What Is Competitive Advantage? (Definition And Types)

By Indeed Editorial Team

Published 9 October 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Business strategies usually emphasise ways to enhance a company's advantage in the marketplace. For individuals working in marketing, it is critical to know how‌ to maximise a company's strengths and minimise its limitations to deliver the best products and generate the highest levels of consumer engagement. You may make distinctive choices about pricing, quality of products and production efficiency by knowing how to recognise a company's advantages in a market. In this article, we define competitive advantage, examine how competitive advantage works, discuss the different types and provide examples.

What Is Competitive Advantage?

When a company or organisation enjoys a competitive advantage, it has a strategic leverage over its competitors. A company may acquire and retain customers more frequently and consistently than rival companies and brands if it can advertise and provide goods and services of greater quality or at lower costs. This advantage can also result in increased brand loyalty and long-term connections between a company and its target market.

Related: 68 Common Business Development Executive Interview Questions

How Does This Advantage Work?

A company's competitive advantage is a quality that may not be simple to replicate. This is because a company may develop its advantages over time. Here are three important variables that might influence how a company creates and develops an advantage over competitors:

Analysing the market

It is necessary to have a thorough understanding of the target market and how it influences a company's overall expansion to achieve an advantage. The key factors that give businesses an advantage over competitors include high-quality products, reasonably priced products and services or any special selling proposition that appeals to their target audience and can help consistently retain clients. A company can start by gathering the following three pieces of crucial market data:

  • Who the target market or demographic is

  • The biggest benefit a product or service offers customers

  • Competitors' strengths and weaknesses

For instance, a company that sells health and fitness supplements can decide that middle-aged adults who need nutritional supplements are its target market. The business may then identify the major benefit that its products provide for customers. Then, they can examine its competition to gain insights and put strategies into place that can distinguish its products from the competition. This informal analysis may influence the tactics they use to maintain consumer engagement and encourage repeat business.

Related: How To Become A Market Research Analyst: A Complete Guide

Implementing strategies

Businesses may formulate and implement their strategy to position their products or services ahead of the competition after conducting a brief market analysis. For instance, a company might concentrate on differentiating or making its products unique from those of its competitors. A company can also employ strategies like differentiation strategies, cost leadership strategies, focused approaches, branding strategies, network advantages and resource advantages to position itself effectively for an advantage.

Knowing the target market and being able to approach one of these strategies is another way advantage works. Businesses can then focus on building their advantage over time by monitoring and recording the performance of their strategies. They can also record the results to further analyse organisational progress towards advantage.

Related: Business Strategy Components And Examples

Monitoring progress and performance

As a business operates over time, it can monitor the strategy it uses. A communication platform whose advantage over competitors is its network effect might monitor the number of new users that patrons refer. Monitoring this information helps platform designers create more incentives for users to sign up for a service, like referral programmes or bonuses. Tracking the overall progress can depend on what type of advantage a business exercises over its competitors.

Related: What Is Performance Management? A Comprehensive Guide

Types Of Advantage Over Competitors

The type of advantage over competitors a business can have depends on its approach to developing its market position. Here is a list of types of advantages a company can have:

Differential advantage

A company that has a differential advantage offers products or services with a unique benefit to the market compared to competing businesses. Having a differential advantage means identifying the unique position a business has in its market and describing its benefits to a target market. The unique selling point can be any number of different traits, like better quality, quick service or other specific traits the product or service offers customers.

Related: What Are Market Niches? (With Benefits And 10 Examples)

Cost leading advantage

Cost leadership involves the production of goods or provision of services that are equal in quality to competitors but at lower prices than them. To reduce manufacturing costs, companies concentrate on improving the effectiveness of production processes. They can lower prices while still earning a profit because of their cheap production costs. Developing a cost leadership approach can involve continuously analysing and developing operational methods that increase efficiency and productivity.

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Market-focused advantage

Businesses that have a focused advantage target predefined markets rather than one large market. The market-focused approach may use strategies that give information to a business about its target demographic. The business can then use this information to customise its products or services to fulfil a target market's needs. This is advantageous because companies can use this approach to build relationships with their customers by personalising the market's purchasing experience.

Network advantage

Network advantage is oftentimes the advantage that subscription services or social media and communication platforms can have over their competitors. For instance, if a cable operator provides its subscribers with membership benefits or incentives, it may have an advantage over rival service providers. The cable operator may attract additional customers who recognise the value of joining its network.

Resource advantage

The term resource advantage refers to an advantage over competitors that a business can have because of a constrained availability of resources or commodities for production. A business that receives government contracts to remove solid trash from environmental sites is an example. As other waste disposal firms might not have access to this opportunity due to licensing constraints, the contracting company may have an advantage in this situation because it has the legal authority to operate in this role.

Brand advantage

Brand loyalty is an advantage that results from having a distinctive or outstanding brand image. Customers who draw inspiration from a company's image, positioning and marketing tactics are typically more loyal to the business and may be willing to spend more on goods and services. To stay relevant and continue offering distinctive benefits to clients, brand advantage might also require regularly updating features exclusive to a brand's products or services.

Related: Brand Management: A Complete Guide (With Examples And Tips)

Examples Of Advantage Over Competitors

A company can build an advantage over competitors over time by managing how it approaches its market position and pursuing continual development. These examples can illustrate how different strategies can affect this advantage:

Cost leadership example

Consider a multinational electronics manufacturer that wishes to improve its position to gain an advantage over competitors. To decrease the prices of its products, it might reduce the costs associated with operation, manufacturing, resource procurement and supply. The manufacturer can acquire an advantage over competitors in its industry if it is effective in offering its products at a cheaper price than its competitors who provide similar quality products.

Market-focused example

Assume that an online magazine seeks to establish an advantage over other websites that serve the same niche clientele. The magazine may use strategies for acquiring data about its target market to publish issues that centre on subjects that attract its readership. The online magazine can improve its competitive advantage by developing interesting articles, surveys, quizzes or social media debates to connect to its audience.

Differentiation example

Assume a new software business is positioning its unique products in a market. To differentiate its products from those of rival developers, the company may study how users engage with and employ identical software products of rival firms. The company might concentrate on developing a software application that incorporates these distinct aspects that the target audience may demand, after determining the attributes that the target market values the most in their user experience. Utilising this information might also assist the company in creating distinctive marketing plans that can help them in their market.

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