Competitive Advantage Guide
The Biden administration recently issued an executive order to promote greater market competition within the United States economy. The rationale is that a fair, open, and competitive marketplace is integral to a thriving economy. In addition to benefiting consumers, it can also increase innovation, productivity, and resiliency in businesses.
However, the focus on making markets more competitive poses a challenge for companies — how do they stay competitive? This question matters because many businesses are offering the same or similar products and services as others. Unless they offer something the competition isn’t, they risk losing their place in the market.
The most effective way to navigate competition is through maintaining a competitive advantage. In doing so, businesses set themselves apart and provide unique value to customers and other stakeholders. The result is often more sales, which produce higher profits, which support long-term business growth. This guide dissects competitive advantage, explores its role in business success and longevity, and discusses how companies can leverage their unique strengths to secure a strategic edge.
What Is Competitive Advantage?
When a business sells products or services more successfully than its competitors, it’s maintaining a competitive advantage. It’s often discussed in terms of offerings; a brand sells higher-quality products and services than a competitor and preserves a larger market share. However, competitive advantage can also be about its branding, intellectual property, or customer service. The two main approaches to competitive advantage include:
- Comparative advantage: An enterprise delivers products or services more efficiently and at relatively lower prices than competitors.
- Differential advantage: An enterprise offers products or services differently than its rivals. This differentiating factor is seen as better from the customer’s perspective.
Ultimately, a competitive advantage should enable a company to make more sales and attain better profit margins than its competitors.
Three Strategies of Competitive Advantage
Michael Porter, a renowned professor at Harvard Business School, published a book titled Competitive Advantage: Creating and sustaining superior performance in 1985 that remains relevant today. In it, he identified three strategies for creating a competitive advantage. They include:
This tactic is delivering unique products and services that diverge considerably from competitors' offerings. A differentiation strategy doesn’t necessarily mean creating entirely new products or services but will involve continual research and development. For instance, teams may glean insights from customer data to identify which features the target audience most wants from their offerings.
In addition to maintaining a distinct value proposition, companies that differentiate themselves can often charge more for their products and services. Many customers are willing to pay a higher price for something they deem more valuable.
Enterprises with a cost leadership strategy want to deliver goods or services at lower costs than their competitors. They will investigate methods of manufacturing quality products or top-notch services at low costs, allowing them to sell these offerings at a more affordable price.
Ways to reduce prices begin by lowering production costs. Companies achieve this by streamlining supply chains and eliminating waste, among other approaches. These cost savings translate into a better price for the consumer. Cost leadership also involves promoting a unique value proposition for the change, making it harder for rivals to replicate.
A focus strategy can benefit those companies whose markets are overrun by competitors. Instead of marketing their products and services to a broad target audience, they focus on meeting customer needs within a niche market.
The enterprise develops offerings catered to these customers or reorients existing products and services with updated features that this target audience most wants. This new audience should include the most reliable customers. Marketing to a niche audience generally takes more work, but the results — greater profitability and brand loyalty — prove worth the effort.
Identifying and Creating Competitive Advantages
To establish a competitive advantage, a business needs to determine what sets it apart from others in the industry. To begin, consider the primary components of competitive advantage:
- Value proposition: What does the company offer that’s of value to customers?
- Target market: What market segment does the company hope to reach through its products or services?
- Competitors: Who are the company’s competitors? What value do these rivals offer the target audience?
With a firm grasp of these elements, you’ll understand where your competitive advantage lies. As is often the case, a business may have multiple competitive advantages. Choose the one with the greatest potential to set your company apart and engage customers. These steps will help you identify and build a competitive advantage:
Determine Your Unique Strengths and Capabilities
Most companies are aware of areas of improvement, but recognizing areas where your business excels is more important for a competitive advantage. To discover those capabilities, gather insight from your brand position and customer reviews of products and services.
A SWOT analysis is another technique used for virtually any business strategy. SWOT stands for strengths, weaknesses, opportunities, and threats, and it aids organizations in decision-making. Beyond highlighting strengths, it can reveal opportunities for developing a competitive advantage that teams may not have considered otherwise.
Conduct Market Research
You may know your current target market but want to identify niche markets for a focus strategy or to tap into adjacent markets. Thorough market research can guide in pinpointing the greatest competitive advantage. This includes examining the competitor landscape and external factors influencing markets, such as economic, political, environmental, and technological concerns.
Review Current Business Strategy
Evaluate your finances and operations to find areas where the business has superior performance. With finances, it’s areas of stability and profit centers. With operations, it’s areas of great efficiency and those with the potential for improvement. Which processes can you innovate to achieve operational excellence?
Examine Your Recruitment Process
Sometimes, what sets a company apart from its competitors is its talent. Innovation, creative marketing, and optimized processes aren’t possible without the problem-solving minds of a skilled workforce.
A competitive advantage can be found in assessing your approach to recruitment, the benefits you provide employees, and workplace culture. You’re more likely to attract the desired talent by showing prospective employees the reasons why they should consider your company. In this way, you can maintain a competitive edge among the workforce and consumers.
Sustaining the Strategic Edge
No matter how a business goes about developing a competitive advantage, the important aspect is to ensure its sustainability. For example, say an enterprise obtains a rare natural resource that’s valuable for making high-quality products more efficiently. It typically won’t be long before competitors attain the resource from suppliers, as well. Any competitive advantage you seize is short-lived.
Instead, a sustainable competitive advantage is one that competitors can’t easily imitate, generating greater value for stakeholders long-term. The nature of market competition means that sustaining a competitive advantage can be difficult. Organizations must ensure they hold fast to core strengths and adapt to market changes to avoid losing their competitive advantage.
