With any business, it is important to be able to separate yourself from the competition to gain an advantage. This can be anything from running your operations with greater efficiency to being able to differentiate the attributes of your product from those of your rivals.
Having a competitive advantage and being able to maintain it are key factors in the longevity and profitability of a business entity.
Overview: What is a competitive advantage?
Competitive advantage refers to the various factors that make an organization’s services or goods more desirable to consumers than those of its competition.
3 benefits of a competitive advantage
Here are a few benefits of having a competitive advantage:
A company that has a competitive advantage is more likely to be profitable than its rivals.
2. Comparative advantage
One type of competitive advantage is comparative advantage. This means that one company is able to make a product more efficiently than the competition. The benefit of this is that the more efficient company can then sell the product cheaper and achieve greater sales.
3. Differential advantage
Another type of competitive advantage is a differential advantage. This means that a company’s goods or services are differentiated in some way from the competition and seen as superior. This is a benefit because a customer that cares about the perception of quality will choose the company’s product or service with this differentiation.
Why is competitive advantage important to understand?
Understanding competitive advantage is important for these reasons:
Break away from the herd
Understanding competitive advantage is important to understand so that you can find ways to separate what your business does from competitors. By differentiating yourself, whether by price, attributes, or quality, you can have a competitive advantage.
Sustaining the advantage
Having knowledge of competitive advantage is important because if you find your organization in a position to have such an advantage, you will need to develop strategies for how to maintain it.
One reason to understand competitive advantage is to be able to properly identify just what your competitors are. Your competitors are not merely the companies that offer the same product, but also any entity that can fulfill the needs of the customer. One example would be how newspapers thought they were simply in competition with each other, but they were, in reality, also in competition with customers being able to get the news online.
An industry example of competitive advantage
When Starbucks began branching out beyond the big cities and into smaller towns, it was often the only barista-level coffee available in the area. This provided the company with a major competitive advantage over coffee that a customer might get at a gas station or diner as it was seen as the best quality coffee in the town. In areas where there might be a local barista-level coffee shop, Starbucks often still had a competitive advantage due to its brand recognition acting as a symbol of quality.
3 best practices when thinking about competitive advantage
Here are some best practices to think about when it comes to competitive advantage in your organization:
1. Creating a competitive advantage
In order to create a competitive advantage, your company needs to offer a benefit to your target market that the competition is not providing.
2. Keeping a competitive advantage
In order to maintain a competitive advantage, an organization needs to listen to the needs of its customers and stay on top of changes in technology as well as trends in the marketplace.
3. Always focus on improving
Just because your organization finds a way to have a competitive advantage and it succeeds, do not rest on your laurels. Always strive to find ways to improve the way you provide quality for your customers and how you meet their needs. Many companies have lost their competitive advantage by believing that what made them different one day would continue to maintain their advantage indefinitely.
Frequently Asked Questions (FAQ) about competitive advantage
When is it clear that a company has a competitive advantage?
If a business is able to gain market share through an increase in efficiency, productivity, or differentiation in its product or service, it has a competitive advantage.
What often gives larger companies a competitive advantage?
Being able to buy in wholesale quantities often gives larger companies a competitive advantage. Larger companies often have the financial resources to operate at a loss for longer than a small business can.
How can a small business have a competitive advantage over a larger one that offers the same product?
Smaller companies have the benefit of being able to provide a more personalized customer service experience as well as being seen as a vital part of the local community.
Finding your competitive advantage
When you think about the product or service you provide, consider the things that can give you a competitive advantage. Perhaps you are able to offer a service turnaround quicker than a competitor. Maybe you are using higher-quality ingredients in the baked goods you sell. Whatever can separate your company in the eyes of your target market for the better can give you a competitive advantage and help ensure your company’s success.