Defining Your Competitive Advantage And Finding Your Business Edge
As every business owner will tell you, staying afloat is difficult enough as it is. To succeed on top of simply surviving and to actually grow -- that’s a whole other challenge in itself. It doesn’t matter what your company does, what its products or services are, you’re always going to be competing directly with other similar companies in your industry. In order to survive, you have to beat your competition. How do you beat your competition? By defining what your competitive advantage is and to maintain that advantage over time.
What Is Competitive Advantage?
Your competitive advantage consists of a unique set of values or qualities that your company has that helps to set you apart from similar businesses within the same industry. For example, having the highest quality product or having the lowest price are two different competitive advantages. Your competitive advantage is why many customers will choose your product or service over those of your competitors.
Without a competitive advantage, customers won’t have a good reason to stay loyal to your company, which is why it’s so important to define what competitive advantage is. It’s not only how you’re going to survive long-term as a business, but it’s also your best chance at positioning yourself as a market leader within your industry.
How Does Competitive Advantage Works?
As convenient as it would be, you can’t just create a competitive advantage out of thin air. For example, you can’t just slash your products’ prices so that you now boast the most affordable product out of all your competitors. Doing so can not only hurt your profits, but could cause you to lose money overall and hurt your chances of growth, not to mention survival. The idea isn’t to just create a competitive advantage, it’s to create a sustainable competitive advantage. The question, then, is not only how you can define your competitive advantage, but how to maintain it as well. The illustration below should give you a basic idea of how your competitive advantage is defined and how it can become a sustainable competitive advantage:
The illustration above is helpful in showing the process of how a competitive advantage comes about. But let’s dive deeper to better understand how each stage leads up to the creation of a competitive advantage and how that advantage can be further leveraged towards the success of your company:
The resources are your company’s physical assets, human resources, and organizational capital. It’s your resources that determine what your company can do as far as operations and business activities go. Let’s say, for instance, that you own a taxi cab company. Your fleet of cabs, your drivers, and the money your company has combine together as a large portion of your resources.
Your capabilities refer to how you manage your company’s resources to meet market demands. Using the taxi cab example, your company’s capabilities will be dependent on how you manage the number of cabs and drivers you have, as well as the capital you have (needed for things like gas, car maintenance, car storage, and more). The number of passengers you’re able to serve within a specific area and within a specific time will be dependent on how you manage your resources.
A well run business will build a strategy based on the resources they have and the capabilities they have as a result of those resources. Using the aforementioned taxi cab example, a strategy might revolve around the area you service, how big of an area you service, how you schedule your drivers (especially if your drivers outnumber the cars you have), how much you charge per mile, and at what times you provide your service.
For example, maybe you can’t afford to charge the most affordable rates compared to other taxi services around you, nor do you have the manpower or vehicles available to provide 24 hour services. However, you may identify that a town within your area has a burgeoning nightlife and that there’s a lack of cab service in this area at night. Your strategy may be to target the area in which there are a lot of bars and to schedule your drivers at night to serve people who are coming home late.
If you have a good strategy in place and it’s well executed, it should become successful. When a strategy becomes successful, a competitive advantage should arise. In the taxi cab example, your competitive advantage would be that you offer a service in an area with a need and at a time when other competitors aren’t offering the same services.
Sustainable Competitive Advantage
If your strategy continues to be successful, it can become a sustainable competitive advantage. For instance, as people take your cab service home late at night from that one area more and more often, your company will become known by everyone as the taxi service to call. Your competitive advantage will become part of your brand. McDonald’s is a good real life example. They were one of the very first restaurants to provide “drive-through,” allowing people to grab their meal on the run -- a service that up until then, did not exist yet. As a result, it became a competitive advantage over other restaurants and soon, the brand “McDonald’s” was synonymous with “fast food.”
With the previous cab company example, you could lose your advantage should another cab company mimic what you’re doing. However, by establishing this particular competitive advantage before anyone else and actually identifying it as your competitive advantage, you can take steps to strengthen it. For example, maybe you station your cab drivers in areas where there’s a high concentration of bars at specific times at night so that customers will know exactly where to find them instead of having to call a service and wait for them to come pick them up.
If your competitive advantage becomes well established to the point that it’s sustainable, it will be difficult for other businesses to move to compete on that level. If your competitive advantage is valuable, rare, and difficult to imitate, that competitive advantage will turn into a core competency.
Basic Types Of Competitive Advantage
There are three main types of competitive advantage that you can focus on. These include cost advantage, differentiation advantage, and focus advantage. All three can be effective methods of creating a sustainable competitive advantage.
A cost advantage refers to the pricing of your product or service. You offer your products or services to consumers at a price that’s lower than similar products and services offered by competing businesses that are of the same (or close to the same) quality.
