What Is a Competitive Advantage? (Plus Types and Examples)
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Competitive advantages are factors that allow business to perform better than their competitors. A company may develop advantages through their products or business strategies. Learning about these advantages may help you understand why some businesses succeed in their markets. In this article, we discuss how these advantages work, describe various common types of advantages and provide a few key examples.
How does competitive advantage work?
Competitive advantage is an attribute that a company has that other companies can't easily replicate or reproduce. This is because these advantages are commonly a characteristic that businesses develop over time. The three key factors that can play a role in how a business might develop a market advantage are an analysis of the target market, implementing strategies and monitoring progress and performance. Here is a description of each factor:
Analysing the market
Developing a market advantage usually require knowledges of target audiences and how it affects the overall growth of a business. One important reason companies achieve an advantage relates to quality products, lower-priced goods and services or an otherwise unique selling point that attracts the interest of a company's target market and can sustainably retain customers. A business can begin with analysing their market by considering these three questions:
Who is the target market or demographic of a product or service?
What is the biggest benefit a product or service offers customers?
What are the strength and weaknesses of competing products or services?
For instance, a health and wellness supplement provider might identify its target market as middle-aged adults needing anti-ageing supplements. To better reach their target audience, the company invests more into developing anti-ageing solutions and focusing advertising campaigns on the longevity benefits of their products.
After completing adequate market analysis, businesses may develop and implement a strategy they can use to position their products or services as better than their competition. For instance, a business might focus on differentiating its products or making its products stand out from the competition. Some other strategies a business can approach to better position itself for an advantage include:
cost leadership strategies
Knowing the target market and being able to utilise one of these strategies is another way to create competitive advantages. Businesses can then focus on building up their advantage over time by monitoring and recording the performance of their strategies and recording results to further analyse progress towards developing their advantage.
Monitoring progress and performance
As a business operates over time, it can monitor the strategies it has implemented to build its market advantage. For instance, a communication platform whose advantage is its network effect may monitor the number of new users referred to the service through veteran subscribers. Monitoring this information can help the platform designers to create more incentives for users to sign up for their service, like referral programmes or bonuses.
Companies also often implement multiple strategies and constant review can help determine which are more cost-effective and worth investing more time and money into.
Types of competitive advantages
The type of advantage a business has usually depends on its approach to developing and expanding its business. Here are six common types of advantages a business may have:
A company that has a differential advantage offers products or services that have more unique benefits to users than competing options. A product or service's unique selling point can be any number of different traits, such as better quality, longer-lasting and more functionality or can be other specific traits a company offers in relation to its products and services, such as free shipping or a longer warranty period.
Companies with a differential advantage often directly advertise it to their target audience. For example, a company that provides products with more functions that its competitors may focus on advertising its capabilities in a long list to show consumers their product is more useful than its competitors.
Cost leading advantage
A cost leading advantage means a business offers products or services that are priced lower than competitors. The cost leading advantage can be due to having lower labour expenses, using alternative materials that cost less or finding cheaper sources to provide the same components or services. A business may also reduce its net profit margins to price products lower than its competitors. For example, generic brands often sell products at lower prices than similar products offered by established brands.
A company with a market-focused advantage has a product or service that has a unique benefit tailored to its target audience. For instance, for an online tech company, the unique benefit of their products or services might be helping customers find information about a specific issue. This type of advantage can also mean that a company focuses its marketing efforts on positioning its products as the best solution to a specific problem. This advantage usually requires extensive research on feedback from target audiences, such as online surveys, product reviews and customer complaints.
A business with a network advantage usually has many customers that refer products and services to potential customers. Businesses with a stronger network effect often have better products, services or branding. The more awareness and customers of a brand, the stronger the network effect is usually. Companies can further enhance their network advantage by offering referral promotions, such as coupons or store credit.
A business with a resource advantage may have exclusive access to resources or to a greater supply of resources than competitors. For example, an oil company that has access to larger oil deposits has a resource advantage. This type of advantage usually also occurs when a business has higher-quality or more-experienced staff than others, such as having a larger customer service team or more knowledgeable sales staff.
There are many types of brand advantages. A business with a brand advantage might have a more positive public reputation. For example, consumers may trust new medicines or therapies from a more established pharmaceutical company. The company can also have a product name that is well-known or can support marketing campaigns that create more awareness. More effective branding, such as a memorable logo or slogan, often results in a brand advantage, as their products may be more recognisable to regular consumers.
Examples of competitive advantages
A market advantage develops over time with continuous improvement and management of how a business develops its position in the market. Here are some examples of how cost leadership, market-focus and unique products can create market advantages.
Here's an example of an electronics manufacturer developing a cost-leadership advantage:
TechGiantCorp is a large-scale electronics manufacturer that wants to better position itself to develop an advantage. The executive teams decide to scale down the costs of operations and materials to lower the prices of its products. They predict that if they can successfully offer their products at lower prices than their competitors with equal quality, then they can gain an advantage in their market. This strategy resulted in a sales increase of 20% while also reducing costs by 10%, allowing them to gain a majority of the market share for electronics.
Here's an example of a pharmaceutical company that develops its market advantage by focusing on the marketing and branding of its products:
Thomas Ledbetter Inc., a large-scale drug manufacturer wants to improve its competitiveness in the market with its anti-inflammatory medications. The marketing teams decide that if they can effectively market themselves as a trustworthy brand, customers may choose to purchase their products over other inflammatory drug products. The company hosts several public relations and marketing events to introduce itself to more consumers and build stronger connections with the market. This strategy allows Thomas Ledbetter Inc. to leverage its brand to affect consumer purchasing behaviour and earn a greater portion of the market share for specific products.
Here's an example of how a company can develop market advantage by having a unique product compared to its competitors:
Established Diesel, Inc. is a new small-scale manufacturing company that wants to establish its place in the market. The executives are considering how they can effectively compete with the dominant player in their market, which has large budgets for research and development. The executive team decides that if they can develop products with newer and more innovative designs, they can develop an advantage in their market by being the first to sell a product that meets a specific market need. This decision ends up benefiting their organisation, as consumer interest grows for their unique product and sales increase by 50%.
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