competitive advantage in business planning

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What is competitive advantage? Strategy with examples

Creating a competitive advantage is a long process, starting from the very beginning of forming the company’s culture, mission, and vision. You can likely see the advantages you can create while you are creating the company’s mission, aka the summary of why your company/product exists, which customer problem you aim to solve, and your overall goal.

What Is Competitive Advantage Strategy With Examples

At the end of the day everything is defined for creating customer value, which generates profit for the business 🤑

The role of a competitive advantage is then to make sure that you are creating and delivering the customer value as you planned.

In this article, we will learn the story of competitive advantage. We will understand the process to analyze our product and market, how we can state our strategy inside the market, and how we can test our options. By the end, we will learn how to sustain a competitive advantage with best practices and real-life examples.

What do we mean by competitive advantage?

Competitive advantage is the capability you have over competitors to create value for customers. The advantage creation process starts from the mission, which usually coincides with the inception of the company in the first place:

The strategy of your company may be different, but each decision you make and feature you define aims to achieve a competitive advantage. If I still can’t emphasize how important competitive advantage is, think about it like this: every goal we want to achieve in our daily lives as product manager serves to create a competitive advantage.

You can say you achieved a competitive advantage if:

You are offering something different than your competitors
Your company’s strategy is different than other companies
You can create more economic value with your product than your competitors

As product managers, our role requires us to carry the company’s mission and objectives into our product. To do this, we have to analyze the market, external competitors, our product, and internal company capabilities. According to our analysis, we create options and select our strategy.

The type of choices we make shapes our goals and how we want to compete with our rivals. The decision we make puts our product into one of two categories and helps shape our competitive advantage:

Niche product
Cost advantage product

1. Niche product

When you have a niche product, users prefer your product because it creates a unique output — something they can’t get elsewhere. Users will often pay extra for this.

I love to provide Apple examples in these cases. Apple products offer you premium features and users don’t mind paying the required amount. Think of new iPhones or Mac laptops — the experience they provide isn’t easily replicated by competitors. With a niche product, however, don’t forget there is always a risk of being copied. The challenge for this method is protecting your uniqueness.

To continue with modern examples, think of how Instagram creates a unique platform for sharing photos, the same way that Twitter does with small posts and that Facebook does for longer posts and videos.

When we think of a niche product, I can’t skip the classic example of Coca-Cola. With its unique recipe, no one has been able to replicate or get close to it.

2. Cost advantage product

While making the product, your company should have a production or distribution advantage over rivals. With a cost advantage, you can sell your products at competitive prices.

We can think of big brands for this — because of their high production amounts, they catch a cost advantage opportunity. Walmart can be one of the best examples of this strategy. They offer very low prices and for that reason, people choose to shop there over other stores.

competitive advantage in business planning

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How to identify and analyze your product’s competitive advantage

Competitive advantage can only be created after a strategic management process. As product managers, we identify the differentiator points and amplify them to create a competitive advantage:

Different Types Of Competitive Advantage

The decision we will make will be between the type of advantage we seek and the target market. I recommend you start with your target market.

If you still haven’t read Start with Why: How Great Leaders Inspire Everyone to Take Action by Simon Sinek, I recommend that you start asking why 🧐 For example, why will users pay for your product and why you are producing this product in the first place?

The second big decision is what kind of an advantage you seek. This is the time to bring your analysis and every input you have to the table. Lower cost or differentiation has its levels like in the picture above. You don’t have to focus on a pure version of these, though, you can mix the customer need and market situation and create an in-between.

As we discussed earlier, to be able to create a competitive advantage, you should select one of the strategies from your analysis. How can you decide which strategy is the best? Your winner which will become your advantage should pass at least three tests:

The fit test
The competitive advantage test
The performance test

1. The fit test

For the first test, we go over the company’s vision, mission, objectives, and company structure. We may know the problem, but our approach to solving it should fit our company culture and internal dynamics. We search for the best fit according to our internal and external analysis.

2. The competitive advantage test

You may find a good competitive advantage, but it is not enough if you can’t sustain it . We mentioned finding an advantage, but now we will test if it is likely to sustain our strategy (like Coca-Cola).

The competitive advantage can be easy to imitate and we may only have a first-mover advantage . This option has a risk if you are investing more and competitors will be able to access the technology behind your product easily. They may even beat you with lower-cost strategies. For these reasons, you should have a good plan to sustain the advantage you created.

3. The performance test

Performance is the profit you will generate with this advantage. At the end of the day, we are seeking profit and the higher value advantage will most likely be our winner. You need to create a value proposition model for each option.

Additionally, you should check the product’s performance, strengths, and the market around it. Use product metrics to see how it’s doing. The performance of the product can be determined with all of those components.

What does it mean to have a sustainable competitive advantage?

In the competitive advantage test, we are checking if the strategy is sustainable or not. Do not worry if you think your advantage will be imitated by your rivals. Most competitive advantages are brilliant ideas and most of them will be copied in a way. Your rivals will find a way to offer a better solution by using your idea.

