Having a competitive advantage can increase the value of a firm and its shareholders because of the specific advantages it has over its competitors. A persistent competitive advantage can assist businesses in remaining market leaders in their respective industries. However, not all competitive advantages are easily translated into other markets. Some factors determine whether a competitive advantage will transfer to new markets.
What exactly is competitive advantage?
A competitive advantage allows a corporation to outperform its competitors. It refers to variables that enable a company to produce services or items better or at a lower cost than competitors, resulting in more sales or higher profit margins. To be successful, a company’s competitive advantage must create value for its stakeholders while being difficult to replicate. Companies may benefit from several competitive advantages, including:
- Structure of costs
- Product Quality
- Branding
- Customer service
- Intellectual property rights
- Distribution network
Why competitive advantage is important?
What makes one company better than its rivals is its competitive advantage. It is crucial to a company’s success since it can increase profits, bring in new customers, and strengthen loyalty among existing clients. Capital is more readily available (and cheaper) for businesses that can sustain a substantial competitive advantage over their counterparts because of the firm’s higher margins, stronger growth profile, and reduced customer attrition.
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What are the three forms of competitive advantages?
A competitive advantage can manifest itself in three ways:
- Cost advantage: Refers to the ability to produce a product or provide a service at a cheaper cost than competitors.
- Offer advantage: Differentiate a product by including qualities that are highly valued by customers.
- Niche advantage: Serving a specific segment of the market better than anyone else is a niche advantage.
When a company excels in at least one of these three categories while being competitive in the other two, it is in a strong position in comparison to competitors which is why many entrepreneurs insist on pursuing at least one of these advantages. However, if a company merely achieves average performance in all three categories, it will not stand out in the marketplace, which may cause it to underperform and eventually fail.
What are the challenges of competitive advantages in other markets?
Three main factors determine whether a competitive advantage will transfer to another market.
Regional business environment
The diversity of the marketplace is the first challenge regardless of location. While the business may have been victorious against rivals in some local markets, this may not be the case in foreign markets where new rivals with unique advantages and disadvantages have entered the fray.
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Preferences of local consumers
Competition in a foreign market may look very different from competition in a company’s home market because competitors may respond to demand that is distinct from the home market. Therefore, a product that does well in one market may have no relevance in another.
Adaptation
Although the competitive landscape and consumer tastes are not insurmountable obstacles, a company’s success or failure in a new market will depend on its desire and ability to adapt to those variations. A business may want to make adjustments to its product or business model but find it difficult to do so. In other cases, a business may be unwilling to implement the necessary adjustments due to ethical, cultural, or other considerations.
Strategy for gaining a competitive advantage
The VRIO framework is the most popular strategy for gaining a competitive advantage. The VRIO framework’s internal analysis tool can classify resources according to whether or not they exhibit the specified characteristics.
By classifying their assets in this way, businesses can determine which ones provide a sustainable competitive advantage. The VRIO competitive advantage framework consists of four steps that are used to determine if a given resource is, in fact, a competitive advantage.
- Valuable: Does this asset provide any real value?
- Rare: Is this a common resource, or does each company need to develop its own?
- Inimitable: How difficult is it to produce or copyright this product?
- Organized: Is the organization adequate to enrich the product?
Competitive advantage can last for years if one’s company has access to a resource that is precious, scarce, difficult to copy, and structured to capture value. Having a single resource that gives any business an edge over the competition is no guarantee of value or success, and that advantage may only be ephemeral. The most successful businesses are aware of this fact and plan accordingly.
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Building competitive advantage
Michael Porter, a well-known Harvard Business School professor, and an excellent business coach, suggested three tactics for gaining a competitive advantage: cost leadership, differentiation, and focus (which incorporates both cost and differentiation focus).
Cost leadership
A cost leadership strategy seeks to become the least expensive maker or provider of a good or service. This is accomplished by manufacturing items of standard quality for consumers at a cheaper and more competitive price than other comparable products. Firms using this technique will maximize profit by combining low-profit margins per unit with high sales volumes. Companies will seek the greatest alternatives in manufacturing a good or providing a service and publicize this value proposition so that competitors cannot copy it.
Differentiation
A differentiation strategy is creating distinct items or services that are notably different from competitors. Companies that use this strategy must engage in R&D regularly in order to preserve or improve essential product or service attributes. Businesses may often persuade consumers to pay a greater price for a unique product with a completely unique value proposition, resulting in larger margins.
Focus
A focus strategy is a method of recognizing the demands of a niche market and then designing products to meet those needs. The focus strategy comes in two flavors:
- Cost focus: The lowest-cost producer in a concentrated market sector.
- Differentiation focus: Customized or customized value-added items in a certain market niche