The ability of a company to outperform its competitors
What is Competitive Advantage?
Competitive advantage refers to the ways that a company can produce goods or deliver services better than its competitors. It allows a company to achieve superior margins and generate value for the company and its shareholders.
A competitive advantage is something that cannot be easily replicated and is exclusive to a company or business. This value is created internally and is what sets the business apart from its competition.
Key Highlights
- A competitive advantage is what sets a company apart from its competitors, in the eyes of its consumers.
- These advantages allow a company to achieve and maintain superior margins, a better growth profile, or greater loyalty among current customers.
- A competitive advantage is often referred to as a “protective moat.”
- Strong and repeatable competitive advantages can create sustained success for a business and attract capital more readily and cheaply.
What are Some Examples of Competitive Advantage?
Competitive advantages come in many shapes and sizes. They include, but are not limited to, some of the following:
Components of Competitive Advantage
For a competitive advantage to be established, it is important to know the following:
- Value proposition:A company must clearly identify the features or services that make it attractive to customers. It must offer real value in order to generate interest.
- Target market:A company must establish its target market to further engrain best practices that will maintain competitiveness.
- Competitors:A company must define competitors in the marketplace, and research the value they offer; this includes both traditional as well as non-traditional, emerging competition.
To build a competitive advantage, a company must be able to identify its value proposition that will be sought after by the target market, which cannot be replicated by competitors.
Building a Competitive Advantage
Michael Porter, the famous Harvard Business School professor, identified three strategies for establishing a competitive advantage: cost leadership, differentiation, and focus (which includes both cost focus and differentiation focus)[1].
1. Cost leadership
The goal of a cost leadership strategy is to become the lowest cost manufacturer or provider of a good or service. This is achieved by producing goods that are of standard quality for consumers, at a price that is lower and more competitive than other comparable product(s).
Firms employing this strategy will combine low profit margins per unit with large sales volumes to maximize profit. Companies will seek the best alternatives in manufacturing a good or offering a service and advertise this value proposition to make it impossible for competitors to replicate.
2. Differentiation
A differentiation strategy is one that involves developing unique goods or services that are significantly different from competitors. Companies that employ this strategy must consistently invest in R&D to maintain or improve the key product or service features.
By offering a unique product with a totally unique value proposition, businesses can often convince consumers to pay a higher price which results in higher margins.
3. Focus
A focus strategy uses an approach to identifying the needs of a niche market and then developing products to align to the specific need area. The focus strategy has two variants:
- Cost focus: Lowest-cost producer in a concentrated market segment
- Differentiation focus: Customized or specific value-add products in a narrow-targeted market segment
Competitive Advantage in the Marketplace
Three notable examples are:
- Walmart: Walmart excels in a cost leadership strategy. The company offers “Always Low Prices” through economies of scale and the best available prices of a good.
- Apple: Apple uses a differentiation strategy to appeal to its consumer base. It provides iconic designs, innovative technologies, and, therefore, highly sought-after products; this ensures that consumers are willing to pay a premium for Apple devices.
- Whole Foods Market: Whole Foods Market’s advantage relies on a differentiation focus strategy. The company is a leader in the premium grocery market and charges more premium prices because its products are unique. This is appealing to a niche market with higher disposable income.
What is the Importance of Competitive Advantage?
A competitive advantage is what sets a business apart from its competitors. It is essential in order for a business to succeed, whether it’s by ensuring higher margins, attracting more customers, or achieving greater brand loyalty among existing customers.
Higher margins, a better growth profile, and lower customer churn tend to also be very popular among both investors and creditors — making capital more readily available (and cheaper) for firms that are able to maintain a strong competitive advantage among their peers.
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.
Additional Resources
Absolute Advantage
Opportunity Cost
Monopoly
See all management & strategy resources
FAQs
Your statement of competitive advantage has four components: your name, your company, a statement about a problem in your market, and how you and your product solve that problem. Essentially, it is a 30-second statement explaining what differentiates your company in the marketplace.
How do you answer what is your competitive advantage? ›
Your competitive advantage is the combination of marketing elements that sets your business apart. It's about the unique benefit customers get when they do business with you.
...
Ask yourself:
- why do customers buy from my business?
- why do customers buy from my competitors?
- why do potential customers choose not buy at all?
Five types of competitive advantage
- Cost-based advantage. This is the most obvious way of achieving competitive advantage. ...
- Advantage from a differentiated product or service. ...
- First mover advantage. ...
- Time-based advantage. ...
- Technology-based advantage.
Your statement of competitive advantage has four components: your name, your company, a statement about a problem in your market, and how you and your product solve that problem. Essentially, it is a 30-second statement explaining what differentiates your company in the marketplace.
