’ lives. In the scenario mentioned above, for example, the target market of the newspaper shrank to an old population who didn’t have easy access to news or were not too comfortable getting it.

Finally, getting to know your competitors at total 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 target market by bringing timely updates to your goods and services. It is also essential 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 following:

• Benefit: The company should envisage its potential benefits to the targeted market. It must be clear about its products and service’s possible benefits; according to that, it should work on providing real value and generating interest in its user base.
• Target market: Based on the Resource Based View, the company should determine the target market they can adequately cater to according to their control resources. They should make strategies based on the target market.
• Identify competitors: In the competitive landscape, it is essential to understand the potential competitors. The organizations must do their SWOT analysis regularly to 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 that, if identified on time, can benefit an organization to direct its efforts in the right direction. Those factors are:

1. The threat of new entrants: determining the factors that can facilitate a new entrant to enter the market.
2. Rivalry among existing competitors: we need to check and analyze how many competitors offer similar products at a comparable price. This will help your strategy be more innovative and research-based, which can stand out and attract a different market segment.
3. The threat of substitute products or services: Finding out the likelihood of a customer turning to a similar product. This way can indicate the most needed changes that still need to meet the demand of the people.
4. 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.
5. Power of suppliers: See how easily suppliers can increase prices.

Competitive advantage vs. Comparative advantage

An organization’s ability to produce goods or services at a lower price with more efficiency and better quality than its competitor in the market creates an environment of competitive advantage for the company. On the other hand, consumers attain a comparative advantage when they get cheaper substitutes.

Comparative advantage does not imply a better product or service; instead, the focus is on gaining goods or services of the same value at a 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 a comparative advantage.

For example, a firm that manufactures a product in China with lower labor costs than a company manufacturing the same product in the US 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 better and are considered superior by customers. Advanced technology, patent-protected products or processes, brand identity, and superior personnel are all the drivers of creating a differential advantage over your rivals.

Competitive advantage strategies

In 1985, Michael Porter wrote a book that identified three strategies any firm can adopt to tackle the possible competition in any marketplace. These strategies are also called Porter’s generic strategies that big or small businesses can apply, whether they are product-based or service-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 remain one of the most important demands of customers everywhere. Cost leadership strategy refers to the idea that companies can produce a product at a lower price than other competitors. The provider has to maintain quality and meet the customers’ demand, giving him a competitive advantage over its competitors and providing price value to its customers.

Lower costs will eventually generate more revenue as businesses can still profit from every good or service sold. If businesses cannot make more profit in another way, Peter suggested that they find a lower-cost base such as labor, facilities, materials, etc. which can lower the manufacturing cost over the other competitors and provide cost-benefit to the customers.

Differential strategy

To attain a differential advantage, the companies must make different products that stand out from 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 must deliver high quality to customers. If your customers see your product as being different and more beneficial from others, they will be willing to pay more to gain it. For instance, companies launching wireless chargers work exactly on a differential strategy. Their product is more attractive and facilitative and hoards a larger audience; their innovative ideas resolve customers’ problems.

To apply the differential strategy, you can use many ways to get your goods and services to reach the market, which makes them look apart. Such as:

• Better customer service
• Faster or cheaper shipping
• More Variety
• Color and aesthetic
• Brand identity
• Location
• The atmosphere of a brick-and-mortar location
• Source of goods

Focus strategy

Focus strategy targets a smaller portion of the market rather than 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 the “segmentation strategy,” where businesses break down their target population into segments based on the population’s geography, demography, behavior, and psychological intent. Based on these segments, companies decide on distinct groups with specialized needs that they try to meet by applying a cost leadership strategy or differential strategy based on the selected requirements of the segments.

Theories of competitive advantage

The SCP framework

The Structure, Conduct, and Performance framework state 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 strategies suitable for 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 industry’s structure is the critical parameter in determining the right direction for the success of an organization. Not all strategies are appropriate and will work for all sectors. Successful industries may fail if they are applied in not-so-feasible environments.

Porter’s Five Forces and Generic Strategies

Michael Porter’s work is based on the SCP (Structure-Conduct-Performance) paradigm, which identifies two key factors in determining competitive strategy.