Sustainable competitive advantage means you earn high profits with this strategy and the money keeps coming in the long term. However, as you can imagine, the more profit you get, the more competition you will create. And that’s not all, this competition will decrease your sustainability in most cases.

If you succeed in creating an advantage that’s hard to imitate and competitors are unable to find your source, you can say that you have a sustainable advantage. In some product markets, competitors may not imitate your product directly — they may offer a better solution and attract your customers. This example can be seen mostly in the service industry.

Coca-Cola has a sustained product strategy as they kept their formula impossible to imitate. They’ve updated their recipe but still have never had a competitor that copied their recipe or flavor exactly. There are other components supporting this success, such as marketing and sales teams.

When you create a good strategy and opportunity, sustaining the success can be done through all sources of the company. However, do not forget that even sustainable competitive advantages may expire in time.

How to strengthen your product’s competitive advantage over time

As a product manager, finding our own (as well as our competitors’) product strengths and weaknesses is our main duty. However, creating a competitive advantage requires a good strategy. You need a strategy to succeed.

What makes a good product manager is the agile modifications in your strategy over time. If you are persistent to continue in the same strategy, know that your advantage is going to go away.

The below list is variables that you need to be aware of to avoid being beaten by your rivals:

Following the needs shift in the market conditions
Using the latest technology
Following the trends and market opportunities
Knowing every move your competitors take
Knowing customer needs and changing tastes
Creating continuous ideas for the product and the strategy improvement

Time is crucial for even the best things. When the time comes, you should be able to point out the elements or strategies that should be abandoned. A product’s strategy includes everything from abandoned features, new planned initiatives, ongoing strategy, and new elements to adapt to changing circumstances.

The company’s strategy acts as a roadmap to our competitive advantage, along with the long-term plan to beat competitors in the market. And to be able to call yourself a good product manager, you should have a good strategy and good execution capability.

As the product manager, you should be able to address the solutions to possible obstacles the company may face. You should have the answers below for long-term success:

How can we beat our new rivals?
How can we sustain product growth if our user count decreases?
How can we adapt if our customer base changes?
Should we reduce costs and compete using discounting?
Should we partner with a rival that has a capability we don’t have?
Should we expand our business into different countries/demographics?
Should we find new product lines or substitute products?

This continuous questioning process will help you to maintain and strengthen your product’s competitive advantage.

Best practices for leveraging competitive advantage in product development

There are a few practices and tools to help you land your competitive advantage through research and market analysis, including value chain analysis, SWOT analysis, and weighted competitive strength assessment.

Value chain analysis

Product value chain analysis is an effective method to convert your company’s activities into a competitive advantage. This method helps companies understand their own processes better and, with the help of that knowledge, create an awareness of the company’s strengths.

Analysis starts with dividing a company’s process into primary and secondary activities. Primary activities show us what to focus more on the processes that create higher costs and analyze more to decrease them. Primary activities are most likely competitive advantages that we have over our rivals. Secondary activities show us the unnecessary processes so that we can eliminate them to create a cost advantage.

SWOT analysis

Strength, weaknesses, opportunities, and threats are the key elements of this analysis. You can use SWOT analysis to find your company’s competitive advantage options:

Strengths — Internal strengths are the basis for our strategies
Weaknesses — Internal weaknesses are our deficient capabilities
Opportunities — Market opportunities are our objectives that will become the strategy
Threats — External threats help us create defensive points in our strategies

SWOT helps you to find a new strategy or recommend a new strategic action. You will have the opportunity to use your strengths while you are seizing opportunities and preventing external threats. The created strategic actions will strengthen your competitive advantage or create a shiny new one.

Weighted competitive strength assessment

Weighted competitive strength assessment is different from the other methods and helps decide which strategy to use, rather than helping find options. Each possible competitive advantage gets scored and the one with the most points dictates which creates the most value and helps us beat rivals.

To do this, follow the steps below:

Prepare a SWOT analysis or make a list of the competitive strengths and weaknesses
Prepare the market’s key success factors and assign importance and weight to each strength
Add your competitors to the list and add scores on each competitive strength for all of them
Multiply the scores with importance weight and sum the weighted strength for each competitor. The overall measure will be the competitive strength of each competitor
Analyze the result ratings and create a concussion document
List the competitive advantages and disadvantages of the company
Create a strengths and weaknesses list for future strategy processes

The company with a higher weighted score will have an overall advantage within the market. The scores will help you to decide what strategy will be better for you and which will not.

Examples of products with strong competitive advantages and how they achieved them

We earlier talked about Coca-Cola and its competitive advantage. The formula of their drink is not their only competitive strength, however. They also have big, successful marketing strategies that help them to achieve being a market leader.

The Coca-Cola happiness machine and Christmas balloons can be some examples. These kinds of marketing campaigns are called guerilla marketing. The purpose is to increase market share with hit-and-run techniques. It may be a big risk for such a big company but reaps a big reward for its strategy. Coca-Cola takes these kinds of risks and collects the rewards.

