Competitive advantages are what put a business in a more favorable position in the market than its other competitors in the market. As a result, it helps the company to get a better margin and to increase the value of the shares to the shareholders. These advantages are unique for every business. Some competitive advantages that work as wonders for a business do not necessarily have to work for others. Being internally created, it is for a business to decide and find out which qualities they have that can set them out in the crowd.
How to Know if a Company has Competitive Advantages?
The answer lies in the increment of the share value of a particular company in the market. Suppose a company is seen to have a growth in its share value through efficiency and productivity. In that case, it is most likely that the business possesses some competitive advantage over its competitors in the market.
You need to assess an advantage to know if it holds some competitive value. If the benefit is relevant and rare for other businesses to have, we can say it holds a competitive advantage.
Types of Competitive Advantages
The definition of competitive advantages has not evolved much over time. However, different marketers have classified the advantages differently. In “Competitive Advantage: Creating and Sustaining Superior Performance”- a book written by Michael Porter, a Harvard University graduate divides the advantages into three main categories. Let’s check them out:
Cost Leadership
Do you ever wonder how Walmart or IKEA offers its consumers good quality products at a comparatively lower price? The reason behind this is cost leadership. When a business delivers good quality products in a lower price range than the other competitors in the market, it puts the business in a better position. Cost leadership can be achieved through making the best use of limited resources, and workers or trying outsourcing at places where the production cost is less.
Differentiation
When you enter into the business, usually there are hundreds of competitors in the same industry. But what makes your business different than the others? This is where differentiation plays a vital role. Differentiation is delivering some unique service or product to the consumers that bring more attention to you. The best way to do it so keep the experiment and innovation going on in the right way. Differentiation can be done by introducing new features, offering unique services, or just improving the existing ones. Uber is a great example of differentiation. They introduced the On-Demand service which had gained a massive consumer base worldwide.
Focus
This type is different from the previous two. While cost leadership and differentiation are more about the bigger market, focus works with a targeted niche. Focus helps businesses to bloom with zero or less competition in the market. Their specialization in a small segment helps to get them one step ahead of the others. You can take cafes for pets or localized banks for example. These businesses focus on a limited consumer base. Pet owners looking for some recreation for their pets or clients who would prefer some personalized advantages on bank services rather than going to bigger brands would love taking services from these businesses. Having a good focus can help small companies grow healthily without entering into the competition with corporate heads.
Although These Three Were the Primary Components, Modern-Day Competitive Advantages have Some Additional Classes.
For example
Brand Image
In the current world, brand image is one of the most crucial competitive advantages. If your brand gains the faith and loyalty of the customers, you will have repetitive clients, even if you lack in the cost leadership field. This is why Apple has a huge loyal customer base who take products from them with every new addition of it, too despite being costly.
Big Pockets
If you can start your business with a good amount of capital, you can have a great start off by offering exciting deals and discounts to the customers. Not every business can afford this in the beginning. This is where you get a competitive advantage. The big pocket will attract you, consumers, from the very beginning and if your goods or services are satisfactory, the chances of them being loyal to you raise.
The Network Effect
If you think about WhatsApp, people who use it are rarely willing to switch to other applications. The reason behind that is, most of their contacts are also consumers of WhatsApp. This is the Network Effect. When more people are already your clients, their networking automatically helps your business to grow.
Barriers to entering the competition
You can take help from the legal system and government policies to gain an advantage to be a step ahead of your competitors. Laws regarding patent, trademark, copyright, and other business policies; if they are implicated wisely can give you an extra benefit.
Some Examples of Competitive Advantage
Apple
According to Forbes, the brand Apple itself holds a worth of around $200 billion. Note that, we are talking about the brand only, not even considering the assets it owns. They introduced the biggest anime in the world of smartphones, iPhone. Later on, they improved and offered unique features which are nowhere found in the others, from Genius Bar to connectivity between the devices, and great service systems. With time, they successfully took the brand name to a state which is hard for the other competitors to reach. Differentiation, brand, and network effect all are well applied by Apple.
LinkedIn is different from the usual social media platforms like Facebook and Instagram. Using Focus, they targeted the niche of professionals and have created a platform trusted by people looking to hire and get hired. This is where LinkedIn establishes a great example of making proper use of Competitive Advantage.
Facebook’s biggest competitor is Google Plus, which is nowhere close to it in terms of its worth. The networking effect has taken Facebook to the apex of success.
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.