Competitive advantage is a critical concept in business strategy. It is what allows companies to succeed in competitive markets and generate profits for their shareholders.
With international trade growing fast as a result of globalization trade barriers are being reduced and protectionist policies no longer exist in the free-trade world.
Nowadays, companies must be able to compete not only with domestic rivals, but also with competitors from across the globe. And competition in the global market is really intense.
What is competitive advantage?
Competitive advantage is a superiority gained by a business over other businesses. This attribute allows a business organization to outperform its competition on the market.
Competitive advantage in business strategy is what sets a company apart from its competitors and allows it to achieve superior margins, a better growth profile, or greater loyalty among current customers. It is often referred to as a ‘protective moat’.
Typically, the business can provide the same value product as other business, but at a lower price, or it can charge higher prices by providing greater value products through differentiation.
Where does competitive advantage come from?
The three main factors that lead to a significant competitive advantage over competitors.
A company can achieve a competitive advantage by excelling in one or more of these areas:
- COST ADVANTAGE – Lower costs.
- DIFFERENTIATION ADVANTAGE – Unique products
- FOCUS ADVANTAGE – Superior marketing strategy
Strategic managers must decide whether they want the business to focus on competitiveness gained through low costs leading to low prices, selling differentiated products that are unique allowing for higher prices to be charged or coming up with exceptional marketing. So, in general, as a business manager either compete on price, uniqueness or focus.
How to gain competitive advantage?
Here is the list of strategies that when adopted properly are supposed to increase a business’s competitive advantage when faced with a globalized marketplace:
1. COST ADVANTAGE. This is achieved by producing goods or services at a lower cost than competitors. This can be done through economies of scale, rationalization, efficient operations, automation or lower input costs.
Example 1: BMW has increased its investment in the Mini production line by a few hundred million pounds to buy 230 new robots at its UK factory. This will help to reduce the costs of manufacturing, but it will also allow a flexible production system that can make all three types of Mini body shell on the same production line.
2. DIFFERENTIATION ADVANTAGE. This is achieved by offering products or services that are unique and valued by customers. To be competitive in some industries it is not enough to achieve low costs if customers are looking for unique products. This can be done through innovation, Research and Development (R&D), branding or superior customer service.
Example 2: Shell is focusing on Product differentiation by means of Research and Development (R&D) in biotechnology, carbon-emission storage and alternative fuels as it has relatively low reserves of oil and gas compared with other big firms in the industry. The company spends more than USD$1.3 billion on Research and Development (R&D) each year but plans to increase this substantially.
3. FOCUS ADVANTAGE. This is achieved by concentrating on a specific market segment or niche. This allows a company to better understand the needs of its customers and develop products or services that are tailored to their needs. This can be done through superior marketing strategy.
Example 3: Starbucks uses a focus strategy by targeting coffee lovers and offering a variety of coffee drinks and food items in its coffee shops around the world.
Having a competitive advantage is essential for business success. It allows companies to charge higher prices, attract more customers, and generate more profits. However, competitive advantages are not always easy to sustain. Competitors can try to imitate or copy a company’s advantages, or they can develop new advantages of their own.
To maintain a competitive advantage, companies must constantly innovate and improve. They must also be vigilant about protecting their intellectual property and other assets.