Another example is WeChat in China, which created a blue ocean strategy with a next-generation product. Their mobile payment application was using QR codes on smartphones. This strategy is called first-to-market or leapfrogging. They found an opportunity and turned it into a competitive advantage. First movers always have the biggest share in the market so they have a strong competitive advantage.

Another strategy to keep your competitive advantage is an investment in R&D. Technology companies are in a red ocean, and to be able to keep their market share, they should be constantly on alert. Apple’s strongest advantage is its continuous product innovation. They are beating their less-innovative rivals with this advantage and increasing their sales and market share.

Google invested $6.8 billion in 2012 to keep its market share and acquisitions. When other companies gain an advantage, they acquire a competitor company into their organization. They have been acquiring new companies since 2010, such as YouTube, DoubleClick, and Waze. There are hundreds of companies they have done this with and the number continues to increase.

Timing is important for strategic moves and competitive strategies. Sometimes, when to make a move can be more challenging than creating new competitive advantages.

I know I said that being a first-mover has a great effect on creating a strong competitive advantage, but there is no guarantee of success in any market. There are always risks when implementing something new.

Let’s do our best to check the data, and know the product and market. Additionally, we should be careful to only implement strategies that are compatible with our company culture. No need to force our team members to do something different than they believe in. After you implement everything I recommended, I can only send my best wishes to you while waiting for your product to become successful 🫶

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How to Successfully Achieve and Sustain Competitive Advantage

Updated on: 5 January 2023

Competitive advantage is at the core of an organization’s performance in markets where there is heavy competition. It sets an organization apart from its competitors and paves the way for higher profit margins, greater return on assets, and accumulating valuable resources.

There are many ways to achieve a competitive advantage but only two basic types of it. In this post, we will be looking at the concept of competitive advantage and the steps an organization can follow to achieve and sustain competitive advantage through cost advantage and differentiation.

What is Competitive Advantage

Competitive advantage stems from the value an organization is able to create for its customers. It can come in the form of prices lower than what is offered by competitors for the same benefits or in the form of unique benefits that counterbalance a higher price. In the end, the value created for the customer should exceed the organization’s cost of creating it in the first place.

This creates a sustainable advantage allowing them to succeed in the market.

According to Michael Porter, there are two types of competitive advantage;

Low cost – where an organization is able to produce its products at a lower cost than its competitors.
Differentiation – where an organization is able to differentiate its products or service in terms of quality, style, customer service, etc. hence creating superior value to the customers over the competition.

Cost advantage and differentiation stems from industry structure or how well it can cope with the industry forces that influence its profitability (as introduced in Michael Porter’s five forces model ) better than its competition.

How to Create and Sustain Competitive Advantage

Creating a sustainable competitive advantage is a laborious process that needs to be continuously attended to. Adhere to the following steps to ensure you get and remain ahead of the field.

Analyze Competitors

To successfully compete in an industry, an organization needs to understand its competitive landscape. This means gathering and analyzing information on competitor strengths, weaknesses, strategies, positioning, value proposition, customer perception, and more.

Equipped with this knowledge, the right strategy can then be developed to achieve a sustainable competitive advantage.

Learn more about conducting a competitive analysis .

Map Competitors into Strategic Groups

A business mainly competes against other businesses that offer similar products or services and follow the same generic competitive strategy. Such businesses that follow the same competitive strategy in an industry belong to the same strategic group. Identifying the other businesses that fall into the same strategic group as it does, is important to an organization in terms of developing a strategy to achieve competitive advantage.

Learn more about mapping strategic groups .

Assess the Most Attractive Position in the Industry

Based on your strategic group analysis, you now know who your direct rivals are and where they stand. Next, you should articulate your position in the industry to succeed in the marketplace. Defining your competitive positioning will help identify areas of opportunity for your business.

Michael Porter’s five forces analysis helps assess and evaluate the competitive strength and position of an organization. Porter’s five forces model helps organizations understand the intensity of competition in an industry, its attractiveness, and profitability level. It helps identify where power lies in a business situation and hence assess the strength of an organization’s current competitive position and the strength of a position that an organization may look to move into.

The five forces include,

Porter's Five Forces what is competitive advantage

The entry of new competitors
The threat of new substitutes
The bargaining power of buyers
The bargaining power of suppliers
The rivalry among the existing competitors

Three Generic Strategies for Achieving Competitive Advantage by Michael Porter

An organization’s relative position in an industry decides whether its profitability is above or below the industry average. Even within an industry structure that is unfavorable, a well-positioned organization may earn high rates of return.

Michael Porter introduces three generic strategies for achieving above-average performance in an industry and thus creating a competitive advantage. Generic strategies include cost leadership, differentiation, and focus which is divided into cost focus and differentiation focus.

The idea behind the concept of generic strategies is that competitive advantage is at the core of any strategy. And in order to achieve a competitive advantage, the organization must make a choice about the type of competitive advantage it wants to attain and the scope within which it will attain it.

