What is competitive advantage?

Competitive advantage refers to the factors or traits that allow a particular company to produce services or products that are either more cost-competitive or of higher quality than its competitors.

Definition and Example of Competitive Advantage

Competitive advantage is what makes an entity’s goods or services better than all other options available to the customer. While the term is typically used for businesses, the strategies apply to any organization, country, or individual in a competitive environment.

For example, a retailer that offers the lowest prices around has a competitive advantage over other retailers with higher prices. Lower prices can make this seller’s products more attractive than other higher-priced options.

How Competitive Advantage Works

To create a competitive advantage, a company must deliver a clear benefit to its target market that is better than what competitors offer.

Consider: What is the real benefit that this product or service provides? It must be something that customers need and that offers real value. Business owners also need to stay informed about new trends affecting the product, including any new technologies.

For example, in the early days of the internet, newspaper owners were slow to respond to the availability of free news online. They believed that people would continue to pay for news delivered on paper once a day. By failing to stay informed about the advancements (and advantages) of the internet, they allowed their competitive advantage to slip away.

A company also needs to be in tune with its target market to create demand, which is the driving force for all economic growth. They need to know exactly who their customers are and how they can improve their lives. In the above example, the target market for newspapers shrank to older adults who were uncomfortable getting their news online.

Finally, it is important to identify competitors. Competitors are not just similar companies or products. It also includes anything else a customer can do to meet a need that you can fulfill. The newspapers thought their competition was other newspapers until they realized it was the internet. They had no idea how to compete with an instant and free news provider.

Note: Confirm your competitive advantage and reinforce the message in every communication with your customers. This includes advertising, public relations, sales assistance, and even your store.

Types of Competitive Advantage

In 1985, Harvard Business School professor Michael Porter wrote a book that is considered the fundamental reference for business schools on this topic, which helps companies create a sustainable competitive advantage.

In his book, Porter explained that a company must establish clear goals, strategies, and processes to build a sustainable competitive advantage. The company culture and employee values should align with those goals. Porter researched hundreds of companies to identify the three main ways in which companies achieve sustainable advantage: cost leadership, differentiation, and focus.

Cost Leadership

Cost leadership means that companies offer reasonable value at a lower price. Companies do this by continuously improving operational efficiency. They may pay their workers lower wages. Some companies compensate for lower wages by offering non-monetary benefits such as stock options, benefits, or promotion opportunities.

Other companies benefit from a surplus of unskilled labor. As these companies grow, they can take advantage of economies of scale and buy in bulk.

Note: Walmart and Costco are examples of cost leadership achieved by paying their workers less than the cost of living at times. High minimum wage laws threaten this advantage.

Differentiation

Differs

Differentiation means that companies offer better benefits than anyone else. A company can achieve differentiation by offering a unique or high-quality product. Another way is to deliver it faster. A third way is to market it in a way that reaches customers better.

A company with a differentiation strategy can charge a premium price, which typically means it has a higher profit margin.

Note: Companies usually achieve differentiation through innovation, quality, or customer service. Innovation means meeting the same needs in a new way. A good example of this is Apple. The iPhone was innovative because it provided a simple mobile device with computer-like power. Quality means the company offers the best product or service. Tiffany’s can charge more because customers perceive it to be much better than other jewelry stores. Briefly, customer service means going the extra mile to delight shoppers, as in the case of Nordstrom’s, which was the first to allow returns with no questions asked.

Focus

Focus means that company leaders understand and serve their target market better than anyone else. The key to a successful focus strategy is to choose a very targeted market. Often, this is the small market that larger companies do not serve.

For example, community banks use a focus strategy to gain a sustainable competitive advantage. Community banks target local small businesses or high-net-worth individuals. Their target audience enjoys the personal touch that larger banks may not be able to offer, and customers are willing to pay a little more in fees for this service.

National Competitive Advantage

Countries also use another form of competitive advantage in a practice called “national competitive advantage” or “comparative advantage.” For example, China utilizes cost leadership by exporting low-cost products of reasonable quality. It can do this because its standard of living is lower, meaning it can pay its workers lower wages.

India started as a cost leader but is shifting towards differentiation. India offers skilled and technical labor that speaks English at reasonable wages. However, Japan has also changed its competitive advantage. In the 1960s, it was a cost leader known for cheap electronics. By the 1980s, it moved to differentiation through high-quality brands, such as Lexus.

The competitive advantage for America stems from its innovative practices as a nation. For instance, American companies are known for bringing products to market more efficiently than many other countries.

Although innovation is driven by many factors, it is clear that the United States has benefitted from its diversity as a nation. In fact, there is scientific evidence that suggests diversity and maintaining a diverse workplace helps drive innovation and market growth forward.

Amar Bhide makes a good point in “A Bold Economy: How Innovation Sustains Prosperity in a More Connected World.” Even if the U.S. starts to fall behind other countries in producing engineers, it remains better at bringing innovations to market. This is just one of the ways in which natural resources enhance America’s advantage.

Individual Competitive Advantage

There can also be an individual competitive advantage. For example, in the workplace, you can use the theory of competitive advantage to advance in your career. If you are an employee, act as if you are in your own business. Your target market is your employer, your benefit is how to increase the company’s profit, and your competitors are other employees and technology.

Continue

Your competitive advantage lies in your appearance, resume, and interview. Once you secure the job, continue to communicate your advantage through your work performance. You can use your advantage to distinguish yourself from your peers and advance.

Lessons Learned

The “competitive advantage” refers to the attributes that allow an entity to succeed over its competitors. “Competitive advantage” is a term commonly used in business, but it can also apply to countries, organizations, and individuals. Businesses can use cost leadership, differentiation, and focus to provide them with a competitive advantage in delivering their products or services.

Sources

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts presented in our articles. Read our editorial process to learn more about how we verify facts and keep our content accurate, reliable, and trustworthy.

U.S. Department of State Young African Leaders Initiative. “Action Your Business Growth: Competitive Advantage.” Accessed Dec. 4, 2021.

Harvard Business Review. “How Diversity Can Drive Innovation.” Accessed Dec. 4, 2021.

Amar Bhidé. “The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World,” Page 294. Princeton University Press, 2008. Accessed Dec. 4, 2021.

Source: https://www.thebalancemoney.com/what-is-competitive-advantage-3-strategies-that-work-3305828