In markets with intense competition, a competitive advantage is essential to an organization’s success. It allows an organization to stand out from competitors, allowing for greater profit margins, higher asset returns, and accumulation of valuable resources.
There are several ways to gain a competitive edge, but only two types exist. This post will examine the concept of competitive advantage and how organizations can achieve and maintain a competitive advantage by focusing on cost and differentiation.
What is Competitive Advantage?
An organization’s competitive advantage comes from the value it can create for its clients. The competitive advantage can be in the form of lower prices than those offered by competitors or unique benefits to counterbalance higher prices. The value created for the client should be greater than its cost.
This gives them a competitive advantage, allowing them to succeed in the market.
Competitive Advantage: Components
It is essential to understand the following to establish a competitive edge:
1. Value proposition: A business must identify features or services which make it appealing to customers. To attract interest, it must provide real value.
2. Market: An organization must identify its market to maintain its competitiveness.
3. Competitors: An organization must research and define its competitors, including traditional and non-traditional competition.
For a business to gain a competitive edge, it must identify the value proposition desired by its target market and cannot be duplicated by other companies.
How to Create and Sustain Competitive Advantage
It takes work to create business strategies that will last. Follow these steps to stay ahead and get ahead.
1. Analyze Competitors
It is important to understand the competitive landscape for an organization to compete successfully in an industry. This includes gathering and analyzing data on the strengths and weaknesses of competitors, their strategies, positioning and value propositions, and customer perception. With this knowledge, the correct business strategy can be developed to create a sustainable advantage.
2. Cost Leadership
This strategy is designed to help an organization become the lowest-cost producer within its industry. Cost advantage can come from various sources, depending on the industry. These include proprietary technologies, preferential raw material access, enhanced individual skills, better organizational routines and management effectiveness.
A low-cost manufacturer must exploit all these cost advantages. Companies that can achieve and maintain overall cost leadership can be a better performer than the average in their industry if it can set prices that are at or close to the industry standard. This strategy allows organizations to maintain a competitive position by offering products and services at a lower or similar price.
Cost leaders must also consider their bases of differentiation. If the product isn’t perceived as comparable by the buyers or acceptable, they will have to lower prices to compete. It will then reverse the advantages of its advantageous cost position.
This strategy involves a company selecting a specific segment and customizing its strategy for them while excluding other market segments. Focusers optimize their strategy to cater specifically to a group of customers. They do not aim for an overall competitive edge, but they can achieve a competitive edge in the segment that they are targeting.
Two variants of the focus strategy are available:
· Cost Focus: The organization is looking for a cost advantage by leveraging its cost behavior.
· Differentiation in Focus: The organization seeks to differentiate itself by exploiting the needs of its customers.
This business plan is designed to help an organization become unique within its industry in certain dimensions valued by buyers. Generaly This strategy involves the organization selecting attributes that buyer’s value and uniquely positioning itself to meet these needs. The organization is then rewarded with premium prices for its uniqueness.
The logic behind differentiation strategy dictates that an organization’s attributes chosen to differentiate itself should be different than those used by its competitors. A company that can achieve and maintain differentiation will be a better performer than the average in its industry if it offers a premium price that can cover the additional costs incurred for being unique. If an organization wants to be a differentiator, it should focus on ways to differentiate that result in a higher price than the cost.
A differentiator must pay attention to their cost position, as the lower cost positions of competitors could nullify any premium price.
What is the Importance of Competitive Advantage?
It is the competitive edge that sets one business apart from another. A business must succeed by ensuring higher profit margins, attracting new customers, or increasing brand loyalty with existing customers. Investors and creditors are also attracted to higher margins, better growth profiles, and lower customer turnover. This makes capital available (and more affordable) to firms that can maintain a competitive advantage over their peers.
You will become a more effective marketer if you know the strengths and weaknesses of your competitors. You can only win if you understand the competition. Competitive analysis will help you quickly improve your marketing strategy and capture your audience. The results of your competitive analysis should be followed up with a clear business goal and a solid business plan.