How is this possible without lowering the quality of your product or service? Some companies will pay their employees less, using the savings to reduce the price on their products or services. To compensate for their lower wages, they might offer other intangible benefits, such as stock options. Businesses that grow to a larger size will often leverage the economies of scale by buying in bulk to save on material costs, which allows them to lower their prices. It’s why companies like Walmart can offer lower prices on a lot of their inventory than smaller, family-owned businesses are able to offer.
The differentiation advantage refers to the specific advantage your brand is able to provide to its customers outside the price point. For example, maybe you offer the most feature-packed product available in your market or you’re one of the few (if not only) brands to produce their product using only sustainable and eco-friendly materials. Such a differentiation advantage not only helps set you apart from other companies in your industry, but also allows you to charge a premium price. The differentiation advantage can refer to anything from product quality and innovation to customer service and branding.
Obtaining a focus advantage involves targeting a very specific audience and making sure that you serve them better than anyone else. Focus advantage often involves some form of cost advantage or differentiation advantage as well. The idea is that you focus on a niche that larger companies don’t serve. For example, local banks will often target local businesses and provide them with more personal service and benefits that larger banks aren’t able to (or don’t bother to) provide.
Importance of Competitive Advantage
The success of your business, no matter what it is that you do, depends on your ability to define what your competitive advantage is and to ensure that it’s an advantage that’s sustainable over time. The three main reasons why it’s so important that you define your competitive advantage follow:
Distinguishes Company From Other Competitors
Distinguishing your company from other competitors is what will attract more new customers to your business and to keep them loyal to your brand. If there’s nothing that makes you stand out, then you’re not giving consumers a reason to choose your company over any other company that provides similar services or products (in fact, their own competitive advantages will be strengthened as a result of you not having one or not knowing what yours is).
Provides Distinct Quality
With a competitive advantage, you highlight a distinct quality in your product or service that will stand out to customers. Your competitive advantage, if sustainable, will become linked to the quality of your product or service.
Contributes To Brand Loyalty And Image Recognition
If you don’t have a competitive advantage, then even if customers choose to use your product or service they will have no reason to keep using it. They may try out the product or service of a competitor simply because they don’t know what makes your product or service special. They may not even remember your brand even after purchasing your product or service because nothing made it stand out. With a competitive advantage, you’ll increase both brand loyalty and brand image recognition.
Elements Of Competitive Advantage
Your competitive advantage arises out of the effectiveness of your business strategies. This includes the marketing strategy you implement. Your marketing strategy needs to be aligned to the values of your competitive advantage. This can be done by identifying these elements:
It’s not a competitive advantage unless it benefits your users. Identify how your product or service benefits your users. Your user benefits should tie directly to your competitive advantage. You’ll want to emphasize your user benefits throughout your marketing campaign.
Identify who your target market is. Your competitive advantage should cater to your target market, while your marketing efforts should help attract users in this target market. You won’t have much of an advantage if you’re targeting the wrong audience.
If you don’t know who your competitors are, then there’s no way to define what advantage your product or service has over theirs. Identify exactly who your competition is.
Examples of Companies And Their Competitive Advantage
Now that you have a good idea of what a competitive advantage is and how it’s defined, let’s take a look at some well-known examples of competitive advantages throughout a variety of different industries:
Louis Vuitton uses a differentiation advantage by creating luxury products that are of a higher quality than their competition. In fact, they’ve managed to link their differentiation advantage to their brand name. When people think of Louis Vuitton, they think of luxury. As a result, they are able to charge incredibly high prices for their products.
Amazon focuses both on cost advantage and differentiation advantage strategies. Their massive growth has allowed them to do both. For example, they can charge lower prices for products because they buy in bulk. This is most evident when comparing the price of their books (the product they were originally known for) to the price of books offered at traditional brick and mortar stores. On top of that cost advantage, they also have a differentiation advantage when it comes to their service. They offer faster shipping than almost any other online store and returning items that customers aren’t happy with is a cinch, making their customer support one of the best out there.
Google is by far the most popular search engine on the planet. It’s brand name is so strong that people use it as a verb (to “Google it” means to search for something on Google). This occurred as a result of Google’s efforts to maintain a differentiation advantage. Not only do they have one of the most user-friendly search engines -- the main page has very little else besides the search bar -- but they’ve also consistently worked to improve the quality of their product. They’ve done this by continuously tweaking their search algorithm to deliver faster, more accurate, and more relevant results to their users.
Leverage Your Competitive Advantage To Sustain Your Business Edge
Your company’s competitive advantage is what helps it stand apart from the crowd and what will ultimately help to drive your success. However, if you don’t define your competitive advantage, then you can’t leverage it to your advantage. Make sure that you define what your competitive advantage is so that you can sustain your business edge as you grow.
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