What is a Competitive Advantage?
A competitive advantage is an attribute that enables a company to outperform its competitors. This allows a company to achieve superior marginsOperating MarginOperating margin is equal to operating income divided by revenue. It is a profitability ratio measuring revenue after covering operating and compared to its competition and generates valueValue AddedValue Added is the extra value created over and above the original value of something. It can apply to products, services, companies, management, and 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 from competitorsHighly skilled laborA unique geographic locationAbility to manufacture products at the lowest costBrand 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 about 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 its 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 cannot.
Strategies forCompetitive 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 that of its competitors, the company is then able to establish a selling price that is unable to be replicated by other 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 then be able to set a premium price on its products or services.
In a focus strategy, a company focuses on a narrow target market segment. This strategy is successful if 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 segmentDifferentiation-focus: Differentiated products/services in a narrow market segment
Competitive Advantage in the Marketplace
Three great examples include:
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 ofCompetitive 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.
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