Each of the generic strategies highlights different methods competitive advantage can be achieved.

Porter's Generic Strategies Example what is competitive advantage

Cost leadership

An organization adhering to this strategy aims to become the low-cost producer in its industry. The sources of cost advantage vary here from industry to industry, and may include proprietary technology, preferential access to raw material, increased individual skills, improved organizational routines, location advantages, managerial effectiveness, and more .

A low-cost producer must find and exploit all these sources of cost advantage. An organization that can achieve and sustain overall cost leadership, can become an above-average performer in its industry given that it can command prices at or near the industry average.

By offering their products or services for a similar or lower price than their competitors, organizations following this strategy can maintain a low-cost position in their industry which will, in turn, increase their return.

A cost leader however needs to consider the bases of differentiation, for if the product is not perceived as comparable or acceptable by its buyers, it will be forced to reduce prices well below its competitors to gain sales. This will in turn reverse the benefits of its favorable cost position.

Differentiation

An organization that follows this strategy aims to become unique in its industry along certain dimensions that are highly valued by buyers. In this strategy, the organization selects specific attributes that are considered important by its buyers and uniquely positions itself to meet those needs. It is then rewarded for its uniqueness with premium prices.

An organization can achieve differentiation through the product itself (quality, price, durability), its delivery system, marketing approach, customer service, and many other factors. The logic behind the differentiation strategy requires that the attributes an organization chooses to differentiate itself should be different from the attributes used by its rivals.

An organization that can achieve and sustain differentiation can be an above-average performer in its industry if the premium price they offer can offset the extra costs spent for being unique. An organization aiming to become a differentiator therefore should adhere to ways of differentiating that lead to a price premium greater than the cost of differentiating.

A differentiator shouldn’t ignore its cost position for there’s a chance of its premium prices being nullified by the inferior cost position of competitors. To overcome this, a differentiator can reduce costs in all areas that don’t affect differentiation.

Focus

An organization following this strategy selects a segment of the industry and tailors its strategy to cater specifically to them while excluding the rest of the market. By optimizing its strategy for a selected group of customers, the focuser aims to achieve a competitive advantage in its target segment although it cannot achieve an overall competitive advantage.

The focus strategy has two variants;

Cost focus: here, the organization seeks a cost advantage in its target segment by exploiting its cost behavior

Differentiation Focus: here, the organization seeks differentiation in its target segment by exploiting the special needs of the buyers

How to Measure and Analyze Competitive Advantage

The value chain model by Michale Porter can be used as a tool to diagnose competitive advantage and find ways to improve it. The value chain divides an organization into the distinct activities it performs in designing, producing, marketing, and distributing its products and helps identify the linkages among the activities that are central to achieving competitive advantage.

Porter’s value chain model divides these activities into two categories,

Primary activities are the activities involved in the physical creation of the product, its sale and transfer to the buyers, and after-sale assistance.
Support activities ; these are the activities that support the primary activities and each other by providing purchased inputs, technology, human resources, and various organization-wide functions.

The value chain analysis helps understand the activities that are most valuable and should be optimized to achieve competitive advantage.The firm can then optimize the primary activities that account for the greatest share of production costs and increase profit margins. The analysis can also reveal the support activities that could use more spending to generate better value.

Analyzing competitive advantage

Here’s how to analyze your organization’s value chain based on how you want to develop a competitive advantage (cost leadership or differentiation).

Cost leadership

In order to reduce the cost of internal business activities,

First, identify the primary and support activities involved in developing and delivering products and services.
Determine the importance of each activity in terms of production cost. Those activities that consume a large percentage of the total cost of production should be addressed first.
Identify the cost drivers behind each activity by analyzing how they use the company resources.
Map out the connections between the activities to better understand the roles each plays in the overall value chain. This will allow you to detect problems such as how reducing the cost of one activity would cause the cost of a linked activity to increase.
Now that you have understood the cost drivers and the inefficient processes in the value chain, you can make informed decisions on how to improve them and reduce production cost.

Differentiation

An organization following a differentiation strategy can effectively create more value for the buyer by adding product features and improving customer satisfaction by following the steps below.

Identify the activities in the value chain that contribute the most to creating customer value.
Evaluate the differentiation strategies for improving customer value. Strategies like adding more product features , improving customer service and responsiveness, and offering complementary products can be used to increase product differentiation and product value.
Identify the best sustainable differentiation. Creating superior differentiation and customer value requires the use of many interrelated activities and strategies. Use the best combination of them to pursue a sustainable differentiation advantage.

Now It’s Your Turn to Develop a Competitive Advantage Strategy

To gain a competitive advantage is to attract more customers, make more profit, return more value to shareholders than rival organizations do. A company can effectively gain a competitive advantage in one of two ways; by reducing its own costs and by adding more value to its products or services hence differentiating itself from competitors.

We hope this post will assist you in developing your own strategy to achieve a sustainable competitive advantage. Got anything to add? Let us know in the comments below.

