Competitive Advantage: Meaning And Types
Sustainable business strategies reflect the competencies and capabilities of an organization in addressing customer needs. These strategies create competitive advantages…
October 17, 2021 | 7 mins read
Sustainable business strategies reflect the competencies and capabilities of an organization in addressing customer needs. These strategies create competitive advantages over other products and organizations in the industry. A smart approach to establish a favorable position in the market is to offer more value to customers through affordable products and quality services.
Competitive advantage in strategic management can be seen anywhere goods are sold, even in a vegetable market. Sellers try to outperform each other by offering the lowest rates, best quality and product differentiation, such as doorstep delivery. This way they address the three main aspects of customer retention — quality products, cheap rates and good customer service, without even having theoretical knowledge of the meaning of competitive advantage. A manager can create a competitive advantage in business by identifying ways to increase customer value that can set their business apart.
Let’s explore what competitive advantage is and how you can construct competitive advantages as a manager.
Competitive advantage is a factor or set of factors that help an organization outperform its rivals using superior services or goods that are better than the rest. These factors can minimize production costs and generate better margins. A competitive advantage can be attributed to several factors such as branding, quality, cost structure, distribution network and customer service. The meaning of competitive advantage shows us that it can extend beyond businesses to countries or individuals. Competitive advantage in strategic management can generate huge value for organizations and shareholders.
If we look at the meaning of competitive advantage, we find these characteristics:
The ability of an organization to produce a product or offer service at low opportunity cost is its comparative advantage and its ability to offer something unique is the differential advantage. Both are competitive advantages for increasing profit margins.
Big organizations usually create more competitive advantages due to their purchasing power and production advantages. If a big firm operates in a market with low competition, it can create an advantage where it offers specific services at premium rates. If managers fully understand the meaning of competitive advantage, they can focus on improving customer value and identify advantages in the market. The aim is to benefit the customer, which is the driving factor behind constructing a successful and sustainable competitive advantage in business. Let’s look at the key elements involved:
Sustainable competitive advantage in strategic management is highlighting how the customers can benefit by buying from an organization over its rivals. It’s an effective strategy for profit-making, relying on the basic understanding of a market.
Now that we know what is competitive advantage and what to focus on to achieve one, let’s look at the types of competitive advantage and some examples.
Even though the answer to the question ‘what is competitive advantage’ remains unchanged, strategists over the years have found ways to separate the different factors that can create competitive advantage by dividing it into different types. It’s important to test every proposal to determine how sustainable a decision can be while trying to gain a competitive advantage in business. Here are the different types of competitive advantage:
Cost leadership is the strategy where an organization produces products or offers services of the same quality as that of a rival but at much lower rates. It’s achieved by large-scale production, focusing on continuously improving operational efficiency and reaping the benefits of economies of scale. Big firms often find it easy to prevent rivals from duplicating their model and create cost leadership.
Focus or segmentation strategy was the go-to for small firms when they had to compete with large organizations. The strategy is to target a certain segment rather than the entire market and craft offerings according to their needs. This is done by gathering detailed information and understanding the specific needs of that segment of customers. An organization can focus on the uniqueness of its product or its cost when targeting a specific group. It’s such an effective method that now even big names like Facebook, Amazon and Google devise strategies around focus targeting.
An organization enjoys a differential advantage when it offers products or services that stand out from the clutter. The organization has to define its uniqueness and how it can benefit a customer. This is either created by a unique product or specific, high-quality services. Innovation drives differentiation by disrupting an industry and creating sustainable advantages.
In modern times, brand loyalty is a big competitive advantage that organizations can capitalize on. Aggressive marketing campaigns and high-quality, reliable products can create a strong brand image. Customers refuse to choose other brands if an organization maintains customer value.
Big organizations with huge funding can disrupt the market by offering high-quality products and services at fairly low rates. They have the financial backing to entice customers with attractive offers even if the result is narrow margins of profit. Smaller businesses can’t sustain such a model and usually lose their edge.
The network effect is the advantage over rivals that a business gains when a huge number of people use their products or services. For example, users of a messaging app may be reluctant to switch platforms as all of their contacts use that particular platform. This effect gives a business a competitive advantage to dictate a market.
It’s quite common for businesses to gain advantages by using entry barriers. Policies, trademarks, patents and exclusive suppliers prevent rivals from becoming close competitors or entering the market at all.
First mover advantage is gained by organizations or individuals who take calculated risks to enter a blue ocean market. Because there’s no competition, they establish a monopoly in the beginning. Later, they gain a competitive advantage over other players by having a stronghold over a majority of the market share.
To establish a clear-cut competitive advantage, businesses can rely on more than one strategy. If using two or more strategies means sustainable growth and profit then managers can be assured that their model will be tough to replicate.
The meaning of competitive advantage becomes quite clear by studying its examples. Let’s have a look at a few:
Facebook initially capitalized on the social media industry with personalized content and an advertisement-free model. The platform was unique and constant innovation only strengthened it to create a near monopoly-like position. With their nearest competitors far from threatening their market share, Facebook today enjoys a competitive advantage because of their network effect.
If we don’t know something today, we google it. That itself is proof of the competitive advantage that Google has gained over these years. It’s the most effective search engine that has created a strong base with its innovation, funding, network effect and user experience.
Walmart capitalized on cost leadership to offer branded products at cheaper rates. It leveraged economies of scale to minimize costs of operation and outsourcing which allows it to charge less money for quality products.
All of these big names maintained their positions by monitoring the competition and using flexible strategies that adapted to change. Using market research is key as it’s an ongoing process fundamental to supporting an organization’s position in the industry. It’s true that in a changing market, competitive advantage may be the exception. So, it’s important for managers to not only understand how the market works but also how it will change.
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