What is competitive advantage is a question that helps any businessman understand better the dynamics of business. Competitive advantage is the condition that permits a country or company to produce goods and services of equal value in a more desirable fashion or at a lower value. These conditions give a company an upper advantage over its competitors by allowing the producers to make more sales or earn superior margins compared to its competitors in the market. This keeps the business ahead of the game and assures them of consistent profits. A business looking to make a name for itself by claiming its market share must understand the factors that attribute to competitive advantage and maximize on it.
Competitive advantage is attributed to a number of factors that include the quality of product offerings, branding, cost structure, customer service, intellectual property, and the distribution network. For a business, identifying how these factors can be manipulated to yield maximum profits will go a long way to ensure the business earns enough to sustain itself. The subsequent paragraphs seek to answer the question what is competitive advantage and why is it important in business?
Competitive advantage theory
The competitive advantage theory implies that decisions made based on the competitive advantage at all levels, i.e. corporate, national, local and individual, leaves everyone better off. To put it plainly, it is asking for maximum use of resources and the globalization of services and manufacturing across the world.
Competitive advantage brings greater value to the business and its shareholders as a result of a number of conditions or strengths. To stay ahead of your competitors, you have to ensure you have a sustainable competitive advantage to strengthen your market share command.
According to Michael Porter, an organization can achieve competitive advantage over its rivals through differentiation advantage and cost advantage. Differentiation advantage is when a company offers better quality products and services as its competitors, while cost differentiation is when a company offers the same products as its competitors but at a lower price. Porter strongly believes that the essence of strategic management should be to offer a sustainable competitive advantage to firms.
Types of competitive advantage
There are two main types of competitive advantage, which includes differential advantage and comparative advantage. Below is a detailed explanation of the two types of competitive advantage:
Comparative advantage is created when a company is able to produce goods and services more efficiently compared to its competitors leading to greater profit margins. In most cases, the rational buyer will choose the cheaper of the two perfect substitutes offered by firms. This can be exemplified by consumers preferring to buy petrol from a vendor who offers it at 10 cents less than his or her competitor. For imperfect substitutes, the trick lies in higher margins for the lowest cost producers, which often leads to eventual superior returns.
Other factors such as geographical location, economies of scale and efficient internal systems can also lead to a comparative advantage. Comparative advantage has little to do with quality products. It implies that a trader has the ability to provide goods of the same value at a lesser price. For instance, when a company produces its goods in a country with lower cost of labor like China, will produce products at a lower cost than in a country with a higher cost of labor like the U.S.A. In international trade economies, opportunity cost greatly determines comparative advantage.
A differential advantage is when a firm’s products or services differ from its competitors’ offerings and are perceived as superior. Some of the factors that influence differential advantage include patent-protected products or processes, advanced technology, a strong brand identity, and a superior personnel. These factors contribute to differential advantage due to their ability to support wide margins and large market shares.
Competitive advantage strategies
Applying competitive advantage in business is a plus for any business. There are different competitive advantage strategies that allow a business to stay ahead of its competition. Companies that are deliberate on this reap the most out of the market compared to their competitors. Below are some of the competitive advantage strategies applied by firms in the market.
Cost leadership strategy
This strategy preys on price as a method of remaining ahead of the pack. This strategy allows companies to offer attractive prices to its customers. Two major U.S retailers known for this method are Wal-mart and Amazon.
This strategy relies heavily on the strengths of a company. This allows the company to focus on its strength and maximize on it by building their brand around it. Arguably, branding is the most conspicuous form of this strategy. With this strategy, companies such as BMW, Nike, and Samsung have a distinct status that allows them to stand out from their competitors.
This strategy implies that a company stays ahead of its competition by doing things in a new and different way. Firms can grow in their market by discovering new ways to provide a solution to problems affecting their target market. If your ideas and innovation remain relevant to your target market, you will remain ahead of the game.
Operational effectiveness strategy
Companies using this strategy focus more on being the best and most effective companies in their field of specialization. A company such as FedEx has continued to be a leader in shipping business by being effective in its operations. It started out as an innovative strategy but soon after other companies joined the business and yet it continues being the best in its field. An effective operation might mean better ways to analyze data or coming up with effective operating systems both of which you do to your level best. Doing what you do well will give so as to cut on time spent to complete a task or bring other advantages to your company and clients will keep you ahead of the game for long.
Technology-based competitive strategy
Using new technology to a company’s advantage has brought a lot of advantage to companies ever since the time of Henry Ford who revolutionized the auto industry with an assembly line. Companies that use technology in a new way or use new technology to their advantage have a high probability of maintaining their edge in the market. Workers that embrace and master new technology always increase their competitive advantage over those who do not embrace new technology.
Adaptability competitive advantage
In an unstable and erratic economy, companies have to learn to change quickly to suit the prevailing market conditions to stay ahead of the game. The ability to adapt quickly to change allows a company to gain a competitive advantage over its competitors. Company executives can bring adaptability to their company by being more receptive to change.
The information advantage
Competitive advantage in simple terms is the ability of a company to outpace its competitors. All the strategies mentioned above rely on information, which gives the company a competitive edge in the market. Companies that remain ahead of their game have better data collection strategies that give them insight about their consumer needs, threats from their competition and allow them to predict the probable cause of action in the market.
List of competitive advantages
Competitive advantage examples include:
Providing a variety of products and services may lead to efficiencies like reduced costs. Most customers may prefer a variety like the selection of products offered in supermarkets.
Processes that are effective and allow the company to meet their targets faster and in a more cost-effective way gives the company an edge in the market.
Companies need to leverage on economies of scale to drive unit costs down.
Getting access to deeper financial resources than your competition gives you an advantage especially if you are in a capital-intensive industry.
Reputation is the general opinion held by your customers, employees, partners, regulators and the public about your business. Maintaining a good reputation keeps your business ahead of the rest thus making it very important for you to maintain a good reputation.
By now, the essence of competitive advantage in business is well defined in your mind. The different strategies and examples of competitive advantage have been well elaborated in the previous paragraphs. Competitive advantage porter is a subject that has also been explored in the introductory paragraphs, specifically, one dealing with the theory of competitive advantage. Therefore, giving an answer to what is competitive advantage should not be strenuous. The knowledge shared in this article is quite crucial for anyone running a business, big or small. Staying ahead of your competition will allow you to realize maximum allowable profits at the same time maintain your lead in the market.