What Is Competitive Advantage?
The Most Popular Ways for Businesses to Differentiate Themselves
Any business with a competitive advantage is able to attract more customers than its competitors by having some special factor that no one else possesses. The key to capturing competitive advantage is knowing what your customers want and finding a way to give it to them. Very few sources of competitive advantage last very long however, so businesses are engaged in a never ending search to find new angles to beat their competitors. It’s all about finding some way of differentiating products and services from other offerings. The whole purpose of business strategy is to find new sources of competitive advantage.
Popular Sources of Competitive Advantage
Cost – This is a major source of competitive advantage. Despite our nationalistic desire to buy products made in our own country, most consumers vote with their wallets. Cost advantage is the reason why Walmart is so successful and why so much is made in China where costs are much lower than in high wage countries. Naturally, there is a downward limit on this form of competitive advantage. For example, Japanese cars were once mainly popular because they were cheaper than North American cars. Now Korean cars are cheaper. Perhaps we will soon be buying cars made in China or India. But even their cost advantage will soon disappear as the playing field for wages levels out globally. Competitors can only reduce costs so far before becoming unprofitable. The experience curve states that the cost of making any product declines with experience at a predictable rate. This means that, other things being equal, competitors will continually reduce prices over time as they find cheaper, more efficient ways of making their product. The implication for managers is that the longer they hope to offer a particular product the more they need to find cheaper ways of producing it.
Quality – Everyone wants a product that works and lasts a reasonable length of time. Any company with a better quality product that is not too much more expensive than its rivals will win out. We might be willing to pay a bit more for a Toyota than some other cars even if they are a little more expensive because of Toyota’s reputation for quality.
Service – Customer service is a popular form of competitive advantage in markets where all the players offer similar services or products and they cannot be differentiated in any other way. Car rental companies for example, all charge a similar amount and offer a similar product. There is little they can do to differentiate themselves other than by offering outstanding customer service. The same is true of many retailers. Other than Southwest Airlines that has other sources of competitive advantage, there is not much to differentiate the major airlines other than perceived service levels.
Brand – Many people are willing to pay a little extra for a name brand, especially in the fashion industry, but it applies to cars, soft drinks and many other products. Building a brand is expensive and time consuming but often the only way some businesses can differentiate themselves. But brands are not invincible. They have not saved General Motors from their competitors or IBM, which recently got out of the PC business despite having a highly recognized brand.
Innovation – The most current example of a company that uses innovation as a means of differentiation is Apple Computer with its iPod and iPhone products. As with all forms of differentiation, innovation needs to be ongoing for any one company to keep beating its competitors over several years, but it can yield great dividends for any business that is good at it. Innovation is harder than other forms of competitive advantage, not just because it requires creative thinking but also because most businesses have a short-term, risk-averse focus that is driven by the demand for quarterly profits. This pressure makes it hard for them to take a longer term or more entrepreneurial focus. In any case, having a product that people want, and which no other company can match, is a great source of competitive advantage. Companies protect this form of competitive advantage through patents, as in the case of drug manufacturers, or by continuous innovation.
Convenience – Many consumers are willing to pay a little extra for convenience. This can mean having a good location, as in the case of retail outlets in a mall, or shopping via the internet. The latter is obviously easy to copy but a great location for a retail outlet is not so easy to replicate. Convenience also includes one-stop-shopping and products that are simply easier to use than other offerings.
There are other forms of competitive advantage. This list covers the most popular forms but is not exhaustive. Attractive packaging can also be a factor in some industries, for example. Speed can also be a source of competitive advantage. Opportunists who are quicker than others to spot a new market and enter it fast gain a momentary advantage.
Innovation - The Best Form of Competitive Advantage
Some people downplay innovation, arguing that it is not sustainable so why bother. This is naïve because it fails to face the reality that no advantage lasts very long anyway. Apple’s recent succession of innovations – iTunes, iPod and now iPhone proves that innovation can pay great dividends and that a string of innovations is not only better but the only way to gain sustainable competitive advantage.
