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What is a Competitive Advantage? Explained with Examples

Free Competitive Analysis Kit

Aayushi Mistry

• December 12, 2023

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.

2. Network Effect

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.

4. Customer Lock-in

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.

5. Patents/Intellectual Property

Patents are essentially a temporary monopoly granted by the governments to stimulate risky R&D. Example: biotech and pharmaceutical companies.

6. Know-how/Monopolies

If a critical enabling element can be kept secret, it can become a source of sustainable advantage.

7. 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.

8. 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.

9. Exclusive License

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.

10. Cost Advantage

Cost advantage can be achieved through economies of scale. This makes it difficult for competitors to match the low prices.

11. Adapting Product Lines

For products that continuously evolve, many tech companies could fit in this category.

Want to Perform Competitive Analysis for your Business?

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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
• 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:

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.

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About the Author

Since childhood, I was in awe of the magic that words bring. But while studying computer science in college, my world turned upside down. I found my calling in being a copywriter and I plunged into a world of words. Since then, there is no looking back. Even today, nothing excites me to find out the wonders the words can bring!

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What Is a Competitive Advantage?

• How It Works
• How To Build It
• Competitive vs. Comparative Advantage

The Bottom Line

• Business Essentials

Competitive Advantage Definition With Types and Examples

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

Competitive advantage refers to factors that allow a company to produce goods or services better or more cheaply than its rivals. These factors allow the productive entity to generate more sales or superior margins compared to its market rivals. Competitive advantages are attributed to a variety of factors including cost structure, branding , the quality of product offerings, the  distribution network , intellectual property, and customer service.

Key Takeaways

• Competitive advantage is what makes an entity's products or services more desirable to customers than that of any other rival.
• Competitive advantages can be broken down into comparative advantages and differential advantages.
• Comparative advantage is a company's ability to produce something more efficiently than a rival, which leads to greater profit margins.
• A differential advantage is when a company's products are seen as both unique and of higher quality, relative to those of a competitor.

Investopedia / Michela Buttignol

Understanding Competitive Advantage

Competitive advantages generate greater value for a firm and its shareholders because of certain strengths or conditions. The more sustainable the competitive advantage, the more difficult it is for competitors to neutralize the advantage. The two main types of competitive advantages are comparative advantage and differential advantage.

A comparative advantage is when a firm can produce products more efficiently and at a lower cost than its competitors.

A differential advantage is when a firm's products or services differ from its competitors' offerings and are seen as superior. Advanced technology, patent-protected products or processes, superior personnel, and strong brand identity are all drivers of differential advantage. These factors support wide margins and large market shares.

For example, Apple is famous for creating innovative products, such as the iPhone, and supporting its market leadership with savvy marketing campaigns to build an elite brand. Another example is major drug companies. They can market branded drugs at high price points because they are protected by patents.

The term "competitive advantage" traditionally refers to the business world, but can also be applied to a country, organization, or even a person who is competing for something.

How To Build a Competitive Advantage

To build a competitive advantage, a company can use one of three main methods:

• Cost: Provide offerings at the lowest price
• Differentiation: Provide offerings that are superior in quality, service, or features
• Specialization: Provide offerings narrowly tailored to a focused market

Competing on price can be effective, but if you slash prices too much you risk decreasing profit margins to an untenable level. Many firms opt instead to differentiate themselves in other ways, which helps preserve or expand their profit margin.

Benefits of a Competitive Advantage

When a company creates a durable competitive advantage, it sets itself apart from the competition and provides value to customers as well as stakeholders. By producing a desirable product or service that is better or more cost-effective than its competitors,' the company can make more sales, generate more revenue, and enjoy greater profits.

Strategies to Build a Competitive Advantage

To build a competitive advantage, a company must know what sets it apart from its competitors and then focus its message, service, and products with that difference in mind. Here are several strategies companies use to build a competitive advantage:

• Research the market : Market research helps a company identify and define its target market, which can guide it in developing the most effective advantage.
• Identify strengths : A company can find its unique strengths, especially relative to competitors, by reviewing products, services, features, positioning, and branding.
• Evaluate finances : Companies can take a close look at their financial performance to spot profit centers and areas of stability, using financial statements and ratios.
• Review operations : How efficient is a company's operations? Where is it effective, and where is there room for improvement? Consider customer service as well as production and supply chain management.
• Consider human resources : The talent a company can attract as employees and leadership can make an important difference in the success of the business. Evaluating company culture, hiring, and staffing practices can help.

Competitive Advantage vs. Comparative Advantage

A firm's ability to produce a good or service more efficiently than its competitors, which leads to greater profit margins, creates a comparative advantage. Rational consumers will choose the cheaper of any two perfect substitutes offered. For example, a car owner will buy gasoline from a gas station that is 5 cents cheaper than other stations in the area. For imperfect substitutes, like Pepsi versus Coke, higher margins for the lowest-cost producers can eventually bring superior returns.

Economies of scale , efficient internal systems, and geographic location can also create a comparative advantage.

Comparative advantage does not imply a better product or service. It only shows the firm can offer a product or service of the same value at a lower price.

For example, a firm that manufactures a product in China may have lower labor costs than a company that manufactures in the U.S., so it can offer an equal product at a lower price. In the context of international trade economics, opportunity cost determines comparative advantages. 

Amazon ( AMZN ) is an example of a company focused on building and maintaining a comparative advantage. The e-commerce platform has a level of scale and efficiency that is difficult for retail competitors to replicate, allowing it to rise to prominence largely through price competition.

How Do I Know If a Company Has a Competitive Advantage?

If a business can increase its market share through increased efficiency or productivity, it would have a competitive advantage over its competitors.

How Can a Company Increase Its Competitive Advantage?

Lasting competitive advantages tend to be things competitors cannot easily replicate or imitate. Warren Buffet calls sustainable competitive advantages economic moats , which businesses can figuratively dig around themselves to entrench competitive advantages. This can include strengthening one's brand, raising barriers to new entrants (such as through regulations), and the defense of intellectual property.

Why Do Larger Companies Often Have Competitive Advantages?

Competitive advantages that accrue from economies of scale typically refer to supply-side advantages, such as the purchasing power of a large restaurant or retail chain. But advantages of scale also exist on the demand side—they are commonly referred to as  network effects . This happens when a service becomes more valuable to all of its users as the service adds more users. The result can often be a winner-take-all dynamic in the industry.

How Is Competitive Advantage Different From Comparative Advantage?

Comparative advantage mostly refers to international trade. It posits that a country should focus on what it can produce and export relatively the cheapest—thus if one country has a competitive advantage in producing both products A & B, it should only produce product A if it can do it better than B and import B from some other country.

A company's competitive advantage is the way it excels compared to its rivals. This advantage may be through cost leadership, differentiation, or focus. Identifying a company's competitive advantage helps show how it is positioned to be more successful than its competitors, creating more revenue and generating greater profits.

Young African Leaders Initiative. " Action Your Business Growth: The Importance of Knowing Your Competitive Advantage ."

U.S. Small Business Administration. " Market Research and Competitive Analysis ."

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