1. Industry attractiveness and its determinants: Porter developed the five forces model to analyze industry attractiveness. It identifies five forces that mutually influence competition within an industry: the entry of new competitors, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers, and the rivalry among competitors.
2. Relative competitive position: Porter argues that organizations are not bound by their industry. Through strategic choices, organizations can shape the industry by influencing competitive forces. Industry leaders can influence buyers, suppliers, and competitors, ultimately shaping the underlying industry structure.

Competitive strategy is also influenced by a company’s relative position within the industry. Organizations can achieve competitive advantage through two basic strategies: low cost and differentiation. These advantages result from the organization’s ability to handle industry forces more effectively than its competitors. Porter introduces three generic competitive strategies for achieving above-average performance:

1. Cost leadership: The organization aims to become the lowest-cost producer or operator in the industry. Risks associated with cost leadership include technological advancements that may allow new entrants to become cost leaders. Constant research and development can help minimize this risk but may increase costs.
2. Differentiation: The organization strives to be unique in the industry by offering dimensions valued by buyers, such as higher quality or additional features. The organization can command a premium price for its unique offerings if successful. Risks associated with differentiated products, changing consumer needs over time, and the possibility of competitors imitating the differentiation.
3. Focus: This strategy involves choosing a narrow competitive scope within an industry and optimizing the strategy for a specific target segment. In cost focus, the organization seeks a cost advantage within the target segment. In differentiation focus, the organization aims for differentiation with a narrow segment. Risks associated with focus strategies include imitation by competitors, the target segment becoming unattractive, and broader competitors dominating the segment.

Organizations that attempt to pursue multiple generic strategies without achieving any of them are said to be “stuck in the middle.” they lack competitive advantage and are at a disadvantage compared to organizations that have successfully positioned themselves as cost leaders, differentiators, or focusers.

While Porter’s positioning framework has been an industry standard for over two decades, Mintzberg (1998) argues that it can constrain creative thinking. The options of cost leadership, differentiation, and focus may limit strategic thinking by not encountering “outside the box” approaches.

Resource-Based View (RBV)

Resource Based View suggests that the organizations within an industry possess identical resources and pursue similar strategies. This environment does not accelerate competitive advantage as the resources, even heterogeneous, are mobile, so they 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. An organization’s resources include capabilities, processes, assets, information, attributes, knowledge, etc., which the organization controls and rightly implements to promote efficiency and enhance competitive advantage.

He defines that to enhance competitive advantage, these resources should have these four attributes that make them sustained for a more extended period and help the organization stand out.

• It must be valuable, neutralizing threats and exploiting opportunities.
• It must be imperfectly imitable. Valuable and rated resources can only be a source of sustained competitive advantage; competitors must possess them to attain them.
• It must be rare 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 organizations, hence making it a travail source.
• They cannot be strategically equivalent substitutes. Organizational resources are strategically equivalent when used separately to implement a similar strategy.

In other words, the Resource Based View states that heterogeneous and immobile resources within an industry make the organization’s resources valuable, imperfectly imitable, rare, and not easily substitutable. Such resources lead the organization to success by maximizing its competitive advantage.

Core competencies

Phahalad and Hamel took the RBV framework a step further by enforcing the value of core competence as the leading factor in advancing 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, resulting in substantial profits. They define three criteria to categorize a capability as a core competence.

1. It should contribute considerably to the potential market population’s benefits of the end product.
2. A core competence should open the way for organizations to various markets.
3. It should be difficult for the competitors to imitate and easily adapt to their strategy.

Examples of Competitive advantage

Here are some real-life illustrations of how businesses have successfully gained a competitive advantage in the market. By examining these examples, you can gain valuable insights into the various strategies and factors contributing to a company’s ability to outperform its competitors.

Pinterest

In the huge social media industry, launching a new social media platform requires extraordinary efforts and developmental ideas if one wants to remain to stand out. Instead of following the same patterns, Pinterest 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 creating a fool-proof strategy to take on the social media’s juggernauts.

