What is a Competitive Advantage?
In business, competition is one of the major issues that entrepreneurs have to grapple with when they are trying to make a profit. Finding a way to beat off competition in the industry can decide whether a business is successful or not.
In the contemporary business world, the competition has intensified even more since companies are spending more and more on adverts and other promotional campaigns. This forces companies to come up with strategies that will help them outsell their peers.
BREAKING DOWN Competitive Advantage
A competitive advantage is, therefore, an attribute that a firm/ company possesses which enables it to outperform its peers. It is the factor that buyers look at when choosing between options in the market. A competitive advantage can also be referred to as a competitive edge.
All profitable companies make a profit by having a competitive edge over their rivals. They have better bargaining power compared to their rivals which enables them to be more convincing. Apple used iTunes to market their products. Having a competitive edge is simply giving your customers a reason to buy your product over other people’s products.
Competitive advantage can be attributed to a variety of factors including cost structure, branding, and the quality of product offerings, distribution networks, intellectual property, and customer service.
Types of Competitive Advantages
There are two main types of competitive advantages that exist and they are the:
- Comparative Advantage
- Differential Advantage
Comparative advantage is the firm’s ability to create a good or service more efficiently compared with its rivals. This can be in the form of a higher quality of product created with a lower cost of production. This means that a firm can report higher profits by selling their products or services at a lower but more competitive price without compromising on quality.
Many companies always try this by cutting salaries which translates to a lower cost of production. Others even go to the extent of relocating their production bases to countries with lower wage caps in order to capitalize on cheap labor. Apple Inc. is a good example that has used a comparative advantage of using the cheap labor available in China to lower its production costs.
Another good example of comparative advantage is when firms achieve economies of scale after an expansion which can allow them to lower their prices since they buy raw materials at a lower price. A comparative advantage mainly favors larger companies that have the ability to be flexible in their operations.
The other type of competitive advantage is the differential advantage. This is where a firm/company makes uniquely attractive products that are able to appeal to the customer. This type of advantage can be achieved through a lot of research and innovation. It requires a firm to understand the needs of the customer and satisfy them with every need.
In the current business dynamics, differentiation will determine whether buyers will buy your product or not. That is why all companies are now coming up with innovative products that are meant to offer something unique and appealing to the customer. Differential advantage can largely help your company edge out rivals in the market.
A good example of a company with a lot of differential advantage is Apple whose products i.e. mobile phones, tablets, and laptops are unique and offer a lot of quality compared to most of their competitors. For this reason, buyers are willing to pay a premium price for these products with a guarantee that they are getting the best quality they can in the market.
Differential advantage can also be acquired by patenting. A patent gives the owner exclusive rights to an idea or product. Patents can make a company become an elite in the industry and thus producing products that are unique and of high quality. Patents are acquired through serious research with innovative and highly skilled researchers. Some companies can also buy patents from individuals and use them as their own protection.
How to Have a Competitive Advantage in Your Industry
Now that we have known what a competitive advantage is and how it can be instrumental in a company’s success, we can go ahead and see possible techniques that can be used to gain a competitive advantage over rivals;
- Understand Your Customer
It is a popular saying that “the customer is the king”. The customer is at the core of the design and quality of your product. You want the product to appeal to the customer in every possible way and this can only be achieved through listening to the customer. Interacting with your customers at the personal level is a very wise strategy and it can work to help you design your product/service around the customer.
- Examine Your Company’s Strengths
Your company obviously has strengths in certain areas compared to your competitors. You should, therefore, identify these strengths and market your product around these strengths. If your company offers the cheapest quality goods or services, use this as your selling point. If your company produces the best quality goods and services, use this as your marketing strategy. Know your company’s strengths and use them to entice buyers.
- Use a Differentiation Strategy
I defined the term differentiation earlier on in this article. Differentiation is when your company offers an attractively unique product compared to rival products.
A company should strive to have differentiated goods and services if they really want to have a competitive edge over their rivals. Look for gaps in the market that aren’t filled and use that as your design core when creating or upgrading your product or service.
If a mobile phone company wants to have an edge in the industry and they realize that cracked screens are a nuisance to customers, they should, therefore, produce phones that are more durable and harder to crack.
Innovation is the key behind very many economies in the world right now and this applies to the corporate world. Major companies in the world have set up innovation centers with Airbus being the latest company to do so. Innovation brings more ideas that will help products sell easily and hence give a competitive edge over their rivals.
- Operational Effectiveness
For a company to maximize production, they have to operate effectively and efficiently. This requires top-notch management and commitment from leaders in the company. All successful companies have very good operations in place which ensures that production runs smoothly and fast.
A company that has very good operations has a better competitive advantage compared to companies that lack efficient operations in place.
The business world is very dynamic and it changes within a short time. That is why firms need to be on their feet to adapt to changes in production and marketing. Trends do affect buyer attitude in very many ways and it is very wise for any business to keep up with the latest trends in the market. Those who lead in trends have a higher market advantage.
Flexibility has enabled major players in the business world to maintain their key positions for longer times and possess an advantage over their rivals. Samsung is a major leader in the smartphone industry due to its ability to adapt to numerous changes in the industry. It even leads to setting trends for other smartphone manufacturers to follow. Flexibility and ability to adapt to change are therefore very important if you need to acquire a competitive advantage in your company.
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