What Is Competitive Advantage? (2024)

Definition and Example of Competitive Advantage

Competitive advantageis what makes an entity's goods or servicessuperior to all of a customer's other choices. While the term is commonly used for businesses, the strategies work for any organization, country, or individual in a competitive environment.

For instance, a retailer that offers the lowest prices around has a competitive advantage over other retailers whose prices are higher. The low prices can make that retailer's products more attractive than other, higher-priced options.

How Competitive Advantage Works

To create a competitive advantage, a business must provide a clear benefit to its target market that's better than what the competition offers.

Consider: What is the real benefit this productor service provides? It must be something that customersneed, and it must offer realvalue. Business owners also need to stay up to date on the new trends that affect theproduct, including any new technology.

For example, in the early days of the internet, newspaper owners were slow to respond to the availability of free news online. They thought people would continue to pay for news delivered on paper once a day.By not staying up to date on the advance (and advantages) of the internet, they allowed their competitive advantage to slip away.

A business also needs to be closely attuned to its target market to create demand, the driver of alleconomic growth. They need to know exactly who their customers are and how they can make their lives better. In the example above, newspapers'target marketshrank to older people who weren'tcomfortable getting their news online.

Finally, it's important to identify competitors. Competitors aren't just similar companies or products. They also includeanything else your customer could do to meet theneed you can fulfill. Newspapers thought their competition was other newspapers until they realized it was the internet. They didn't know how to compete with a news provider that was instant and free.

Types of Competitive Advantage

In 1985, Harvard Business School Professor Michael Porter wroteCompetitive Advantage,the definitive business school textbook on the topic, which helps companies to create a sustainable competitive advantage.

In his book, Porter explained that a company must create clear goals, strategies, and operations to build sustainable competitive advantage. Thecorporate cultureand values of the employees must be in alignment with those goals. Porter researched hundreds of companies to identify the three primary ways that companies achieve asustainable advantage:cost leadership, differentiation, and focus.

Cost Leadership

Cost leadershipmeans that companiesprovide reasonable value at a lower price. Firms do that by continuouslyimproving operational efficiency. Theymight pay their workers less. Some firms compensate for lower wages by offering intangible perks such asstock options, benefits,or promotional opportunities.

Otherstake advantage of unskilled labor surpluses. As these businesses grow, they can benefit fromeconomies of scaleand buy in bulk.

Differentiation

Differentiationmeans companies deliver better benefits than anyone else. A firm can achieve differentiation by providing a unique or high-quality product. Another method is todeliver it more quickly. A third is to market in a way that reaches customers better.

Acompany with a differentiation strategy can charge a premium price, which means it usually has a higherprofit margin.

Innovation means they meet the same needs in a new way. An excellent example of this is Apple. The iPhone was innovative because it provided a simple handheld device with the power of a computer. Quality means that the firm provides the best product or service. Tiffany's can charge more because patrons see it as far superior to other jewelry stores.

In short, customer service means going out of the way to delight shoppers, like in the case of Nordstrom's, which was the first to allow returns with no questions asked.

Focus

Focusmeans the company's leaders understand and service their target market better than anyone else. The key toa successful focus strategy is to choose a very specific target market. Often it's a tiny niche that larger companies don't serve.

For example,community banksuse a focus strategy to gain sustainable competitive advantage. They target localsmall businessesorhigh-net-worth individuals. Theirtarget audienceenjoys the personal touch that bigbanksmight not be able to give, and customers are willing to pay a little more in fees for that service.

National

Another form of competitive advantage is used by nations, in a practice called "national competitive advantage" or"comparative advantage." For example,Chinauses cost leadership by exporting low-cost products at a reasonable quality level. It can do because itsstandard of livingis lower, which means it can pay its workers less.

Indiastarted as a cost leader but is moving toward differentiation. It provides skilled, technical, English-speaking workers at a reasonable wage.Japanalsochanged its competitive advantage. In the1960s, it was a cost leader that excelled at cheap electronics. By the 1980s, it had shifted up to differentiation in quality brands, such asLexus.

America's competitive advantage stems from its innovative practices as a nation. For example, U.S. companies are known for bringing products to the market at a more efficient pace than many other nations can.

While innovation is driven by many factors, it's clear that the U.S. has benefited from its diverse makeup as a country. In fact, there's scientific evidence showing that diversity, and maintaining a diverse workplace, help to drive innovation and market growth forward.

Amar Bhidé makes a good point in"The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World." Even if the United States starts to lag behind other countries in producing engineers, it's still better at bringing innovations to market. That's just one of the waysnatural resources boost America's advantage.

Individual

There can be individual competitive advantage, too. For instance, at work, you can use the theory of competitive advantage to advance your career. If you are anemployee, work as if you were in business for yourself. Your target market is your employer, your benefit is how you increase the company's profit, and your competitors are other employees and technology.

Communicate your competitive advantage in your appearance, your resume, and your interview. Once you've got the job, continuing communicating your advantage in your work performance. You can use your advantage to differentiate yourself from your peers and move ahead.