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What Is Competitive Advantage and How to Find Your Strategic Edge

Competitive advantage is an important tool for developing business strategy. Explore different sources of competitive advantage and determine what gives your company an edge over your competition.

[Featured image] A group of employees discuss their organization's competitive advantage.

Competitive advantage is why your product, service, or company is better than similar offerings in your market. It can come from various sources, such as product quality or innovation, proprietary technology, or excellent customer service. Established brands may have a competitive advantage based on customer loyalty alone or by their connections to markets of potential customers. For example, if a big company like PepsiCo wanted to release a new soda flavor, it would have a competitive advantage over a small indie brand releasing the same flavor because of its existing reach.

In this article, you’ll learn about developing different strategies for competitive advantage and how to determine the competitive advantage of your products or services.

Read more: What Is Strategic Management? Benefits, Process, and Careers

What is competitive advantage?

Your competitive advantage makes your product or brand more attractive to customers than your direct competition. Think about why your product or brand is a natural choice for customers. Your competitive advantage is the deciding factor that closes sales.

For example, you might offer your product at a lower price than your competition. Customers who are conscious about saving money will be more inclined to purchase your product on that basis. Or, you may offer the fastest shipping available, drawing in customers who are in a rush to receive their order.

Types of competitive advantage strategies

Your competitive strategy is how you'll use or develop an advantage. This type of insight can help you set goals and direction for the future, such as developing new products or services. The type of competitive strategy you need depends on the value you offer your customers.

Three examples of competitive advantage strategy include cost, differentiation, and focused niche. Let’s take a closer look at these strategies.

One common competitive strategy focuses on the cost of your product or service. This may mean finding a way to offer your product for a lower cost compared to your competitors, such as streamlining processes or successfully negotiating lower prices with your vendors. When you can offer your product for the lowest price, you’ll attract customers who are looking for the best deal, developing cost leadership.

On the other hand, having the lowest price isn’t the only way to employ a cost-based competitive strategy. Luxury and name-brand products use a higher price point to signal to customers that their offerings are more elite than other choices. Although the object's price is part of the competitive advantage, luxury brands use a different strategy called differentiation to highlight what makes their products superior.

2. Differentiation

Differentiation is a strategy brands use to demonstrate how their product or service is unique and unlike competitors' offerings. Offering a product that customers perceive as more valuable will help you build a loyal customer base willing to spend more money to purchase your product. When they compare your product to similiar ones, they understand the added value represented by a higher price.

You can position yourself as different from your competitors either in a broad way—building a company that operates fundamentally differently than others in their niche—or in a more focused way by developing superior products with new technology, specialized features, or higher-quality materials. For example, Apple consistently offers new cell phone models at higher and higher prices by touting its enhanced technological abilities with each new iteration.

Example. Despite the higher price of Apple phones, 48.7 percent of cell phone users in the US owned Apple phones in 2022 [ 1 ]. Although Apple positions itself as different and better than its competition, it still offers a product nearly half the market can access. If Apple were to continue differentiating itself into a smaller core group of users, it would employ a similar competitive advantage called a focused niche.

3. Focused niche

A focused niche competitive advantage strategy means offering a product custom-tailored to a certain use or group of people. When you have a smaller, focused core of potential clients, you can further explore their pain points and deliver a product designed to address their needs. Designing a product or service with your end customer in mind can help you delight your customers and create customer loyalty.

Example. While other automakers may sell millions of vehicles annually, Ferrari shipped a mere 11,155 vehicles in 2021 [ 2 ]. With a price tag that starts at nearly a quarter of a million dollars, Ferrari targets a core group of wealthy car enthusiasts shopping for a new car.

Other types of competitive advantage

You can develop a strategy around the advantage whenever you can find an edge over your competition. More examples of competitive strategy include:

Geographic competitive advantage : You may have access to resources others don’t have due to your location. For example, you might have a more strategic location that draws in more customers, more accessible access to suppliers, or access to trade routes through rail lines, shipping ports, or airports.

Customer service competitive advantage : By providing the best customer service experience, you can stand out from others in your market and build a loyal base of customers who appreciate the help you’ve offered.

Skilled workforce competitive advantage : If you can attract the most talented employees to your company, you can build a competitive advantage based on their advanced set of skills.

Why is competitive advantage important?

A competitive advantage is important because it helps you define your positioning in the market and explain to customers why your product or service should be their natural first choice. After identifying your competitive advantage, you can drive a higher profit margin by prioritizing activities that help you earn a bigger or more precise market share. When you demonstrate the value of your product to customers—for example, by using price, marketing, or quality cues—you can attract a group of loyal customers who will want to buy your product repeatedly.

Who decides on a competitive advantage strategy?

Senior-level executives, such as the chief executive officer or director of strategy, sometimes decide strategies involving competitive advantage. While managers and other supporting staff may not directly set strategy, they facilitate activities supporting those goals. Let’s take a closer look at these careers.

