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 between companies, you’ll end up with a long list of crossed attributes.
- You could say that a Big Company’s Competitive Advantage is its huge logistics that reduces transportation costs.
- For a small Company competing against it, you could say that its Competitive Advantage is its flexibility.
You’ll always find something good in all companies:
- 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 attributes between different companies.
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 particular “more-volatile” or circumstantial attribute.
When should you look for Competitive Advantages?
A Competitive Advantage analysis must be developed when studying a certain Market.
- And how to Penetrate or Succeed 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 reached the Top of the Market.
* if you have not visited our “Porter 5 Forces” page, we encourage you to do so.
Since all of this can be a little bit confusing, we’ll now give you different examples of Competitive advantages, so you understand it better:
Competitive Advantage Examples
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 - Competitive Advantage example
Think about the Coffee-shops market.
There are millions of Coffee Shops everywhere in the world since:
- The 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 thousands of small coffee shops all around the world:
- Some of them have nice results since their coffee is the best.
- Some of them have good side-products.
- Other ones are well located, etc.
Inside and 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 within their establishments.
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 (at least, compared to European standards) but they offered you a place to be, a place to meet, a place to work where you didn’t feel that “it is time to leave since we finished our coffee an hour ago”.
- That is the Competitive Advantage within the Coffee shops.
Some successful Coffee shops were doing right before Starbucks, of course, but it was Starbucks the first one in identifying why some businesses were more successful than others (or at least the first that we know).
- If you want to open a Coffee shop business you’d better offer a comfortable place Starbucks-similar to your customers. If you just offer a good coffee… You won’t have it easy to success.
Amazon - Competitive Advantage example
One of the biggest companies ever: Amazon.
It has different business lines few people know: cloud computing, server services, etc. But it was the on-line retail what allowed Amazon to success as no one had done before.
They didn’t create the concept: there was eBay and some others platforms for purchasing on-line everything you wanted.
eBay: the most famous e-commerce platforms in his time.
They all had their strengths:
- Some of them had better niche-products.
- Others charged less money for the shipments.
However, there was a big and remarkable barrier when purchasing something through Internet rather than on a physical shop:
- You always 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/her.
Hence, 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: offer a real alternative to the physical shopping experience.
- You had almost everything you purchased at your home in just 1 day.
- They (Amazon) guaranteed that everything you purchased was perfect.
- The shipment costs were lower than what you would have spent in gasoline or a bus ticket 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.
… as Strengths within the e-commerce market, but individually, they would have not been decisively for succeeding.
You only success for sure, if your clients regard you as a real alternative to physical shopping.
IKEA - Competitive Advantage example
The Ikea case is really interesting since not only they lowered the cost by “forcing” their clients to become “handymen” for one day but by establishing also a close relation with their suppliers.
The furniture market is not as homogeneous as it seems: there are expensive furniture firms, and low-price ones.
If we just divide it into two categories (as it can be done in practically all markets) you’ll find 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 had identified one thing that would describe the global habitability even in the future years: the increasing human mobility.
- Nowadays, people don’t live 40 years in the same flat or house.
- They tend to move from one place to another, sometimes between different countries.
- The flats are becoming smaller than they were in past times.
So: Why not offering our Customers affordable furniture options at very low prices, for these temporary stages in their lives?
In order to accomplish this objective, they had to:
- Deliver the furniture in a massive way, like supermarkets do.
- Offer sober simple designs that would fit everywhere.
- Establish a very close relation with their suppliers so they can mass-produce their products, lowering the overall costs drastically.
This last point became the real competitive advantage for the (not luxury) furniture market:
- A perfect symbiosis with their suppliers.
IKEA don’ lower the costs by just not-assembling you the Closet (of course it contributes significantly):
- This Closet must be perfectly designed, with no power tools required for assembling it.
- All the pieces must be within the packaging with not a single exception.
- It must be easy to assemble.
- It must be cheap.
- It must be 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 the furniture unassembled” but on a long-term stable close relation with their suppliers that make possible to offer low-price products with acceptable quality standards.
* This competitive advantage can be found in many low-price sectors, not just only in IKEA.
Harley Davidson - Competitive advantage example
Our last example requires no introduction: Harley Davidson.
It is one of the most loved and desired Brands in the world:
- They build some of the most expensive motorbikes in the world, and the 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 to the USA market.
Then, the Japanese started to develop high-quality and medium-to-low price motorbikes that almost “killed” the USA industry.
- Honda, etc.
What happened next?
Technically, Harley Davidson could not offer something remarkably better that their competitors did (we are not motorbike fans, so sorry for the technical mistakes we may commit).
Then, their Marketing Campaign moved from highlighting their technical characteristics to the values associated to their 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 their customers to become part of something that was synonym of:
They built a Brand name so strong that even non-motorbike lovers know what having a Harley Davidson mean.
The Competitive Advantage (within the Motorbike market) their acquired was a profound engagement with their customers through a powerful Brand name.
- It made them to shine among the rest of their competitors.
Of course, they currently offer 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 very 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 since you can find dozens of companies with technically-excellent motorbikes, but none of them have Harley Davidson’s margins.
* Moreover… you know where does Harley Davidson obtain some of their biggest benefits? In merchandising.
While the majority of the companies have at least, one or two strengths, just having a real Competitive Advantage guarantees succeeding within a certain market.
- A Competitive Advantage is a solid and sustained characteristic that makes the difference between Top market players and low-class ones.
Whether you are just analyzing a Market or you are trying to penetrate it, you should start looking for the Competitive Advantage that would let you to tame it.