In the following article you will know what it is competitive advantagehow to achieve it and why it can mean the success of your business.
Competitive advantage is the reason why there is brand loyalty, it is the reason why you prefer an iPhone over any other mobile phone. It is the reason why you prefer a Coke and not Pepsi.
For this reason, finding, developing and taking advantage of the competitive advantage is vital to expanding the opportunities for success.
It is not easy to know how to be ahead of your competition. However, it is often more difficult to stay there once you reach the top. When it comes to competitive advantage, offering a unique product or service is absolutely vital to your business.
However, all companies within your niche are looking to offer a unique service or product; making it increasingly difficult to stand out.
Some companies rely on patents to protect themselves, others try to stay in the shadows as long as possible; but the reality is that you need to create something very difficult to copy or it will be impossible to maintain your competitive advantage. Sooner or later, the competition will try to imitate what works.
Taking into account the importance of this topic, we wanted to create this content to explain more precisely what competitive advantage is and what are the different ways to obtain it. Pay close attention to the following paragraphs.
What is competitive advantage?
The competitive advantage it is a characteristic of the company and/or product that allows it to stand out from its competitors. This can be found in any part of the processes, allowing to cut costs, offer better prices, provide a better product or provide better customer service.
The Investopedia portal defines this term as the conditions that allow a company, or even a country, to produce a product or service of equal or greater value at a lower price or in a more efficient way. These conditions allow you to generate more sales compared to your rivals.
In other words, a competitive advantage is an advantage over the competition, gained by offering consumers greater value, either through lower prices or by providing greater benefits and services that justify higher prices.
Types of competitive advantage.
The two types of competitive advantage used by companies are comparative advantage and differential advantage. We will explain them below.
Differential advantage.
Refers to all those characteristics and benefits unique What can a company provide to its customers? differentiating of your competitors. A differential advantage gives a firm the ability to charge higher prices for its products or services, since customers perceive the benefits of the extra cost.
These differences are not only related to the quality of the product. Two companies can offer a product of the same quality, but one can offer better payment systems, fast shipping or better after-sales service.
This type of differentiation can be achieved through a high level of interaction and commitment with the customer, who becomes a faithful ambassador of the brand.
Comparative advantage.
This term is coined by the English economist David Ricardo, who in the 19th century stated that countries should specialize in producing only products in which they have more expertise and are more efficient in terms of costs.
In the case of a company, the comparative advantage It is your ability to produce a good or service more efficiently than your competitors. In the case of two companies that offer two goods of the same quality, the one that can reach the finished product with lower production costs will have the comparative advantage.
This will give the company higher profit margins even if it sells the product at the same price as the competitor.
For this reason, companies like Apple have their production centers in countries like China; where the cost of labor is lower compared to the United States. This lowers production costs.
What should I take into account to generate competitive advantage?
In order to build a competitive advantage that lasts over time, you must first define and understand the following elements:
- Benefit: What are the benefits that your products or services offer to your customers? Is your company solving the problems or supplying the needs of a target niche? You must define very well the benefits that you can offer in order to direct your differentiation strategies.
- Target market: Do you know exactly who your market is? Do you know their problems? Do you know what they are looking for? If you know your target market, you can provide products or services that they really need. Even more important, you will know how to get them to buy from you.
- Competition: Do you know your competition? Do you know how they operate? How much do you charge? Do you know their strengths and weaknesses? Knowing who you’re up against will put you ahead of the game.
To build competitive advantage, a company must detail the benefit that provides your target market so that the competition they can’t do it.
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Generic Strategies by Michael Porter.
The famous American academic, renowned for his economic theories and business strategies, Michael Porter, suggests that the fact that a company is the market leader does not mean that it will be forever.
A company must have clear objectives and strategies to achieve a sustainable competitive advantage. The corporate culture and employee values must be aligned with those objectives.
As it is very complex to remain a leader over time, Porter says that there are three ways in which a company can achieve competitive advantage: Costs of leadership, differentiation and focus.