1. Chief executive officer (CEO)

Average annual base salary (US) : $204,424 [ 3 ]

Job outlook (projected growth from 2022 to 2032) : 3 percent [ 4 ]

Requirements : You'll likely need a bachelor’s degree, typically in business or public administration. Sometimes, you must earn a Master of Business Administration (MBA). Typically, you'll also need to acquire experience in management positions in your industry.

As CEO, you can help guide your company's overall direction and strategy. You might also direct other senior leaders, manage overall company operations, and answer to a board of directors. In this role, you'll establish company goals, oversee financial activities, negotiate contracts, and provide overall leadership.

Read more: What Are Leadership Skills, and Why Are They Important?

2. Director of strategy

Average annual base salary (US) : $169,969 [ 5 ]

Requirements : At least a bachelor’s degree, although a master’s degree is also common. Typical areas of study include business, marketing, finance , or communication.

As the director of strategy, you'll be responsible for developing initiatives to help the company reach its goals. You might assess industry and market trends, perform competitive analysis, evaluate partnerships, and look for new business opportunities. In this role, you'll report to senior leadership and may have a staff of professionals on your team.

3. Product managers

Average annual base salary (US) : $121,160 [ 6 ]

Job outlook (projected growth from 2022 to 2032) : 6 percent [ 7 ]

Requirements : A bachelor’s degree in business management or supply chain operation management. In some cases, you may need to earn your MBA.

As a product manager, you may oversee a product from development to final sales. In this role, you can conduct market research and develop products based on feedback. You can also develop strategies for positioning your product in the market and manage staff to oversee the product’s creation and packaging.

Read more: What Does a Product Manager Do? And How to Become One

How to determine your competitive advantage

Although each company will develop its own process of setting competitive advantage strategies, you should be aware of two frameworks for considering competitive strategy. The five forces and VRIN are two ways of determining what makes you different from your competition.

Five forces

The five forces that impact your company’s competitive advantage include:

Competitors

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If you’re ready to take the next step, consider earning your Strategic Leadership and Management Specialization from the University of Illinois at Urbana-Champaign. You can complete this series in two months with only 10 weekly study hours. This program covers leading teams, managing an organization, corporate strategy, and more. Upon completion, gain a shareable Professional Certificate to include in your resume, CV, or LinkedIn profile.

Article sources

Statista. “ US iPhone User Share 2014-2022, https://www.statista.com/statistics/236550/percentage-of-us-population-that-own-a-iphone-smartphone/.” Accessed November 9, 2023.

Statista. “ Ferrari: Number of Cars Delivered 2011-2012 , https://www.statista.com/statistics/695882/number-of-car-shipments-made-by-the-italian-sports-car-company-ferrari/.” Accessed November 9, 2023.

Glassdoor. “ Salary: CEO in United States , https://www.glassdoor.com/Salaries/ceo-salary-SRCH_KO0,3.htm.” Accessed February 27, 2024.

US Bureau of Labor Statistics. “ Top Executives: Occupational Outlook Handbook , https://www.bls.gov/ooh/management/top-executives.htm.” Accessed February 27, 2024.

Glassdoor. “ Salary: Director of Strategy in the United States , https://www.glassdoor.com/Salaries/director-of-strategy-salary-SRCH_KO0,20.htm.” Accessed February 27, 2024.

Glassdoor. “ Salary: Product Manager in the United States , https://www.glassdoor.com/Salaries/product-manager-salary-SRCH_KO0,15.htm.” Accessed February 27, 2024.

US Bureau of Labor Statistics. “ Advertising, Promotions, and Marketing Managers: Occupational Outlook Handbook . https://www.bls.gov/ooh/management/advertising-promotions-and-marketing-managers.htm.” Accessed February 27, 2024.

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What is Competitive Advantage?

What are some examples of competitive advantage, components of competitive advantage, building a competitive advantage, 1. cost leadership, 2. differentiation, competitive advantage in the marketplace, what is the importance of competitive advantage, video explanation of competitive advantage, additional resources, competitive advantage.

The ability of a company to outperform its competitors

Competitive advantage refers to the ways that a company can produce goods or deliver services better than its competitors. It allows a company to achieve superior margins and generate value for the company and its shareholders.

A competitive advantage is something that cannot be easily replicated and is exclusive to a company or business. This value is created internally and is what sets the business apart from its competition.

Key Highlights

A competitive advantage is what sets a company apart from its competitors, in the eyes of its consumers.
These advantages allow a company to achieve and maintain superior margins, a better growth profile, or greater loyalty among current customers.
A competitive advantage is often referred to as a “protective moat.”
Strong and repeatable competitive advantages can create sustained success for a business and attract capital more readily and cheaply.

Competitive advantages come in many shapes and sizes. They include, but are not limited to, some of the following:

Access to natural resources not available to competitors
Highly skilled labor
Strong brand awareness
Access to new or proprietary technology
Price leadership

For a competitive advantage to be established, it is important to know the following:

Value proposition: A company must clearly identify the features or services that make it attractive to customers. It must offer real value in order to generate interest.
Target market: A company must establish its target market to further engrain best practices that will maintain competitiveness.
Competitors: A company must define competitors in the marketplace, and research the value they offer; this includes both traditional as well as non-traditional, emerging competition.

