Competitive advantage: what is it and which ones can a company have?
Do you know what your company’s competitive advantage is ? Or what are the differences that make it stand out in the market? If your answer is no, your business may be missing out on valuable opportunities to innovate and offer differentiated opportunities to customers.
Your company’s approach to customers, for example, can become an advantage if it meets the needs and solves the pain points of your target audience.
A 2023 study by consultancy Forrester highlighted this relationship, pointing out that 41% of customer-centric businesses had a revenue growth rate of 10% .
In comparison, only 10% of companies that did not use this strategy achieved the same revenue result.
Therefore, it is essential to know what your company’s “strengths” are within the market in order to invest in actions that enhance competitive advantage, boosting the generation of profits and other gains.
It is worth remembering that a well-planned and publicized positioning of competitive advantages strengthens the brand’s image and recognition, as a reference for quality, price, innovation, among other characteristics.
So, if you want to establish this definition in your company, continue reading the article and understand what competitive advantage is, types of differentials, how to gain an advantage in the market and the role of sustainable competitive advantage today.
Happy reading!
What is competitive advantage?
Competitive advantage is the difference that a company has in relation to its competitors in its market segment, placing it in the spotlight and, consequently, attracting more sales and retaining more customers who value the solution offered, be it a product or service .
Some factors that can differentiate companies’ offers are:
- offer superior quality (in processes or in the use of more efficient raw materials)
- prices lower than the competition
- differentiated payment conditions, among others.
The concept of competitive advantage was established by Michael Porter , author and professor at Harvard Business School in the United States.
Porter is the author of the book ‘Competitive Advantage – Creating and Sustaining Superior Performance ‘, a great read to learn how to assess competitive position and implement actions to improve it.
For Porter, competitive advantage concerns the way a company responds to the challenges that command market competition .
In other words, it is a concept that illustrates the company’s proactivity to stand out and its ability to analyze the movements in its segment, establishing a clear position and investing so that it gains relevance.
How important is competitive advantage in business?
A company that knows its competitive advantage can better organize its management efforts to improve both its work model and the communication of its differentials through marketing, for example.
Thus, the importance of the concept within companies becomes evident when the team promptly answers the question:
↪️ Why does a customer buy a service/product from our company and not from company B?
If employees’ responses need to be quick, customers and potential consumers need to be just as quick. This indicates that people recognize the company’s efforts and value the solutions it offers.
Professor Porter emphasizes that, in addition to recognizing the excellence of the product or service, companies need to pay attention to other factors, such as customer pain points, their market niche and whether people have easy access to offers .
For example, a brand of sliced bread may have a product line that is highly rated and sought after by consumers. However, it is not easy to find and, what’s more, it is always out of stock at points of sale.
The competitive advantage is recognized, but the lack of planning can harm the company’s sales and profit generation due to a production or distribution bottleneck that interferes with access to the item.
What are the types of competitive advantage?
The types of competitive advantage, according to studies conducted by Michael Porter, are divided into four groups: pricing, service/access, focus and exclusivity . Learn more about each one in the following topics:
Pricing
Price is a classic competitive advantage, but it is not always the highlight of a product or service. This is because setting a price below the competition, without knowing and considering the costs involved in the operation, is a sign of financial loss in the long term.
Therefore, if the company identifies the possibility of reducing costs (operational, labor, among others) and, therefore, can review the pricing of a product line or service, the price can be a reliable advantage.
So, avoid making decisions based on “guesswork”, especially when it comes to financial matters. Analyze the company’s costs, the annual budget and make decisions based on reliable data.
Service/access
At the beginning of the article, we cited research by the consultancy Forrester that highlights the growth in revenue of companies whose strategies are customer-centric.
In other words, the focus of these businesses is clear, and the teams work focused on the objective. After all, excellence can only be achieved when there is commitment and means to ensure that the delivery is of a high level.
Customer service is a strong competitive advantage in the service industry, but it is also relevant for direct sales of products. The same thinking applies to the access customers have to solutions.
A product (or service) that, in addition to being easy to find/request, reaches more remote areas has a valuable competitive advantage, especially if competitors are not present.
Here’s a tip: carry out an analysis of opportunities based on these questions in your company to check whether it is viable to position yourself as a reference and create an action plan to make improvements.
Focus
The focus- based type of competitive advantage , or focus, works strategically to meet the needs and pains of a niche market .
In other words, the company has a well-defined target market, studies the consumer profile present in that area, what they are looking for, the desired differentials, those that are already met, among other points to create the strategy.
Segmentation is an important action for companies to define their ideal target audience and know who they are communicating with and how to bring them closer to the brand.
💡 TIP : the focus advantage can be associated with pricing or exclusivity as a strategy to create an even stronger differential within the chosen niche.
Exclusivity/differentiation
The fourth type of competitive advantage is exclusivity , or differentiation. Price competition usually involves two companies selling the same product competing for space in the same market.
With a focus on exclusivity, the company will add differentiated features to its product or service that competitors do not have, as a tactic to win customers.
Imagine a city with three different creative clubs. However, only one of them, the smallest, has an indoor heated pool.
In other words, partners can take advantage of the internal and external structure at all times of the year, and this can be a decisive factor in attracting new customers.
Offering exclusivity can be costly. Therefore, it is essential to seek evidence from industry research or conduct your own survey to determine possible differences, how much people are willing to pay for it, and the expected return on investment.
How to gain a competitive advantage?
Now that you know the types, what can you do to achieve your company’s competitive advantage? Here are the fundamental steps to achieve this goal.
1. Know your target audience
When it comes to target audience , don’t limit yourself to knowing just general information — demographic characteristics, personal data, education, location, etc.
Invest time and resources in getting to know this group. If possible, conduct market research to identify the main needs and desires of the people your company wants to impact.
Thus, products and services can have the right characteristics and generate desire in the target audience through creative marketing and sales actions.
2. Balance costs and quality
Just like poor pricing, cutting costs at random can result in loss of quality, and that is not the goal. The best way to do this is to balance it so that changes in costs do not affect quality.
First, analyze the main production costs to identify inputs , services and materials that can be replaced with more economical versions, but without affecting quality. Changing the company’s energy supply is an example.
3. Invest in customer service
Customer service is a very strategic competitive advantage, so plan improvements for this area in your company.
Invest in technologies to support the process, such as contact management software and team training focused on trends, such as humanized and personalized service.
4. Invest in design innovations
How a product (or service) reaches the customer is an essential component of the success of the experience. The more impacted the customer is by the design , whether by the way it is used or by the way the service is performed, the better.
Therefore, it is essential to be aware of the market, trends and new materials available to bring new things to customers.
5. Create a community
Your company’s competitive advantage can have an even greater impact if you work to get closer to your customers to strengthen relationships, forming a community .
This way, your business can be a reference in the segment, as the points of contact are constantly active, both through social networks and personalized events or exclusive advantages, which can generate sales, but also many valuable conversations.
Examples of competitive advantage of companies
Some examples of companies’ competitive advantage are:
- investment in innovation, especially in research and development, with a focus on creating new solutions or evolving the current portfolio;
- implementation of new technologies to automate production processes and modernize the structure, increasing the efficiency of the internal team and the quality of the products;
- customization of solutions to offer unique products and services that serve underexplored market niches with low competition;
- lean management as strategies to reduce costs and waste, including managing the waste produced.
It is important to highlight that competitive advantage is only maintained with continuous effort to ensure that the level of delivery of the product or service is preserved.
Therefore, your company needs to be aware of market movements to preserve its competitive edge and, if necessary, seek new focuses, without affecting the customer experience.