What Is Competitive Advantage? Guide to Competitive Advantage

Competitive advantage is an attribute of a business that offers greater consumer value or appeal to its products or services relative to its competitors. A business that has a competitive advantage over other businesses gives its target market something that competitors don't offer or can’t offer.

Low-cost products, special services, better products, or stronger marketing are all examples of a business’ competitive advantages. Companies that have sustainable competitive advantages over other companies can increase their profit margins and improve their market share, taking control of large percentages of the business in their field.

The three main types of competitive advantage are differentiation, cost advantages, and focus advantages. Here is a little information about all three.

1. 1. Differentiation: Differentiation refers to a number of ways tailoring business strategy to create beneficial points of difference between a business and its competitors. Points of specialization can be high-quality products, innovative proprietary technologies, a unique brand image, or innovative marketing.
2. 2. Cost leadership: Companies that find ways to lower production costs and offer lower prices for their customers have a competitive advantage. This is where comparative advantage comes into play, which refers to companies that have lower supply chain costs than competitors, increasing their sales margins.
3. 3. Focus advantage: A business that has a focus advantage refers to targeting products, services, or marketing to cater to a small subsection of a business’s target audience. A focus strategy enables companies to isolate their most reliable customers within a market segment and service their needs directly, creating greater customer satisfaction and brand loyalty.

Competitive advantage refers to one company's ability to differentiate itself over its competitors. Comparative advantage refers to a business’s ability to produce a cheaper good compared with other businesses.

Comparative advantage is a type of competitive advantage that contributes to a business’s cost advantage, enabling companies to sell goods at lower prices while still yielding higher profit margins than their competitors. A business that outsources its production to countries where labor and materials are cheaper than its competitors will have a comparative advantage.

Here are some examples of how a business might achieve economic growth over its competitors through a sustainable competitive advantage.

1. 1. Product quality: When a business offers a higher quality product compared to its competitors, it has a differential advantage. This may have to do with product development, research, or technology. The product may also be durable and made of high-quality materials.
2. 2. Pricing: Low prices create a competitive advantage for a business, particularly if other factors such as quality are not well-positioned to be competitive. Companies that can produce their products more cheaply can sell them at lower prices for their customers, while still maintaining a higher profit margin than competitors who produce their goods more expensively.
3. 3. Customer service: Excellent customer service or loyalty perks can lend competitive advantages to a business by fostering brand loyalty. For example, a bank with the highest number of available ATMs provides a competitive service advantage for its customers.
4. 4. Marketing: A company with an intelligent and effective marketing strategy can encourage brand loyalty in its customers. Memorable marketing can put a company at the forefront of new customers’ minds, making them more likely to turn to their services when they are needed.
5. 5. Distribution networks: If a brand makes a product that requires a distribution network to reach customers—like soda, snacks, or paper products—larger distribution networks mean that a brand will have a competitive advantage. This refers to relationships with third-party vendors that use or sell a company’s products to their own customers.
6. 6. Innovation: A brand that devotes its efforts to developing innovative intellectual property, new technologies, or new products to sell will have a competitive advantage over other similar companies. This principle often applies to technology startups, home appliances, and automobiles.

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