What enables a sustainable competitive advantage? The answer will depend on which competitive advantage strategy you leverage — differentiation, cost leadership, or focus. There are general tactics for safeguarding your competitive advantage, such as ongoing innovation and investigation into the competitor landscape. You also want to prioritize brand management and customer satisfaction to secure loyalty.
Barriers to Entry and Competitive Advantage
Another consideration with a competitive advantage is barriers to entry. This concept refers to various challenges an organization may face in seeking to enter a new market or industry. Barriers to entry can be beneficial for large corporations because they limit their competition and cement their place within markets, thus allowing them to fortify and sustain a competitive advantage.
Barriers to entry can be natural or artificial. Discover how the different types can enable a competitive advantage for some businesses:
Natural Barriers to Entry
- Economies of scale: Companies within the market have created efficient processes that allow them to operate at lower costs.
- Access to resources: Well-established businesses tend to have more access to resources within their markets.
- Research and development: Companies with more capital can invest in more research and development, prompting small businesses to follow suit. However, with fewer resources, these efforts likely can’t be as extensive.
- Network effect: This concept refers to the value of a company’s products or services increasing as more consumers use them. Existing brands already have customer loyalty, giving them a competitive advantage over emerging brands. ⠀
Artificial Barriers to Entry
- Brand recognition: What makes brand recognition different from the network effects is intention. Companies invest heavily in branding so that consumers associate them with a particular product or service. It can also be more abstract, like an emotion.
- Licenses and patents: Seeking licenses or patents for products or services — even specific features — can prevent similar companies from mimicking them.
Some barriers to entry are specific to industries. For instance, small enterprises may have a difficult time entering the pharmaceutical industry because all drugs require authorization from Food and Drug Administration (FDA) before they can be marketed in the United States. Pharmaceutical companies need to prove the drug’s efficacy, which necessitates ample resources to devote to research and documentation. Similar situations are at play in the financial services and oil and gas sectors.
Added Impact in the Digital Age
Innovation is one of the key driving forces of competitive advantage. In today’s world of frequent technological disruption, companies would be remiss not to explore new technology to boost their competitive advantage. Organizations across multiple industries are taking notice of this digital transformation, sparking mass investment in emerging tools. A study from McKinsey & Company notes a $104 billion equity investment in applied AI and a $2 billion equity investment in next-generation software development in 2022.
Some technologies to consider for helping maintain a competitive advantage include:
- Software (project management, human resources management, etc.)
- Cloud-based and automation tools
- Blockchain technology
- Artificial intelligence
Examples of Competitive Advantage
Looking at the competitive landscape, it can be difficult to decipher how some brands have managed to dominate industries and have such staying power. The following provides insight into two well-known brands and how they’ve managed to sustain their competitive advantage:
With global appeal and notoriety, few brands in any industry have continued to thrive like Apple. One tactic the brand employs is a differentiation strategy. Constant innovation keeps Apple’s products relevant, and iconic branding has allowed it to sell devices at a premium price.
Walmart has perfected the cost leadership strategy. Consumers know that if they want the best prices, they can often find them at Walmart. The brand strives to offer the lowest prices through economies of scale.
Amazon has established a powerful competitive advantage through its unmatched logistics and distribution network. This allows for extremely efficient delivery times, often as quick as the same day, making it a go-to option for consumers seeking quick and convenient purchases. Amazon's vast product range and customer-centric approach, including user reviews and personalized recommendations, further solidify its market dominance.
Starbucks’ competitive advantage lies in its brand experience. Beyond just selling coffee, Starbucks has created a distinctive ‘third place’ atmosphere between home and work where customers can relax and enjoy their coffee. This, combined with a strong global brand and a consistent, high-quality product offering, has helped Starbucks maintain a loyal customer base and a significant presence in the coffee industry.
Google's competitive advantage is rooted in its dominant search engine technology, which has become synonymous with online searching. Its algorithms provide fast and relevant search results, earning the trust of billions of users worldwide. Additionally, Google's diverse range of integrated services like Gmail, Google Maps, and Google Drive, and its advancements in AI and machine learning, further consolidate its market position.
Nike has built its competitive advantage through strong brand recognition and marketing strategies. Its association with high-profile athletes and influencers, innovative product designs, and a focus on performance and lifestyle have made it a leading brand in the sports apparel and footwear industry. Nike's ability to connect with its audience through storytelling and aspirational messaging keeps it at the forefront of consumer preferences.
Enhance the Success of Your Competitive Advantage Strategy
A key sign of a flourishing economy is healthy market competition. For businesses, this means examining their products and services, processes, and other factors to establish where they have a competitive advantage. Focusing on this element or elements empowers brands to stand out from their rivals, engage more of their target audience, boost sales, and ultimately experience lasting growth.
What does your competitive advantage strategy look like? Whether it’s cost leadership, differentiation, a focus strategy, or something more specific, you want a system for tracking performance, getting all teams on board with the initiative, and ensuring all efforts contribute to big-picture goals. With Spider Impact from Spider Strategies, this is possible.
Our strategy and performance management software makes it easier for executives to communicate the objectives of a competitive advantage strategy to everyone at the company. It automates visualizations, providing personnel with the information they need to do their part, such as executive briefings, dashboards, and other reports. Other benefits of Spider Impact include:
- Automated meetings
- Advanced data governance and security
- Insight into the timeline of strategic initiatives
- Access to high-level strategy management and low-level operational business intelligence
Contact us to learn more about competitive advantage and how Spider Impact can help your organization experience success with business strategy. You can also book a live demo or schedule a free test drive today.
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