To build a competitive advantage, a company must be able to identify its value proposition that will be sought after by the target market, which cannot be replicated by competitors.

Michael Porter, the famous Harvard Business School professor, identified three strategies for establishing a competitive ad vantage: cost leadership, differentiation, and focus (w hich includes both cost focus and differentiation focus) [1] .

The goal of a cost leadership strategy is to become the lowest cost manufacturer or provider of a good or service. This is achieved by producing goods that are of standard quality for consumers, at a price that is lower and more competitive than other comparable product(s).

Firms employing this strategy will combine low profit margins per unit with large sales volumes to maximize profit. Companies will seek the best alternatives in manufacturing a good or offering a service and advertise this value proposition to make it impossible for competitors to replicate.

A differentiation strategy is one that involves developing unique goods or services that are significantly different from competitors. Companies that employ this strategy must consistently invest in R&D to maintain or improve the key product or service features.

By offering a unique product with a totally unique value proposition, businesses can often convince consumers to pay a higher price which results in higher margins.

A focus strategy uses an approach to identifying the needs of a niche market and then developing products to align to the specific need area. The focus strategy has two variants:

Cost focus: Lowest-cost producer in a concentrated market segment
Differentiation focus: Customized or specific value-add products in a narrow-targeted market segment

Competitive Advantage - Differentiation Focus

Three notable examples are:

Walmart: Walmart excels in a cost leadership strategy. The company offers “Always Low Prices” through economies of scale and the best available prices of a good.
Apple: Apple uses a differentiation strategy to appeal to its consumer base. It provides iconic designs, innovative technologies, and, therefore, highly sought-after products; this ensures that consumers are willing to pay a premium for Apple devices.
Whole Foods Market: Whole Foods Market’s advantage relies on a differentiation focus strategy. The company is a leader in the premium grocery market and charges more premium prices because its products are unique. This is appealing to a niche market with higher disposable income.

A competitive advantage is what sets a business apart from its competitors. It is essential in order for a business to succeed, whether it’s by ensuring higher margins, attracting more customers, or achieving greater brand loyalty among existing customers.

Higher margins, a better growth profile, and lower customer churn tend to also be very popular among both investors and creditors — making capital more readily available (and cheaper) for firms that are able to maintain a strong competitive advantage among their peers.

Watch this short video to quickly understand the main concepts covered in this guide, including the definition of competitive advantage and how companies create it using various business strategies.

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What Is Competitive Advantage? Its Nature & How to Find Yours

Published: June 14, 2022

An offering can't dominate a market as another "face in the crowd." The most successful products and services have some kind of edge — a defining, compelling x-factor that captures and capitalizes on potential customers' attention. That "edge" is most commonly known as a competitive advantage — and if you want your business to survive and thrive, you need to identify and lean into yours.

Here, we'll further explore what a competitive advantage is, see how competitive advantage works, review some of the most common types of competitive advantage, and establish the steps you need to take to determine yours. Let's dive in.

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What is competitive advantage?

A competitive advantage is a characteristic or factor a company possesses that allows it to bring more affordable, higher-quality, or more innovative products or services to market than its competitors.

Having a competitive advantage means being able to present your customer base with a unique, compelling reason to pick your product or service over your competitors. The market for virtually every product or service is flooded with a variety of options — all serving the same fundamental function.

Almost any airline can get you from point A to point B within a similar timeframe. Coke and some grocery store brand, generic cola are the same kind of soda. Apple and Samsung both make smartphones. And most of what's reported in the New York Times can probably be found in the Boston Globe.

And yet, shares within all of those markets are never evenly distributed. Certain products or services perform better than others — both in general and within specific niches. The offerings that take off (or even stay afloat) generally have something that sets them apart from similar products or services.

That "something" is a competitive advantage, and it typically comes in one of a few forms. Let's take a look at three of the most prominent types of competitive advantage — cost leadership, differentiation, and first mover.

Types of Competitive Advantage

Cost leadership.

Cost leadership might be the most prominent, straightforward type of competitive advantage. Simply put, it occurs when a firm can offer a product or service at a lower price than its competition without sacrificing too much quality.

Generally speaking, a cost leadership advantage is the byproduct of exceptional operational efficiency or low production costs. Companies often pursue this kind of advantage by taking strides like paying lower wages, auditing and streamlining production processes, or any other actions that can meaningfully chip away operating expenses .

Example of a Cost Leadership Competitive Advantage — Ryanair

European airline Ryanair sets itself apart from its competition via cost leadership. The company offers flight prices that consistently and significantly undercut what other airlines in the region are willing to charge.

Ryanair sustains its advantage through strategies like maintaining a large fleet of planes with limited aircraft variety — allowing them to purchase large quantities of spare parts — and cutting down on non-essential travel perks like free food and in-flight entertainment.

