10.2K views This has to be one of the overused terms when developing business models and plans. What is the competitive advantage?
Simply put, a competitive advantage is a technique or practice used to put an advantage against competitors so that the products and/or services are superior in one or more attributes, leading customers to prefer the products and services with an edge. An advantage can be one (or more) of the following:
- Cheaper price
- Better durability
- More functionality
- More customization
- and so on...
How to build a competitive advantage?
Building a competitive advantage is important in a world full of choices, otherwise the Value Proposition will not be able to compete in the market. In order to come-up with such an advantage, it is required to have some resources that might include one or more of the following:
- Access to natural resources or geographic locations, such as oil producing companies that own oil reserves that competitors cannot duplicate.
- Highly skilled human capital with significant experience offering unique set of services to customers that it is difficult to compete with.
- Possession of new innovative Intellectual Property (IP) or technology, such as software companies offering proprietary software licenses of essential software.
- Low-cost labor and resources to manufacture products at the lowest cost, especially in developing regions where it is possible to get a production line setup at a lower cost than competitors overseas.
- Power of the brand name recognition when the company is big and well known, where customers come to trust and buy products not necessarily for their need- but rather because they trust and love the brand name itself. Often times, this allows the brand names sell at a premium cost.
Comparative advantage
Often times, coming up with a unique proposition becomes a difficult job. It is not easy to gain exclusive access to a natural resource or technological innovation, thus it is easier here to focus on doing 'just enough', which is also known as the Comparative Advantage.
Comparative advantage is doing better than the competition on one or more fronts. Here, it is easier to compete in the market due to doing marginally better than them on pricing, efficiency, usability, or another aspect that is value by the customer. See the example displayed in the figure above- we have three competitors (A, B, C) with competitive advantages for each (price, durable, or functional). If our competing product does better on one or more of these aspects (cheaper, more durable, better functionality) then we have a comparative advantage.
Differential advantage
On the other hand we find differential advantage, which means: gaining advantage by doing something different. Startups and business can research customer needs and come up with different solutions or different features that were not available before in the market, so that they have first mover's advantage to the market. Returning to the above example, if our product offers customization and this is not something that is being covered by competition, then we have a differential advantage.
Competitive vs. Unfair advantage
Unfair advantage is not totally synonymous with Competitive advantage, the main difference being that an unfair advantage is something that is more difficult for competitors to mimic or copy, which enforces the edge over competition.
Take online websites as an example. A more established site will have better SEO and trend higher in search results than new emerging and less established sites. Although these emerging sites may spend more money on marketing and reach, the organic reach for the more established site remains an unfair advantage.
Porter's competitive strategies
Porter suggests different competitive strategies available to firms:
- Cost Leadership: becoming the low cost product, offering the cheapest product in the market.
- Differentiation: As mentioned above, a company can decide to undertake a different and un-conventional approach to introduce a differential advantage.
- Focus: here, the company focuses on a single product or service (or target segment) and becomes either a cost leader or a differentiator.
