Competitive advantage is the group of unique market factors that help a company’s products sell better than those of its competitors. It is the advantage or lead that one brand has over another in production and sales. Here are the six factors of competitive advantage.
6 Factors of Competitive Advantages with Examples
1. Figure Out How Appealing the Target Industry is
To make a good plan for how to get a competitive edge, you need to look at the target industry very closely and fully comprehend the rules that apply there.
Michael Porter says that each industry is ruled by the following six competitive forces:
- competition from new companies,
- competition among those who are already in the market,
- buyer negotiating power,
- supplier negotiating power,
- the risk of having other options.
All of the listed forces affect costs, prices, and the overall profitability of an industry, so they should all be carefully looked at before getting into a market.
Companies usually lower their prices when a buyer has a lot of negotiating power. However, buyers with a lot of negotiating power usually want more expensive products or services, which increases the costs and investments of the company. In this case, there is a lot of pressure on businesses to lower their margins, which makes them less profitable in the long run. Also, another important factor is the ability of suppliers to negotiate, which affects the price of raw materials and other basic components used in production. Prices are also affected by the power of competition and the threat of substitution.
No two industries have the same profitability; thus, the power of these factors varies. Some industries, like soft drinks or medicines, have lesser competitive pressure, whereas in others it’s harder to establish profitability and enjoy high returns.
Some seemingly mundane sectors are enormously profitable, while more prominent, high-class, and high-technology industries are hard to enter into and may not offer large margins or returns once inside.
2. Spend Less Money
Cost leadership companies tend to be multi-segment or even cross-industry players who aim out to dominate the market in terms of pricing. Depending on the nature of the sector, its cost-cutting competitive advantages may come from factors such as size economies, exclusive technology, proximity to low-cost raw materials, minimal overhead, inexpensive labor, or complete automation of production.
Businesses with a low cost to produce typically sell basic, stripped-down goods in an effort to maximize profit margins.
When a business prioritizes gaining scale or cost advantages from all possible sources, it can undercut its rivals’ prices while still making a profit, rising to the top of its industry.
However, a low-cost company needs to create not only cheap items or services but also commodities that are seen to be desirable by customers if it is to establish a sustained competitive edge and land a solid place on the market. If it doesn’t, low-cost producers will have to undercut their competitors by offering steep price cuts.
The main goal of a cost leadership strategy is to achieve cost leadership rather than merely to be among the top contenders.
To illustrate the company’s cost leadership strategy, consider the following: Ryanair
Ryanair, headquartered in Dublin and founded in 1985, is an Irish low-cost airline with the stated goal of becoming the largest European low-cost carrier by cutting costs wherever possible (LCC).
3. Be Unique
A company with a differentiation strategy strives to stand out in its industry in ways that buyers value. To acquire an edge, it chooses one or more dimensions that many buyers consider important and approaches them differently than its competitors.
By addressing buyers’ needs better than competitors, the firm presents itself as a market leader and top provider and can charge premium pricing for the uniqueness of its products or services.
To acquire a competitive edge through differentiation, a company must be unique and truly different from the competition, and customers must be willing to pay a premium price.
A good differentiation strategy may take diverse shapes at different organizations, even in the same market, as customers value distinct traits.
Profitability requires a price premium over the cost of differentiation. A corporation must set correct pricing that exceed the extra costs incurred to differentiate itself and always strive for cost-effective differentiation as an inferior cost position may neutralize a competitive advantage achieved owing to premium, but not high enough prices.
Firm’s differentiating strategy:
Louis Vuitton, a French luxury goods company and fashion house founded in 1854, sells high-quality leather goods and ready-to-wear accessories at premium pricing.
4. Focus
As the focus strategy narrows a company’s competitive scope inside an industry, it optimizes its strategy for the chosen sector, omitting other sectors. A firm achieves a competitive advantage in its target market by tailoring its strategy to this segment, even without an overall competitive advantage.
Michael Porter’s “Competitive Advantage” says a focuser chooses a segment or group to exclude others.
