A competitive advantage is what gives a business its “edge." It’s what a company does better than its competitors and helps them to have a stronger market position. It is part of a strong competitive intelligence strategy.
Some competitive advantages can be considered sustainable — advantages that sustain a company’s success. These advantages are what make a specific set of products or services stand out to customers compared to their competitors.
Harvard Business School professor Michael E. Porter wrote the widely utilized textbook “Competitive Advantage.” In it, he details what is required in order to achieve a sustainable competitive advantage.
Let’s explore the role of developing and promoting your competitive advantage and how to apply Michael Porter’s three strategies for your gain.
Table of Contents
Competitive Advantage Definition
Examples of Competitive Advantage
What Competitive Advantage Is Not
What You Need to Create a Competitive Advantage
Porter’s Approach to Competitive Advantage
Porter's Strategy 1 Cost Leadership
Porter's Strategy 2 Differentiation
Porter's Strategy 3 Focus
The Significance of Establishing a Competitive Advantage
How to Find Your Competitive Advantage with Meltwater
Competitive Advantage Definition
What is competitive advantage?
We define it as the way companies provide goods and services to achieve larger margins, greater market share, and sustainable success.
Examples of Competitive Advantage
Examples of competitive advantage include a vast range of factors:
- Highly skilled labor
- A specific location
- Low manufacturing costs
- Brand identity recognition
- Access to advanced, proprietary, or new technology
Competitive advantages allow a company to maintain brand loyalty and customer satisfaction.
What Competitive Advantage Is Not
It’s important to understand that competitive advantage is not simply a list of your strengths. While recognizing your strengths can contribute to your success, your competitive advantage is greater than this.
Competitive advantage isn’t easily created or duplicated. If it could be easily copied, then it might be considered growth opportunity rather than competitive advantage. Your competitive advantages focus more on long-term success, meaning it will take a competitor longer to replicate what you’re doing.
What You Need to Create a Competitive Advantage
To build a strong competitive advantage, a business must have a thorough understanding of a few key things:
- Value: The goods and/or services of a company should provide real value to its customers.
- Target audience: A company must know who its primary customers are and how to cater to this specific group.
- Competitors: A business must understand who its direct and indirect competitors are in the marketplace.
A company must understand and convey the unique value it provides to a specific audience that another competitor cannot. This message must then be communicated effectively through advertising, social media, brand messaging, and other marketing.
Tip: Learn how to perform competitor analysis using competitor analysis tools and understand the importance of competitive benchmarking.
To figure out your competitive advantage, follow the What + Why formula:
(What your business is really good at) + (Why you're good at it)
Here are some examples:
Google: "We are the best at finding relevant content online and providing access to knowledge + we continually invest in our technology, test new ideas, and hire digital-native employees.”
Porter’s Approach to Competitive Advantage
In his book, Porter reviews in detail how a company must establish clearly defined goals, business strategies, and operations in order to construct a solid competitive advantage. It’s not a matter of plucking a strategy out of a hat.
For a competitive advantage to be sustainable, it must play to your organizational strengths AND be valuable to your clients. You need to build systems and processes around your advantage. This means building relationships with vendors whose services can support your advantage.
In addition, the overall company culture and the team members of the company must be in alignment with these things. Your employees play a role in upholding and promoting your advantage. It gives your employees direction and purpose when making decisions and helping to move the company forward.
Porter conducted an intensive research process of several hundred companies that eventually helped him contrive his sustainable competitive advantage strategies.
He ultimately concluded the following:
Achieving competitive advantage requires a firm to make a choice . . . about the type of competitive advantage it seeks to attain and the scope within which it will attain it.
He also wrote:
Source: Competitive Advantage
Porter broke down the three ways to achieve a sustainable competitive advantage over competitors into these three strategies:
- Cost Leadership
- Differentiation
- Focus
In each of these strategies, Porter further explains that strategic scope and strategic strength must also be in alignment. Strategic scope refers to demand-side business and considers the size and components of the target market. Strategic strength refers to the supply side of the business and considers the competency and strength of the business itself.
Let’s look at how these strategies can apply in strengthening your competitive advantage.
Porter's Strategy 1: Cost Leadership
Cost leadership occurs when a company provides reasonable value at a low price point. These organizations strive to achieve a market share by making themselves attractive to those who are price-sensitive.
To achieve this, these businesses usually employ large-scale mass production practices using economies of scale. This allows these organizations to sell products or services below or around the average price for their respective industries, aiming to make up for their lower margins in volume.
Benefits of cost leadership
Cost leadership tends to positively correlate with market size. It caters to the average consumer rather than a niche audience, providing cost-saving opportunities for the general public.
This mass appeal may help the company weather market downturns. When consumers cut back on spending, they can get more for their money with cost leaders.
Potential downsides and threats of cost leadership
There are aspects of this strategy that businesses must consider in order to be successful. For example, organizations that employ a cost leadership strategy can easily face undercutting from rival competitors. To avoid this, the organization must be the lowest-cost producer, and not just one of the lowest-cost producers.
Cost leaders typically pay their employees less. In some cases, companies might not allocate enough funding for adequate customer service or shift coverage. However, they may offer other advantages to make jobs more appealing, such as stock options, promotional opportunities, and education reimbursement.
Higher minimum wage laws can also threaten the advantages of cost leadership companies. An increase in wages could lead to an increase in product pricing, which could shake up the business’s target market.
Examples of Cost Leadership
Let's look at some examples of cost leadership strategies to create a competitive advantage.
