What is a Competitive Advantage?
A Competitive Advantage is something that allows a Company to Perform better than its Competitors.
- A more efficient manufacturing process, access to cheaper raw materials, etc.
There are different ways of conceiving what a Competitive Advantage is.
However, according to our professional experience, the most practical way of conceiving it is by analyzing an entire Sector.
If you only look for particular advantages of companies, you’ll end up with a long list of virtues.
- You could say that a Big Company’s Competitive Advantage is its huge logistics that reduces transportation costs.
- For a small Company competing, you could say that its Competitive Advantage is its flexibility.
You’ll always find something good in all companies:
- A Better customer service, a prettier Design…
Are all of them Competitive Advantages?
When looking for a Competitive Advantage, you need to look for something that has proven to be Absolutely Critical.
- To being Successful in a certain Market.
This way, you won’t waste time comparing different companies for nothing.
Difference between Strengths and Competitive Advantages
David vs Goliath: Guess who’s got a Market Strength and who has a Competitive Advantage.
In our “SWOT analysis” page, we explained how to Search for Strengths.
But, what is the difference between a “Strength” and a “Competitive advantage”?
A Competitive Advantage, is always a Strength when developing a SWOT analysis.
- However, a certain Strength is not always a Competitive Advantage.
For example: If you buy and sell trainers online, you can regard your “Flexibility” as a Strength.
- Nevertheless, that is not a Competitive Advantage within the e-commerce Market:
- You won’t success in that market by just being Flexible.
Now you might be thinking:
- “Ok, a Strength can always be a Competitive Advantage if I reduce the big Market into a micro-niche market“.
But it doesn’t work that way.
A Competitive Advantage is something that lasts, something strong that guarantees success within a market.
- A Strength is usually a “more-volatile” or circumstantial Factor.
When should you look for Competitive Advantages?
A Competitive Advantage analysis must be developed when studying a Market.
- And how to Penetrate it or Succeeding in it.
A Competitive Advantage analysis should be developed together with a Porter 5 Forces.
- While a Porter 5 Forces describes a market and its Key players, a Competitive Advantage analysis explains why these Key players Succeeded.
* If you have not visited our “Porter 5 Forces” page, we encourage you to do so.
We’ll now give you different examples, so you understand it better:
Examples of Competitive Advantages
Now, we’ll explain you the following examples:
- Starbucks – Coffee shop Market.
- Amazon – Online retail Market.
- Ikea –Furniture Market.
- Harley Davidson – Motorbike (chopper) Market.
Starbucks - Example of Competitive Advantage
Think about the Coffee-shops market.
There are millions of Coffee Shops everywhere in the world since:
- Entry barriers are almost non-existent.
- There is no need of special Marketing campaigns.
- Everybody know the product.
You could find lots of Strengths within different coffee shops all around the world:
- Some of them have nice results because their coffee is the best.
- Some of them have good side-products.
- Other ones are well located, etc.
A classic old coffee shop.
These would be different Strengths you could expect to find in most popular Coffee shops.
However, all of this changed when Starbucks “read” properly what was the very Key to success.
The Competitive Advantage that guarantees success:
- Being able to offer the customers a “third” place to be, after home and office.
It was not the coffee, nor the teas or the sofas:
- Starbucks offered a comfortable experience.
Customers felt like home, not being at home:
- They had free wifi (Starbucks was the first offering this service).
- Clean bathrooms.
- Comfortable sofas.
- And, most important:
- Nobody cared if you remained 8 hours inside in front of your computer.
They charged a relatively high price for a coffee (compared to European standards) but they offered a place to be, a place to meet, a place to work where you didn’t feel that “it was time to leave because you finished your coffee an hour ago”.
That is the Competitive Advantage within the Coffee shops.
There were already lots of successful Coffee shops before Starbucks, of course, but it was Starbucks the first one that identified why some were more successful than others.
- If you want to start a Coffee shop you’d better offer a comfortable place, like Starbucks.
- If you just offer a good coffee… You won’t have it easy to success.
Amazon - Example of Competitive Advantage
Amazon is one of the biggest companies in history.
It has different business lines few people know:
- Cloud computing.
- Server services.
But, it was the on-line retail what allowed Amazon to success as no one had done before.
However, they didn’t create the concept:
- There was eBay and others platforms, where you could find many Products.
eBay: the most famous e-commerce platforms at its time.
These Platforms had different strengths:
- Some of them had better niche-products.