Two focus strategies exist.
Cost-Differentiation-Focus
Cost-focused companies seek cost advantage in their target industry, while differentiation-focused companies seek segment differentiation. Both focus strategies focus on contrasts between a target segment and other industry segments.
Target segment purchasers must have unique wants to acquire a competitive advantage. Cost-focused companies exhibit cost differences, while differentiation-focused companies gain from consumers’ wants in specific segments.
By specializing in one industry, a corporation gains a competitive advantage due to its competitors’ lack of specialization. Competitors who aim to serve all segments may miss or underserve some purchasers’ wants.
They don’t position themselves as experts, which hurts their brand image with this industry’s clients. A corporation with a focus strategy can give higher quality to consumers from a limited segment, giving it an edge.
As the general differentiation strategy and differentiation focus approach are commonly confused, let’s compare them with instances.
Consider the IT Market
IBM focuses on universally recognized traits for distinctiveness. IBM provides a wide range of computer software, hardware, and middleware. As a large technology corporation, its main focus is the computer market. IBM doesn’t focus on one market sector and remains a generic IT corporation.
Nvidia Corporation is a differentiation focuser that caters to its target market. It designs GPUs for gaming and SoCs for automotive and mobile computing. By differentiating, the company may address the needs of end-users in certain market sectors better than its broadly targeted competitors, earning a durable competitive advantage.
5. Don’t Get Stuck
Some companies have generic strategies or none at all, so they don’t gain from their strategic advantages. As a result, they’re stuck in the middle of the market. They can’t compete with their laser-focused competitors.
According to Michael Porter, being trapped in the center shows a company’s unwillingness to choose how to compete, which might have long-term ramifications. No clear plan can put a company at a disadvantage and out of business, as competitors with clear strategies have a competitive edge.
Companies that pursue mushroom expansion sometimes overlook their plans, ending up with none. Companies with a focus strategy generally dominate their target segments. To boost sales and expedite growth, they abandon their winning strategy. Taking acts inconsistent with their strategy, which blurs their brand image and compromises their strategy’s pillars.
6. Plan for Competitive Advantage
Without competitive advantage, strategic strategies frequently don’t ensure greater performance. Many organizations rely on the planning process for its own sake, rather than generating a strategic plan based on a competitive advantage from an industry structure study. Their techniques often rely on inaccurate price and cost forecasts.
Michael Porter says “many strategic plans are action steps without a clear definition of the firm’s competitive advantage and how to achieve it.”
Some organizations use market share to determine their competitive position, but becoming an industry leader is not always a good strategy. Winning a market’s top spot is normally considered desirable, but it can be risky.
Although market share is linked to competitive position due to economies of scale, “industry leadership is an effect of competitive advantage.” Firms in a perpetual search for industry leadership may never achieve a competitive advantage or lose the one they have as their executives get engaged in never-ending conversations about how to win the most market share without a big picture competitive advantage in mind.
Not all market leaders, like Continental Illinois Bank, achieve profitability because aspiring to market leadership may distract the firm from obtaining and preserving competitive advantage.
Companies should aim for a durable competitive advantage in the target market, not merely market share.
Bottom Line
These factors can easily help a company to create its brand identity by gaining competitive advantage and the attention of the target consumers. Even to the factors can vary from business to business, the core concept is quite similar.
References
- https://chisellabs.com/glossary/what-is-competitive-advantage/
- https://www.business-powerhouse.com/6-strategies-to-gain-competitive-advantage-from-michael-porter-author-of-competitive-advantage
- https://business.simplicable.com/business/new/6-sources-of-competitive-advantage
Nishat Tarannum Mridula is a contributing writer at The Strategy Watch. She has been contributing for last two years.
Nishat is currently studying at the University of Dhaka. Even though her major is in Banking, she enjoys writing on diverse topics, starting from appliances to blogposts. She is in the middle of completing her BBA from University of Dhaka. Alongside that, she writes different types of business articles for The Strategy Watch.