One of the essential reasons for its success is its ability to focus on a contingent of specific repeat customers rather than trying to hoard the audience of different niches. This strategy is called need-based positioning, where Pinterest only targets a particular market population. Most of its users are people already inclined to the niche of fashion, arts and crafts, and ideas for interior design.

Rather than going toe-to-toe with 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 primarily millennials and Zoomers
• Roughly 25% of the time spent 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

Apple

With a 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 have made the company more reliable in the opinion of its consumer market, which has earned its 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 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, not to gain personal economic benefits.

McDonald’s

The main competitive advantage that McDonald’s enjoys is its cost leadership strategy, which has enabled it to utilize economies of scale and produce products at low cost. It has gathered more consumers for it than its competitors.

Starbucks

Starbucks is the world’s largest coffeehouse chain that stands out ahead of its competitors, such as McCafe and Dunkin Donuts. Its use of innovative strategies and great ideas for keeping the customers happy with its services has kept its style unique and made its business prominent. Studies suggest that Starbucks’ competitive advantage is due to its product differentiation strategy, which helps it remain distinct from its rivals and keep attracting more audience at its place.

The strategies include using the third-party environment, constant innovation with new menu items, quality products, and 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 strategically in neighborhoods, high-traffic areas like downtown, busy streets, and shopping malls.
• Starbucks keeps updating itself with 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 often offer customers a new taste.
• 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 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, meaning they have full control of every stage, from moving the coffee beans from the farm to the store and no intermediary.
• The company dramatically invests in its employers by giving them good wages and other benefits. They spend more on the employers’ healthcare 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 careers, providing the company with a skilled and committed workforce.

Walmart

Walmart is a prominent example of a company with a competitive advantage. Their strategy revolves around cost leadership, allowing them to sell branded items at affordable prices. By capitalizing on economies of scale, Walmart effectively minimizes operational costs, outsourcing expenses, and overall spending. These factors combine to grant them a competitive edge within the industry.

Louis Vuitton

In the luxury market, Louis Vuitton distinguishes itself from competitors through a combination of differentiation and differentiation-cost strategies. As a leader in this realm, Louis Vuitton offers exclusive luxury products that command premium prices unmatched by their rivals.

FAQs

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 in a longer and more sustained way than its competitors. Companies must watch out for the new changes introduced in the market and remain updated on the latest 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 properly, can make the business outclass: cost leadership, differentiation, and focus. However, other strategies have also appeared since then, 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 those scenarios, organizations must be sharp to give tough competition to the market rivals to gain maximum sales. 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 the target audience, which requires 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 properly.

How do I identify if a company possesses a competitive advantage?

To determine if a company holds a competitive advantage, one can assess its ability to enhance market share through improved efficiency and productivity, granting it an edge over rival firms.

How can an enterprise enhance its competitive advantage?

Enduring competitive advantages are often characterized by factors that are difficult for competitors to replicate or imitate. Warren Buffet refers to these advantages as “economic moats, where businesses fortify their competitive position. This may involve strengthening the brand, erecting barriers to entry (e.g., regulatory measures), and safeguarding intellectual property.

Why do larger companies frequently enjoy competitive advantages?

Larger companies often gain competitive advantages from economies of scale, primarily manifested as supply-side benefits like enhanced purchasing power of prominent restaurant or retail chains. Scale advantages can also be found on the demand side, commonly known as network effects. These arise when a service’s value increases for all users as more users join, occasionally resulting in a winner-takes-all scenario within the industry.

How does competitive advantage differ from comparative advantage?

Comparative advantage mainly refers to international trade. It posits that a country should focus on what it can produce and export relatively cheaply—thus if one country has a competitive advantage in making both products A & B, it should only create product A if it can do it better than B and import B from some other country.

Conclusion

In the world of business competition, there is a dire need to remain relevant and sustained over time. Competitive advantage dictates businesses in this direction by providing companies the advice and strategies to become a unique and distinct provider in the market.

Businesses must realize their potential and target the right audience with proper strategies. There are multiple theories and examples of highly established brands in the world from which new beginners in the market can learn to grow and remain relevant over time.