What is a Competitive Advantage? Explained with Examples
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Competitive advantages are the strengths and opportunities that you have over your competition.
It includes all the factors that help you stand out from your competition. It is also the factor of seeing which your target audiences may decide to go with your product/service over your competitors.
Depending on your industry, there can be many other advantages. However, eventually, it is the factor that earns you more sales and gives you a surplus in profit.
What is a Competitive Advantage?
Competitive advantages are the strengths and opportunities that you have over your competition. It is an attribute that allows a company to achieve superior profits compared to its rivals and generates more value for the company, customers, and shareholders.
11 Common Competitive Advantage Examples
Strong Branding is one of the strongest sustainable competitive advantages. A lot goes into making a brand like building customer relationships, quality service/product, time, and money.
But when the company is identified as a brand in the market, it brings you a positional advantage. And at the same time, your sales become easier and wider.
The network effect happens when the value of a product or service depends on the number of its users.
In a positive network effect, the more people use it, the more valuable the product becomes. Once the user base reaches a critical mass, it’s extremely hard for anyone else to achieve the same position.
Scale can give companies a sustainable advantage in several ways. For example, in the retail industry, large chains can use their scale to buy merchandise at low prices unavailable to their smaller competitors.
Some businesses make products or services that have very high switching costs for customers. For example, enterprise automation software such as ERP systems is so tightly integrated with critical customer functions that changing an ERP vendor is unthinkable.
Patents are essentially a temporary monopoly granted by the governments to stimulate risky R&D. Example: biotech and pharmaceutical companies.
If a critical enabling element can be kept secret, it can become a source of sustainable advantage.
Economies of Scale
The basic tenet of economies of scale is that the cost per unit declines as output increases. The lower cost per unit is largely driven by the presence of fixed costs within the business’s cost curve.
Exclusive Access to a resource
Exclusive or near-exclusive access to valuable resources can give a sustainable advantage. For example, China currently provides nearly 95% of the world’s rare earth metals.
Sometimes governments grant exclusive licenses to businesses. For example, Stepan is the only company in the US that is legally allowed to import coca leaves and extract cocaine from them.
Cost advantage can be achieved through economies of scale. This makes it difficult for competitors to match the low prices.
Adapting Product Lines
For products that continuously evolve, many tech companies could fit in this category.
How do I know if a company has a Competitive Advantage?
During competitive analysis, you must have come across a few factors where you stand out from your competitors. If these unique factors bring you any strength or opportunity, then those advantages are valuable. And only then, they can help you thrive.
For example, if you have a larger team than your competitor then it is a competitive advantage. But you also need to look closer and see how this is bringing you any profit. Is this advantage helping you bring more business? Is this advantage helping you serve more customers/clientele? Is this advantage making a positive impact on your branding? If yes, then it is bringing you value. Hence, it is valuable.
Other than that, there are a few different perceptions to look at your competitive advantage:
Is your Competitive Advantage Sustainable?
Sustainable competitive advantages are company assets, attributes, or abilities that are difficult to duplicate or exceed; and provide a superior or favorable long-term position over competitors.
In this case, you have an advantage that your competition can not easily catch up with. It can include having new features for your service/products, initiating new sales and marketing strategies, or introducing new technology. This advantage is simply intuitive. It is so much like a race- Looking at the current situation, the industry knows what is the next step. But whoever implements it first has an advantage.
For example, Apple. Inc had this advantage when they released AirPods. That step was intuitive and groundbreaking and sustainable until their competitors had a similar product.
Is your Competitive Advantage Replaceable?
You may have a great advantage. But you need to know if that is replaceable. For example, people who still don’t use AirPods, still have traditional earphones that work equally well. In fact, you will find a lot of people who would prefer earphones over air pods. In that case, having air pods as an advantage is a replaceable advantage.
Similarly, you may have a large team to cater to your target market and your company. But at the same time, if your competitor can invest in heavy technology and innovation to do the same work, then they have a replaceable advantage.
Is your Competitive Advantage Strategic?
Such an advantage is mostly seen in the R&D department, sales, and marketing as well as in operations.
Is your Competitive Advantage Rare?
In these cases, your competition will not have this feature in their product/service or business. A lot of times, such an advantage lies in the way you operate. It can include having unique raw materials, a unique team management system, quicker transportation, a better-developing team, and so on and so forth. Having a rare advantage can help you become superior sooner. And usually, having a rare advantage is like having that secret ingredient in the recipe- Something, that no one can get a hack of.
You can learn these different perspectives by studying your competition analysis with a detailed overview, gaining better knowledge of the market, brainstorming with your team, and being intuitive with respect to your business.
Steps to derive Competitive Advantages
- Determine the right competition
- Understand your market situation and your position in it
- Perform competitor analysis through different frameworks to identify your strengths, weakness, opportunities, and threats. There are five such frameworks that you can implement:
- SWOT Analysis
- Porter’s Five Forces
- Strategic Group Analysis
- Growth-Share Matrix
- Perceptual Mapping
- Figure out the points where you stand out from your competition.
- Those stand-alone points are your competitive advantages.
A table for listing your Competitive Advantages:
Your business name + What you are best at + Why
Add Competitive Advantage to your Business Plan
Your competitive advantage section will come after you have explained your competition.
In the beginning, you have to explain the competitive environment. If you are going to put it next to the section on competitive analysis, you will not have to go into details. Because you will already have explained those details.
However, if you are to present this section only, you will have to explain your competition. Along with that, you will also have to share analytic comparisons. For this, you can use pie charts, graphs, metrics, and other such diagrams.
And then finally, you have to start explaining your competitive advantage over your competitors. Note that you have to write this section in the most convincing way. So, your prospects understand your dynamics well and invest in your business. Moreover, it is important for them to know if you have a clear strategic plan to run your business successfully.
A lot of people may want to skip this section of your business plan. But in our opinion, you must never make that mistake. For it is your chance to tell your investors the ways you stand out from your competitors in your industry.
Important of Competitive Advantages
- You get a chance to highlight your business’s strengths and opportunities
- Your investors can have an idea that you have crystal clear ways to thrive your business
- You restore your investors’ faith in you.
- You explain why your business would be their best choice to invest in