Competitive advantage results in greater value for a company and its shareholders because of certain conditions or strengths. A sustainable competitive advantage makes it difficult for competitors to edge out the benefit. In any business, a competitive advantage can lead to better profit margins and market dominance.
This article defines competitive advantage and explains how it works. Furthermore, it discusses the various strategies to competitive advantage.
What is a Competitive Advantage?
It refers to an attribute that enables a company to beat the competition. A competitive advantage allows a firm to achieve higher margins than the competitor’s, generating value for its shareholders. An excellent competitive advantage must be very sophisticated; infact, it should be impossible to duplicate. It is not considered a competitive advantage if it is readily available and easily copied.
Types of Competitive Advantage
There are two main types of competitive advantages — differential advantage and comparative advantage.
Comparative advantage is created by a company’s ability to produce a product more efficiently than others. This leads to more significant profit margins. Usually, consumers go for a cheaper option of any perfect substitutes provided. For example, a soccer player will buy boots from a sports house that is 2 dollars cheaper than the other shops in the area.
For imperfect substitutes, higher margins for low-cost producers can lead to superior returns. Economies of efficient internal systems, geographic location and scale can also lead to comparative advantage. It is important to note that comparative advantage doesn’t mean the other product or service is better. It only implies that a company can offer the same service or product at a lower price.
This is when a company’s products or services differ from what the competitors are offering, and it is viewed as superior. Superior personnel, patent-protected processes or products, advanced technology, and strong brand identity can result in a differential advantage. All of these factors support larger market shares and wide margins.
A company like Tesla is famous for creating innovative products, such as an electronic car. This supports its market dominance with extensive marketing campaigns to build a top brand. Similarly, established tech companies can also market branded products because patents protect them.
How does Competitive Advantage Work?
In business, there are three essential factors that can determine how a company shapes its competitive advantage. This section discusses these factors and explains how competitive advantage works.
Analyzing the market
To develop a good competitive advantage, you must know the target market and how it might affect the general growth of a business. Companies’ main reason for achieving competitive advantage can be linked to lower-priced goods or services, quality products, or a unique selling point that reaches many clients. It captures the interests of a company’s target market, leading to new sales and increased productivity.
After analyzing the market, a business should develop and implement strategies that they think will help position their products ahead of the competition. For example, a hair and makeup business might focus on rebranding their products to make them stand out from the competition. Another way competitive advantage works is by identifying the target and implementing the appropriate strategy.
A company can focus on extending their advantage by recording and monitoring the performances of their strategies. They should also record the results for further analysis and research. This way, a company establishes total dominance over competition.
Monitoring progress and performance
Over its years of operation, a business can monitor the strategy it uses to develop its competitive advantage. For example, a beauty and hair products company whose competitive advantage is its social media platforms can monitor the number of new customers referred to it through social media. Monitoring this information helps the company create more avenues for new clients to sign up for their products. This can be in the form of bonuses or referral programs.
What is the Purpose of a Competitive Advantage?
A competitive advantage is a factor that helps a company outperform its competitors. It allows the firm to achieve superior margins compared to competitors, generating value for its stakeholders. It is essential to ensure that the competitive advantage is highly sophisticated and cannot be duplicated. It should be out of reach for any potential competition.
Why is Competitive Advantage Important?
Listed below are some of the reasons why competitive advantage is vital for a business.
- It helps a company increase certainty.
- It adds predictability and constancy to a company’s revenue streams.
- It allows an entrepreneur to focus on the essential factors such as talent, resources and finance. This can result in maximum ROI.
- Competitive advantage helps a company achieve organizational momentum.
- Moulds a company to becoming a magnet for brand alliances, talent, and potential investors.
- Reduces unnecessary recruiting, marketing, and fundraising expenditures.
- It helps a company accurately measure its progress.
Strategies for Competitive Advantage
There are three main strategies for developing competitive advantage: differentiation, cost leadership, and focus.
In this competitive advantage strategy, the goal is to become the lowest-cost producer. The best way to achieve that is through large-scale production where you can exploit demand-supply.
Suppose a company can implement this strategy and produce products at a lower cost than that of its competitors. In that case, it will establish a selling price that other companies can’t replicate.
In this strategy, a company’s products are differentiated from those of its competitors. This can be done by innovating new products or delivering high-quality products. By successfully differentiating its products, a company can set a premium price on its products.
In this competitive advantage strategy, a company focuses on the narrow market segment. It is important to note that this strategy is only successful if a company can create products that meet the set standards.
This strategy has two main variants:
- Differentiation-focus: These are services in a narrow market segment.
- Cost-focus: Refers to the lowest-cost producer in a market segment.
Competitive advantage can propel a company to greater heights. Use this information to develop unique marketing strategies that will put your business ahead of competition.
It can be challenging to develop and implement a competitive advantage. However, once it is successfully implemented, it can lead to massive profit margins and business development.