What is competitive advantage and why is it so important?

A surprisingly large number of businesses drift along, chipping away at what they do with no real plan or strategy.  Don’t get me wrong, a lot of these business owners are great at what they do/produce, but often their head is stuck in what they do, rather than making a successful business out of it.  The reasons why this can happen are varied – some business owners don’t have the relevant business management skills, some don’t enjoy the business side of it and a lot of business owners find that there just aren’t enough hours in the day.  In this article, we’ll have a look at what exactly competitive advantage is, how any business owner can achieve it and why it’s so important.

What is competitive advantage?

In a nutshell, competitive advantage is the reason why potential customers should choose you, rather than one of your competitors.  It’s how you make your product better, or at least appear better, than what your competitors are producing.  A competitive advantage rarely happens by chance – a lot of thought and effort usually goes into developing and maintaining one.  There’s a few different strategies you can utilise to achieve a competitive advantage.

The 3 paths to achieve a competitive advantage

There really are just 3 strategies you can implement to achieve a competitive advantage:

  1. Cost leadership – this pretty much involves producing your products more cheaply than your competitors. Generally, if you can produce a similar quality item at a cheaper cost, then you can charge less than your competitors and still make a profit.  In most cases customers will prefer the cheaper product if they believe the quality is the same.  This is something Bunnings does really well.  They maintain huge warehouses and produce in bulk, keeping their costs low.  This means they generally have a larger range of lower priced products than other smaller hardware shops, which makes them more appealing to most customers.
  2. Differentiation – this involves making your product better than your competitors.  It could be a better quality product, something unique that you do or even just to convince customers (through marketing, etc.) that what they’re buying is better.  If customers think your product is better than your competitors, they won’t mind paying extra for it.  This is something that Coca-Cola does really well.  Let’s be honest, there are a number of far cheaper alternatives that taste very similar to what Coke produces, yet a lot of people still buy Coke.  Their brand messaging/marketing always promotes the fun and happiness you get with a Coke, rather than why their recipe is superior.
  3. Focus – this involves completely ignoring a (potentially large) chunk of the overall market and doing an amazing job at providing for a specific market segment (either through cost leadership or differentiation), so that they wouldn’t want to buy from anyone else.  Although this may seem counter-intuitive, successfully focusing on a niche can actually be an extremely profitable strategy.  Take The Man Shake for example, they put 100% of their effort into trying to appeal to only health-conscious middle-aged men.  It’s not like there is a shortage of health-conscious women out there, or people who drink shakes in an attempt to build muscle.  Yet, The Man Shake alienates both of these markets so that they can so effectively appeal to the market they’re after.

Why it’s so important?

Essentially, a good competitive strategy gives potential customers a compelling reason to buy your product.  If you don’t have an intentional competitive strategy in place, then chances are your business won’t be the cheapest, the best or the brand of choice for a specific market.  If this is the case, your business risks appealing to no one, and will likely struggle to generate sales.

Know your industry!

Before settling on a competitive strategy, it’s really important to make sure you’re pursuing the right one.  For example, if I open a stationery shop and try to offer lower prices than Officeworks, I’ll almost certainly go broke.  Best-case scenario I’ll make a modest profit, but have to work ridiculous hours to achieve it.  There’s some really vital considerations to take into account before settling on your competitive strategy:

  • How competitive is your industry?  The reality is, every industry is different, and competition within any industry varies greatly.  What would happen to your sales volume if you raised your prices by 30%?  In a highly competitive industry (e.g. fast food), increasing your sales prices by that much would have a large negative impact on your sales volume.  But, in a relatively uncompetitive industry (e.g. toll road operator), there might be no change to the sales volume.
  • Who is your target customer?  Most businesses have good and bad customers.  Good customers are pleasant to deal with, they buy your profitable products often and promote your products to their networks.  Bad customers are frustrating, take a lot of your time/resources for comparatively small profits and complain frequently.  For your business, do you know who those good customers are?  Are they of a common age, gender, geographic location, personal income, family profile, etc?  Do they have a certain hobbies, habits, values, goals or lifestyles?
  • Do you appeal to your target customer?  If you know your target customer back-to-front, then you can figure out how to develop products that solve their problems.  You can adopt branding that speaks to them and market to them in a way that will resonate with them.  In doing all this, you can get great at finding more of your ideal customers.  This will only be a good thing for your business.

Getting it right

Being able to identify your target customer and the right strategy to achieve a competitive advantage is crucial in any business finding sustained success.  If you can’t do this, you risk appealing to no one and getting stuck in a business that isn’t going anywhere.  This process requires planning and effort to get right.  But, if done right, you can achieve a business that is both personally satisfying as well as financially rewarding.  We can’t be masters of everything – sometimes business owners need to reach out for help where they’re out of their depth.  A trusted business advisor (who is any good) will be able to provide clarity and insight throughout this process.

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