Do competitive advantages last forever explain your answer? ›
A sustainable competitive advantage is a long-term concept, but will not last forever. As soon as any company develops one, its competitors will immediately start trying to copy what it does. Once one of them manages to do so, the advantage is gone.
What are the 3 competitive advantages? ›
There are three main types of sustainable competitive advantage: differentiation, cost leadership, and focus advantage.
What are the 4 types of competitive advantage? ›
The four primary methods of gaining a competitive advantage are cost leadership, differentiation, defensive strategies and strategic alliances.
What is strongest competitive advantage? ›
The strongest competitive advantage is a strategy that that cannot be imitated by other companies. Competitive advantage can be also viewed as any activity that creates superior value above its rivals. A company wants the gap between perceived value and cost of the product to be greater than the competition.
What are 2 advantages of competitive advantage? ›
Why is competitive advantage important?
- It can contribute to higher profit margins.
- It may help attract more customers more frequently.
- It helps maintain brand loyalty.
- It can add predictability and constancy to your company's revenue streams.
- It may help attract more brand alliances, talent and potential investors.
Most successful companies have strong core competencies that they exploit to maximize business and profits. For instance, Amazon's goal of being the “most customer-centric company on earth” embodies the core competency that gives them competitive advantage over numerous other retailers.
Toward global competitive advantage: Creation, competition, cooperation, and co-option.
What are the six pillars of competitive advantage? ›
They are: location, selection, service, quality, price, speed, and turnaround.
What are the 6 dimensions of competitive advantage? ›
Competitive priorities are defined as the dimensions that a firm's production system must possess to support the demands of the markets in which the firm wishes to compete [24]. Reference [25] identifies six criteria which act as competitive priorities: quality, cost, delivery, flexibility, customer focus and know-how.
What are the 7 powers of competitive advantage? ›
The seven powers: Scale economics, Network economics, counter-positioning, switching costs, branding, cornered resource, process power.
What are two strategies for competitive advantage? ›
The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them, lead to three generic strategies for achieving above average performance in an industry: cost leadership, differentiation, and focus.
What is an example of competitive advantage example? ›
For example, if a company advertises a product for a price that's lower than a similar product from a competitor, that company is likely to have a competitive advantage. The same is true if the advertised product costs more, but offers unique features that customers are willing to pay for.
What is your competitive advantage interview? ›
What is a competitive advantage? A competitive advantage is the ability to stay ahead of your present or potential competition. People typically gain a competitive advantage by evaluating the strengths and weaknesses of their competitors and seeing how you could improve your own performance to obtain an advantage.
What is an example of competitive advantage in a sentence? ›
He sought competitive advantage on the field, and at the turnstiles. Paying the public sector over the odds increases wages in cheaper regions, taking away their competitive advantage.
What is competitive advantage and provide two examples? ›
A competitive advantage is where one business has an edge over another. In other words, it is what makes the business stand out from other competitors in the market. For example, a business may have a competitive advantage due to its brand image, technological expertise, customer service, or a distribution network.
What is Starbucks competitive advantage? ›
Excellent customer service is one source of Starbucks' competitive advantage. Starbucks' emphasis on ensuring a positive customer experience has allowed it to become one of the leading firms in the coffee industry.
McDonald's is an industry leader in the fast food industry. Its key competitive advantages have included nutrition, convenience, affordability, innovation, quality, hygiene, and value added services. The success of the organization has been its ability to leverage its key strengths so that it can overcome weaknesses.
What are 5 examples of competition? ›
Types of Competition
- Interspecific Competition. Interspecific competition is the one that occurs between different species that use the same resource or a group of resources. ...
- Intraspecific Competition. ...
- Interference Competition. ...
- Exploitative Competition. ...
- Apparent Competition.
A competitive advantage is a strength or capability that enables an organization to meet a customer or market need better than the competition. Competitive advantages are core organizational strengths that are difficult for competitors to recreate or duplicate.
What is an example of competitive advantage employees? ›
12 competitive advantage examples
- Company culture. Many companies create appealing and dynamic company cultures to increase their appeal to potential employees and customers. ...
- Reputation. ...
- Economies of scale. ...
- Innovation. ...
- Customer experiences. ...
- Technology. ...
- Location. ...
- Employee expertise.
Creative Ways to Stand Out in a Job Interview
- Be Intentional About Your Virtual Background. ...
- Show Some Professional Levity. ...
- Ask Meaningful Questions. ...
- Promote Your Unique Skills. ...
- Reiterate Your Interest, and Leave a Tangible “Takeaway”