- Others charged less money for the shipments.
However, there was a big barrier when buying something through Internet rather than on a physical shop:
- You had to wait for several days.
- If you didn’t like the product, or if it was damaged, sometimes you could do nothing about it.
- It was just you, and the seller; you had to trust him.
Therefore, people used these e-commerce platforms just for buying certain things they couldn’t find anywhere else.
Then, Amazon achieved what nobody though was possible:
- It offered a Real alternative to the physical shopping experience.
- You had lots of Products at your home in just 1 day.
- Amazon guaranteed that everything you purchased was in perfect conditions.
- The shipment costs were lower than what you would have spent if you had gone to a physical shop.
They acquired the best e-commerce Competitive Advantage.
You could point out:
- Low shipment costs.
- Having an easy-to-use interface.
These are all Strengths but, individually, they are not decisive for Success.
You only success for sure, if your Clients regard you as a Real Alternative to Physical Shopping.
IKEA - Example of Competitive Advantage
The Ikea case is very interesting, because not only they lowered their costs by “forcing” their Clients to assemble their furniture, but also by establishing a Close Relation with their Suppliers.
The furniture market is not very homogeneous:
- There are expensive furniture firms, and low-price ones.
If we just divide it into two categories, we can find 2 Sub-Markets:
- The Luxury and the Medium-to-Cheap markets.
50 years ago, buying a Sofa, a Bed or a Closet, was an important “investment”.
This “old” furniture was thought for homes where you’d raise your children.
And then… IKEA had a “revelation”:
- “What if some people want a closet for just few years?”
- “What about the people that is continuously moving from home to home?”
IKEA identified one thing that would describe the global habitability in the future years:
- The increasing human mobility.
- People don’t live 40 years in the same flat or house.
- People tend to move from one place to another, sometimes between different countries.
- Flats are becoming smaller than they were in past times.
So: Why not offering Customers affordable furniture at very low prices, for those temporary stages in their lives?
In order to accomplish this objective, they had to:
- Sell the furniture in a massive way, like supermarkets do.
- Offer sober and designs that would fit everywhere.
- Establish a very close relation with its Suppliers so they can mass-produce their products.
This last point was the Real Competitive Advantage for the (not luxury) furniture market:
- A Perfect Symbiosis with the Suppliers.
IKEA doesn’t lower the costs by just not-assembling the furniture:
- This Closet is perfectly designed, with no power tools required for assembling it.
- All the pieces are inside the packaging with not a single exception.
- It is easy to assemble.
- It is relatively strong.
All these aspects had to be guaranteed by IKEA’s suppliers.
That is why nobody has been able to replicate IKEA’s success:
- Because it is not just based on “delivering unassembled furniture” but on a long-term Relation with its suppliers that make possible to offer low-price products with acceptable quality standards.
Harley Davidson - Competitive advantage example
Our last example requires no introduction: Harley Davidson.
It is one of the most beloved Brands in the world:
- They build some of the most expensive motorbikes in the world, and their demand exceeds widely their supply capacity.
But How were they so successful?
It is just a chopper brand… isn’t it? No. And that is why they succeeded.
In the past, Harley Davidson was a “simple” motorbike manufacturer. Nothing else:
- They manufactured motorbikes at a fair price, in the USA market.
Then, the Japanese started to create high-quality and medium-to-low price motorbikes that almost “killed” the USA industry.
- Honda, etc.
Technically, Harley Davidson could not offer something remarkably better that its competitors did.
Then, its Marketing Campaigns moved from highlighting technical characteristics to the values associated to its Brand:
- American style.
- Being a maverick or a “rebel”.
It was not a matter of who had the best engine anymore;
It was about offering customers to become part of something that was synonym with:
They built a Brand so strong that even non-motorbike lovers know what having a Harley Davidson means.
The Competitive Advantage they acquired was a Profound engagement with their customers through a powerful Brand.
- It made them to shine more than their competitors.
Of course, Harley Davidson offers some of the best motorbikes from a technical standpoint, but also Yamaha does.
- And which values are associated to a Yamaha? None. They just offer good motorbikes.
You may be thinking that this Competitive Advantage could be applied to all markets, and that it is true, but in this case it is even more important because you can find dozens of companies with technically-excellent motorbikes, but none of them have Harley Davidson’s margins.
* In addition… Do you know where does Harley Davidson gets some of its biggest profits from?
- From merchandising.