Competitive advantage refers to factors that allow a company to produce goods or services better or more cheaply than its rivals. These factors allow the productive entity to generate more sales or superior margins compared to its market rivals. Competitive advantages are attributed to a variety of factors including cost structure, branding, the quality of product offerings, the distribution network, intellectual property, and customer service.
Competitive advantages generate greater value for a firm and its shareholders because of certain strengths or conditions. The more sustainable the competitive advantage, the more difficult it is for competitors to neutralize the advantage. The two main types of competitive advantages are comparative advantage and differential advantage.
The term "competitive advantage" traditionally refers to the business world, but can also be applied to a country, organization, or even a person who is competing for something. A firm's ability to produce a good or service more efficiently than its competitors, which leads to greater profit margins, creates a comparative advantage. Rational consumers will choose the cheaper of any two perfect substitutes offered. For example, a car owner will buy gasoline from a gas station that is 5 cents cheaper than other stations in the area. For imperfect substitutes, like Pepsi versus Coke, higher margins for the lowest-cost producers can eventually bring superior returns. Economies of scale, efficient internal systems, and geographic location can also create a comparative advantage. Comparative advantage does not imply a better product or service, though. It only shows the firm can offer a product or service of the same value at a lower price. For example, a firm that manufactures a product in China may have lower labor costs than a company that manufactures in the U.S., so it can offer an equal product at a lower price. In the context of international trade economics, opportunity cost determines comparative advantages. Amazon (AMZN) is an example of a company focused on building and maintaining a comparative advantage. The e-commerce platform has a level of scale and efficiency that is difficult for retail competitors to replicate, allowing it to rise to prominence largely through price competition. A differential advantage is when a firm's products or services differ from its competitors' offerings and are seen as superior. Advanced technology, patent-protected products or processes, superior personnel, and strong brand identity are all drivers of differential advantage. These factors support wide margins and large market shares. Apple is famous for creating innovative products, such as the iPhone, and supporting its market leadership with savvy marketing campaigns to build an elite brand. Major drug companies can also market branded drugs at high price points because they are protected by patents.
If a business can increase its market share through increased efficiency or productivity, it would have a competitive advantage over its competitors.
Lasting competitive advantages tend to be things competitors cannot easily replicate or imitate. Warren Buffet calls sustainable competitive advantages economic moats, which businesses can figuratively dig around themselves to entrench competitive advantages. This can include strengthening one's brand, raising barriers to new entrants (such as through regulations), and the defense of intellectual property.
Competitive advantages that accrue from economies of scale typically refer to supply-side advantages, such as the purchasing power of a large restaurant or retail chain. But advantages of scale also exist on the demand side—they are commonly referred to as network effects. This happens when a service becomes more valuable to all of its users as the service adds more users. The result can often be a winner-take-all dynamic in the industry.
Comparative advantage mostly refers to international trade. It posits that a country should focus on what it can produce and export relatively the cheapest—thus if one country has a competitive advantage in producing both products A & B, it should only produce product A if it can do it better than B and import B from some other country. Lead Conversion Made EasyConvertful – The All-In-One Tool to Turn Your Visitors Into Leads & Sales 🚀I've gotten into arguments about this. People often confuse the three, primarily benefits and value. Sales people talk about their "value proposition" and then go on to list the features and benefits of the product they are selling. In my mind, there is a very distinct difference between the three and it is important to understand not only when selling but when building a valuable company (pun intended). Your product defines the Features Features are the things that your engineers build specifically for your product. If highlighting features were the key to closing deals, we wouldn't need sales people. That can be done with a spec sheet. Features are facts. If you don't know the features of your product, the engineering/manufacturing team can give you a list. Your people define the Benefits Benefits are the direct result of a feature. They are things a customer can accomplish because of the features of your product. Your people determine what the benefits are whether they are sales people presenting to a potential client or marketing people creating some collateral. A more mature company will have a handful of benefits pre-defined. Your customer defines the Value This is the big one. This is what drives people to make buying decisions. The value is unique to each consumer. It is why your product is important to them. It is determined by the significance of the problem your product is solving. The only way to know the value of your product is to get feedback from your customers. Example 1: A Pen. Features: Blue ink, click to display point, clip, plastic, green, smooth outside. Benefits: You can write notes, sign contracts, draw a picture, all with a device small enough to fit in your pocket and the ink is permanent. Value: Green is my lucky color so I sign all of my contracts with my green pen. Example 2: A Tire. Features: Rubber, round, black, thick grooves, manufacturer's logo, 30" diameter. Benefits: Allows your vehicle to accelerate around curves without losing traction and stop on a dime. Value: My tires allow me to drive my children to soccer practice safely. Why it Matters. For business leaders, it matters because the three are linear. Features lead to benefits and benefits eventually lead to value. To build a successful business, you have to work backwards. First determine what you'd like your value to be and then build the features that will ultimately deliver that value. For marketers, it matters because features and benefits have no emotional relevance but the value does create an emotional response. It's the reason case studies and success stories are such a powerful marketing tool. They give real life examples of the value that a product or service provides and they are always specific to that particular client. For sales people, it matters because value is what brings people to a buying decision. Features and benefits are great but those can be displayed on your website. The only way to find the value is through communication with the client/prospect and finding out exactly what pain your product is solving. When you focus on highlighting the value of your product to that client, you will become more successful. Read more from Brian: www.thegrowthnerd.com 4 Ways Millennials Are 'Different' And Why That's A Good Thing The Next Big Movement In Sales Strategy What Playing Basketball Taught Me About Business 5 Characteristics of Outstanding Sales People 5 Tips to Succeed in Relationship Based Sales |
When a company has a unique feature and benefit it is called what?
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