Leadership costs.
Being the leader has the advantage of being able to benefit from economies of scale. At this point, a company can afford to use its large profits to create other strategies that improve its processes.
Likewise, you will have priority over your suppliers, because they will offer you more reasonable prices for the purchase of raw materials. In addition to longer payment terms.
Differentiation.
This happens when a company provides greater benefits to its customers. It can be achieved by means of a higher quality product or a shorter shipping time. Companies often achieve differentiation through innovation, a quality product, or better customer service.
Approach.
If your company focuses on a very specific niche and knows it better than any other company, you will have achieved a competitive advantage through the focus strategy.
This means that you will know your customers better than anyone and for this reason you will be able to solve their problems or meet their needs more efficiently.
Other strategies to generate competitive advantage.
The strategies mentioned by Porter generally cover the possible paths that an individual or company can take to create competitive advantage. However, modern competitive advantages speak of brand recognition, economic power and intellectual property rights; among others.
- Patents: Patents or intellectual property rights are an effective way to protect yourself against competition. They create strong barriers to entry and differentiate their products to the point that they cannot be copied. For example, pharmaceutical companies benefit from this method.
- Economic power: Those companies with their accounts full of cash or that have great financing, have the facility to enter the market or implement very risky strategies for other participants in the industry. When you have the funds, it is easier to make really attractive offers and sell at very low prices.
- Brand: That your brand is recognized and preferred by customers will become one of the most valuable assets of the company. An effective image and positioning strategy makes customers become loyal and even pay more than usual. These customers do not pay for the product…they pay for the brand.
- network effect: When a company gets many people to use its service, it becomes even more valuable. In the case of WhatsApp, almost all our contacts use it; which leads us to not want to try other alternatives.
- A great team: A company’s staff have a huge impact on its success. From the customer service representative, who might provide the only interaction a customer has with your company, to the CEO; each team member plays a role in public perception. If the team focuses on creating a great customer experience, this can translate into brand recognition.
Examples of competitive advantage.
Below you will find some real examples of competitive advantage:
- Amazon: The main competitive advantages of the company are the low prices it offers and the speed of its shipments. Characteristics that he has achieved thanks to his leader position in the market. This e-commerce platform has achieved an economy of scale that is difficult for competitors to replicate, let alone retailers.
- Louis Vuitton: Louis Vuitton’s advantage is based on both the differentiation as in a focus strategy. The company may be a leader in the luxury market, as it caters to a specific niche and its designs are distinctive to the brand. This allows you to charge high prices to a market that is willing to pay them.
- Linkedin: This company moves under a focus strategy. Not being a conventional social network, it is focused on business professionals and enjoys a competitive advantage as a niche social network.
- Google: This tech giant clearly benefits from its leader position. Additionally, it was one of the first search engines and as such has remained a market pioneer.
The company was able to achieve this competitive advantage due to its size, innovation, market position, and the benefits of the Internet. Not only does it have a leadership cost strategy, but its innovation and brand recognition set it apart from its competitors.
If you want to know more about how Google makes money, click here.
- Walmart: Walmart’s success lapses entirely on economies of scale, so its strategy is purely about leading costs. Its power and size allows it to offer products at greatly reduced prices. Something that greatly attracts your customers.
- Tesla: From its inception, Tesla implemented differentiation strategies thanks to the novelty and quality of its vehicles. He accomplished something the auto industry thought unlikely. And although Elon Musk’s intention is to reduce the price of his products, his market niche remains very specific. This makes your customers willing to pay premium prices for a product that does the same thing as much cheaper products.
Conclusion.
A competitive advantage It will differentiate your business from the competition. It will not only allow you to attract more customers, but also charge higher prices. Maintaining that competitive advantage over time requires continuous analysis of processes, the creation of new products or variations thereof. This in order to keep customers loyal and interested in your business.
And never forget, while you are in a market or industry that is growing; the possibilities are endless.
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