What is a Competitive Advantage?
A competitive advantage is an attribute that allows a company to outperform its competitors. This allows a company to achieve superior margins compared to its competition and generates value for the company and its shareholders.
A competitive advantage must be difficult, if not impossible, to duplicate. If it is easily copied or imitated, it is not considered a competitive advantage.
Examples of Competitive Advantage
- Access to natural resources that are restricted to competitors
- Highly skilled labor
- A unique geographic location
- Access to new or proprietary technology
- Ability to manufacture products at the lowest cost
- Brand image recognition
Constructing a Competitive Advantage
Before a competitive advantage can be established, it is important to know the:
- Benefit: A company must be clear what benefit(s) their product or service provides. It must offer real value and generate interest.
- Target Market: A company must establish who is purchasing from the company and how it can cater to their target market.
- Competitors: It is important for a company to understand other competitors in the competitive landscape.
To construct a competitive advantage, a company must be able to detail the benefit that they provide to their target market in ways that other competitors can not.
Strategies for Competitive Advantage
There are three strategies for establishing a competitive advantage: Cost Leadership, Differentiation, and Focus (Cost-focus and Differentiation-focus).
#1 Cost Leadership
In a cost leadership strategy, the objective is to become the lowest-cost producer. This is achieved through large-scale production where companies can exploit economies of scale.
If a company is able to utilize economies of scale and produce products at a cost lower than competitors, the company is then able to establish a selling price that is unable to be replicated by companies. Therefore, a company adopting a cost leadership strategy would be able to reap profits due to its significant cost advantage over its competitors.
In a differentiation strategy, a company’s products or services are differentiated from that of its competitors. This can be done by delivering high-quality products or services to customers or innovating products or services.
If a company is able to differentiate successfully, the company would be able to set a premium price on its products or services.
In a focus strategy, a company focuses its product or services towards a narrow-target market segment. This strategy is successful if customers have different needs and wants, and the company is able to successfully create products/services that can cater to these customers. The focus strategy also has two variants;
- Cost-focus: Lowest-cost producer in a narrow market segment
- Differentiation-focus: Differentiated products/services in a narrow market segment
Competitive Advantage in the Marketplace
Three great examples include:
- McDonald’s: McDonald’s main competitive advantage relies on a cost leadership strategy. The company is able to utilize economies of scale and produce products at a low cost and as a result, offer products at a lower selling price than that of its competitors.
- Louis Vuitton: Louis Vuitton’s advantage relies on both differentiation and a differentiation-focus strategy. The company is able to be a leader in the luxury market and command premium prices through product uniqueness.
- Walmart: Walmart’s advantage relies on a cost leadership strategy. Walmart is able to offer ‘everyday low prices’ through economies of scale.
Importance of Competitive Advantage
A competitive advantage distinguishes a company from its competitors. It contributes to higher prices, more customers, and brand loyalty. Establishing such an advantage is one of the most important goals of any company.
In today’s world, it is essential to business success. Without it, companies will find it difficult to survive.
Video Explanation of Competitive Advantage
Watch this short video to quickly understand the main concepts covered in this guide, including the definition of competitive advantage and how companies create it using various business strategies.