Competitive advantage – it’s a term that we hear a lot, but might sometimes struggle to explain. So what is competitive advantage? In short, it defines the edge a firm has over their competitors. This advantage can be based on anything from a business asset, process or ability that’s difficult to copy or buy. Hence, a competitive advantage could stem from a unique resource that a company owns almost exclusively, from a new patent that allows them to manufacture a superior product, or from the sheer size, the technology used and processes developed that enable them to produce goods cheaper than everybody else.
How to obtain a competitive advantage
Besides the question of what is competitive advantage, many also ask themselves how a competitive edge can be achieved. As a response to this, back in the 1980s, Michael Porter famously identified three different strategies in order to obtain a competitive advantage: cost leadership, differentiation and focus. Even though his findings were published a few decades ago, most business books, by and large, lean on his idea and framework, albeit with small adjustments or adaptations. Let’s look at them in more detail:
This strategy is focused on being able to produce a good or offer a service at a lower price than any other rival while maintaining the same level of quality. As a result, the firm is able to transfer the price value to the customer while still making a healthy profit. If the margin is too low, it is recommended to reduce production costs by identifying ways to lower expenditure on materials, labor or facilities. A good example would be the Chinese smartphone manufacturers Xiaomi who offers reasonable quality at low costs for the consumer.
In this approach, companies are looking to provide products that are significantly different to their competition. According to Porter, firms need to ensure their products are clearly more attractive to customers than other offerings. In order to achieve this, it is recommended to invest into R&D and design to create innovative solutions and to implement a smart marketing strategy to effectively communicate the differences to consumers. A great example for this strategy would be Apple whose iPhone is typically loaded with new ideas and is often perceived as the superior smartphone on the market, allowing the company to charge a premium.
The focus strategy is mainly based on segmentation and targeting a niche market. It’s usually popular amongst SMEs since they might often lack the resources to focus on everyone. In this approach, companies focus on a certain consumer group, based on demographics, geography, behavior or other factors, which allows them to tailor products to the specific needs and demands of customers. Porter points out that once the focus is clear, it’s still key to follow either the cost leadership or differentiation strategy in order to be successful. This is so because according to his theory, simply focusing on a market is not enough while following all three strategies often leads to being stuck in the middle and not achieving any competitive edge.
There is a lot of research that can help in answering the question of what is competitive advantage. In general, most studies share the same idea that owning a unique beneficial business asset, process or ability that’s difficult to replicate or acquire by rivals is the key. Additionally, Porter’s theories show that by following a cost leadership, differentiation or focus strategy, firms can obtain a competitive edge and beat their rivals.