McDonald’s
McDonald’s is a great example of an organization that employs a low-cost leadership strategy. They are able to produce consistent products at a lower cost, and thus are able to offer those products at a lower selling point.
Walmart
Walmart is another example. The company has positioned itself in both rural and urban areas as a leader in low prices.
It offers a variety of products to create a one-stop shopping experience. Products are priced at or below average retail prices, making them hard for cost-conscious shoppers to resist.
Porter's Strategy 2: Differentiation
Differentiation occurs when an organization focuses on making its products or services more unique, attractive, and valued than others in the industry.
These companies usually target larger markets and focus on a differentiation strategy that reaches a much wider scale.
This may include things such as:
- new technological innovation
- superior product quality
- functionality and durability
- the way a brand image is marketed
Benefits of differentiation
Unique products command a higher price point. This is due to higher quality as well as less price competition. Competitors may struggle to produce something comparable, allowing you to be the leader and set the standard for the price.
Higher prices can also lead to higher profit margins. This is especially important when considering that premium products might not sell as quickly as lower-quality products.
Potential downsides and threats of differentiation
Developing premium products and services involves higher production costs for these companies. R&D and market testing become more important for differentiation strategies to avoid investing in products that the target audience can’t or won’t buy.
Also, organizations must charge a higher selling price for products or services. Manufacturing and research costs are higher, which must be passed on to the customer. The products or services must be attractive enough to justify the cost in the minds of consumers, or the company will lose out to the competition.
Premium products might also take a hit during market downturns if consumers cut back on spending.
Examples of differentiation
Let's look at some examples of differentiation to create a competitive advantage.
Apple
Apple is an example of a company that continues to lead the market through a differentiation strategy. The company released the first iPod in 2003, which at the time was an innovative game changer as it allowed users to play music and shuffle songs in whatever order they desired. The brand continues to innovate in terms of its products, user experience, and aesthetics.
Tip: Take a look at 5 things to learn from Apple's marketing strategy
Other Luxury Brands
Other luxury brands, such as Tiffany's, Louis Vuitton, and Lululemon differentiate themselves by providing superior product quality and uniqueness.
Porter's Strategy 3: Focus
Companies employ the focus strategy when looking to develop a lower-cost advantage over competitors, but only within a small market segment. Put another way, low-cost isn’t the company’s entire business model.
As notated by Porter, the focus strategy can be broken down into two variants:
- Cost focus (attracting customers based solely on price)
A cost focus strategy occurs when a company is the lowest-cost producer of a product or service in a narrow market segment. - Differentiation focus (unique strategy in a focused market)
A differentiation focus occurs when a company offers differentiated products or services in a narrow market segment.
Both are beneficial when you know your target market and can meet its needs accordingly. You know your audience better than your competitors and can therefore position your products in a way that’s hard to compete with.
Benefits of focus
Your value proposition is tailored to your target market. You have fewer variables and parameters to contend with, allowing you to invest more in personalizing your offerings to the market. This helps to foster stronger relationships with your audience.
Focus helps to naturally limit competition. You’ve become the best at what you do, making it harder for competitors to make the same claims.
And when you’re focused in a specific market, it’s easier to produce economies of scale that will ultimately lower costs associated with production, distribution, and marketing.
Potential downsides and threats of focus
Working in a limited territory, you’ll naturally have a limited customer base. This can impact future growth unless you decide to expand to other focus markets.
Also, consider the risk of your target demographic disappearing altogether. People move, new competitors enter, and buying patterns and habits change.
Examples of focus strategy
Let's look at some examples of a focus strategy to create a competitive advantage.
Cost focus: Budget household cleaning items
An example of a cost focus strategy is budget household cleaning items that are only available at smaller, local grocery stores or value chain stores. Smaller retail space creates a less competitive shopping environment.
The low prices encourage cost-conscious shoppers to buy their products here even if they weren’t originally shopping for those items.
Differentiation focus: Community banks
An example of differentiation focus is community banks. They hone in on small businesses or the smaller portion of the general population that has a high net worth.
They are able to provide more personalized service than larger banks can provide. Their target client is willing to pay slightly higher prices for this level of service.
The Significance of Establishing a Competitive Advantage
Leveraging the right tools and intelligence (like the ) is essential to establish a sustainable competitive advantage that can go the distance, outperform rivals, and ultimately drive more profit.
In his work, Porter emphasized the importance of avoiding trying to utilize more than one strategy. Each appeals to a different target audience (i.e., customer base) and to different organizational strengths and features.
To create and maintain a sustainable competitive advantage, organizations should perform an in-depth SWOT analysis of their business. A SWOT gives businesses a clearer idea of what their strengths and weaknesses are. It also helps them to see what potential threats and opportunities may arise.
Ultimately, making tactful and data-driven decisions to establish the right competitive advantage strategy is crucial for any organization if it is going to be successful, whether it’s a strategy for a specific event, such as Black Friday, or an overarching long-term plan.
Porter's three strategies provide a strong foundational resource for helping organizations establish a long-term, sustainable business plan and strategy to stay competitive.
How to Find Your Competitive Advantage with Meltwater
For many organizations, Meltwater provides a valuable resource for unlocking your strengths, weaknesses, opportunities, and threats.
Comprehensive data from online and offline channels give you direct insights into the audiences you want to target, allowing you to make informed decisions on marketing, product development, research investment, and new target markets.
Request a demo by filling out the form below to learn more.
