Competitive Advantage

What is Competitive Advantage?

  • Competitive advantage is a sustainable advantage that a business has over competitors that enables it to succeed in the market

  • Competitive advantage explains why a buyer might prefer one offer over another. In other words, why do they choose to buy what they buy…This could be because of:

    • Awareness and familiarity

    • Powerful brands - Trust

    • Being more 'in tune' with buyers’ needs

    • More effective promotion

    • Being better at bringing innovation to the market

What is Cost Advantage?

  • Where a business is able to produce its product at a lower cost than the competition

What is the Differentiation Advantage?

  • Where a business is able to differentiate its product from the competition such that customers perceive superior value

What is the Focus/Niche?

  • Focus is a marketing strategy of targeting specific market segments, rather than the entire market.

  • This is often essential for smaller businesses that lack the resources to compete across the whole market or specialise in servicing the needs of a niche segment that includes buyers with particular needs and preferences.

  • A focus strategy is also pursued by many large businesses that develop different offers that are targeted at distinct market segments.

Value propositions as a competitive advantage:

  • Customers often choose products and services based on their value proposition- how they perceive the merits of a product relative to the alternative, competing products

  • Providing a superior value proposition than the competition is a likely source of competitive advantage- but only if it can be sustained

  • There are various possible value differences that have the potential to deliver a competitive advantage

Four ways to create a winning value proposition:

  • Offer more for less: IKEA- Good quality at low prices

  • Offer more for more: Rolex- High price luxury products with prestige value

  • Offer more for the same: iPhone- New features and capabilities in each release

  • Offer less for much for much less: Primark- Low-cost fast-fashion

Challenges to achieving competitive advantages over time:

  • Competitor innovation: As we have already acknowledged, at least some competitors are learning and innovating, sometimes with enough success to overhaul the market leader

  • Wear-out caused by growth: It can be difficult to sustain some sources of competitive advantage in businesses that achieve sustained rapid growth. For example, innovation is often easier within a smaller business, where employees often have closer and less formal relationships, which tends to encourage creativity.

  • Changing buyer preferences: Markets are always changing and a key dimension of change is changing buyer preferences and expectations. This is sometimes caused by innovation but is also a frequent outcome of demographic change

Benefits:

  • Higher profits

    • A competitive advantage can lead to higher profit margins because businesses can make a reasonable profit on each good or service sold. 

  • More customers

    • A competitive advantage can help attract more customers and maintain brand loyalty. 

  • Predictable revenue

    • A competitive advantage can add predictability and constancy to a company's revenue streams. 

  • More brand alliances

    • A competitive advantage can help attract more brand alliances, talent, and potential investors. 

  • Long-term sustainability

    • A competitive advantage can contribute to long-term sustainability by creating barriers to entry for potential competitors. 

Disadvantages:

  • Competitive response

    • Competitors may try to replicate or surpass a company's competitive advantage. Businesses need to be prepared for this and continuously improve their unique value proposition. 

  • Difficulty maintaining a competitive edge

    • It can be difficult to maintain a competitive edge for a number of reasons, including:

      • Lack of differentiation 

      • Well-informed buyers 

      • The rise of different types of competition 

      • Obsession with what the competition is doing 

  • Slower growth

    • Competitive advantage strategies may lead to slower growth compared to other strategies. 

  • Limited rapid market capture

    • Competitive advantage strategies may be limited in terms of rapid market capture. 

  • Requires time and patience

    • Competitive advantage strategies may require time and patience to see substantial results. 

Determinants:

  • Investment in new equipment and technology:

    • Machinery and computers can improve the speed, reliability and quality of produces, and still provide flexibility. Labour and other costs can be reduced. Advanced technology can also enable a business to provide unique products that are highly valued by consumers.

  • Staff skills, education and training:

    • A skilled and educated staff will be more adaptable and flexible, able to cope with change more readily, and possess more creativity and innovative talents.

  • Innovation through investment in research and development:

    • The pace of change requires companies to update and broaden their product range constantly. Product life cycles are becoming shorter, and new ideas must be incorporated into products more quickly.

  • Enterprise:

    • The entrepreneurial skills of owners of business startups and their desire to become their own bosses create a culture of independence, hard work and flexibility, which helps to supply the needs of larger organisations while also providing alternative products and services.

  • The effectiveness of a business's marketing:

    • A well-planned marketing mix, suited to the needs of a business, can greatly improve its competitive advantage and therefore its ability to gain greater sales volume and charge higher prices in the face of competition.

  • Improving quality:

    • As living standards have improved, quality has become more important to consumers. Improving quality can help a business to increase both sales volume and the selling price of its products and services.

  • Effective human resource management:

    • This can take different forms, such as effective recruitment, high-quality training, an efficient organisational structure and appropriate use of incentives in order to motivate workers.

Difficulties of maintaining a competitive advantage:

  • Lack of differentiation:

    • Companies need to create a unique value proposition to set themselves apart from their competitors. This could involve offering high-quality products, exceptional customer service, or a distinct brand image. 

  • Well-informed buyers:

    • Buyers are more aware of what's available in the marketplace, making it harder for companies to maintain a competitive edge. 

  • Increased competition:

    • There are more types of competition than ever before, making it harder for companies to stand out. 

  • Need for constant adjustment:

    • Competitive advantages aren't permanent, and companies need to be able to adapt and evolve to meet changing customer preferences and challenges from competitors.