Differentiation

Where businesses pursuing a cost leadership competitive advantage focus primarily on price , companies looking to differentiate focus on quality — a differentiation advantage stems from delivering a product or service that's perceived as more innovative, luxurious, or better-constructed than similar offerings in its space.

Example of a Differentiation-Based Competitive Advantage — Emirates

Emirates, an airline based in Dubai, took a different road than Ryanair when it pursued its competitive advantage. Instead of skimping on in-flighty luxuries and non-essentials to help slash prices, Emirates indulged in them — and charged a sizable premium to compensate.

Economy flights on Emirates feature regionally inspired cuisine from flight destinations, in-flight digital entertainment with thousands of content options, onboard high-speed wifi, and several other perks meant to justify its hefty price tags. Those amenities help to set Emirates apart from other airlines and, in turn, give the company its competitive advantage.

Image Source: The Independent

Image Source: Emirates

First Mover

The first company to bring a new type of product, service, or technology to market often has the benefit of a first mover advantage. That kind of business has some extra room to establish a significant share of its market — after all, there's bound to be a stretch where a company with a first mover advantage is the only player in a brand new space.

These kinds of businesses can benefit from the credibility that comes with offering the "original" iteration of a product or service. But a lot of the time, a fast follower that emerges onto the scene with a competitive advantage of its own can overtake a first mover's market share — even when it starts from behind.

Example of a First Mover Competitive Advantage

eBay is a prominent example of a business that emerged with and mostly sustained a first mover competitive advantage. When it was founded in 1995, it was the first fully functional online auction site.

Backed by an exceptional, unique, well-executed concept, eBay was able to effectively create and dominate a new market — developing enough industry authority and brand recognition to maintain a significant competitive advantage over similar businesses in its space over time.

How to Identify Your Business’s Competitive Advantage

1. thoroughly research your competition..

You can't understand what sets you apart from your market if you don't have a pulse on what that market looks like. Understand who your competitors are, what they're charging, who they're trying to appeal to, and how well they're performing. All of those factors — among others — are key components that will help you get a feel for your industry landscape and help you pin down where you'd like to be within it.

If you're selling sales automation software and notice that your competition is focusing primarily on large enterprises while alienating small businesses with their prices, you could consider trying to establish a cost leadership advantage to appeal to that segment of the market.

2. Review your prices and expenses, relative to your competition.

This point ties into the one above, but it bears mentioning on its own. You need to know your industry's pricing standards and what you can viably charge if you want to find the right competitive advantage. If lowering prices will radically undercut quality, slash your margins, and take a toll on your employees' wellbeing, pursuing a cost leadership advantage probably isn't your best bet.

3. Connect with your existing customers.

If you have loyal customers, find out why they chose and stuck with you and your offering. Conduct some outreach — whether that be through actions like conducting surveys or tapping your customer success team.

Having a feel for why real customers picked you over your competitors will give you a sincere, human perspective on your product or service's value. That kind of insight can be a major asset when determining your competitive advantage.

4. Lean into the advantage you identify.

Once you've found your competitive advantage, don't be reluctant to embrace it. Use it to guide how you structure and conduct your sales and marketing efforts. It might take some time for your strategy to stick — but when it does, you'll be in a more stable, effective position to separate yourself from the rest of your market.

As I said at the start of this article, your business can't survive and thrive without something that sets it apart from the rest of your market. That's why your competitive advantage might be the most important element to reference when shaping your sales and marketing strategies.

If you want to get the most out of virtually every facet of your business, you need to take the time to identify your competitive advantage and determine how to promote and leverage it as effectively as possible.

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5 Sources of Competitive Advantage to Drive Growth

team identifying sources of competitive advantage in a meeting

10 Nov 2020

From chariot races and jousting tournaments to playground games and professional sports, competition is an age-old force that drives humans to evolve and outpace their competitors.

Competition in business is no exception, and it can make or break your organization. While it's often uncomfortable and scary to witness another business profit from your company's weaknesses, competition can also push your business to evolve into a better version of itself.

How do you gain an edge to drive growth for your organization? Here are five sources of competitive advantage to leverage for your business strategy.

Access your free e-book today.

Sources of Competitive Advantage

1. product attribute differentiation.

One way to gain an advantage over competitors is by differentiating your product from theirs. Ask yourself: What makes my offering unique? Why would consumers want to purchase my product instead of my competitors’?

Countless attributes can set your product apart. Here are some to consider:

Better customer service
More variety
Faster or cheaper shipping
Color and aesthetics
Brand identity
Atmosphere of brick-and-mortar locations
Source of goods

Whole Foods Market is one example of a company that differentiates its products using brand identity, atmosphere, and sourcing. Whole Foods’ competitors are other natural food chains, such as Trader Joe’s and Sprouts Farmers Market, along with big names in the grocery space, including Stop & Shop and Wegman’s.

Whole Foods stands out in the crowded natural foods market as the first and only certified organic national grocery store in the United States. Its brand identity centers on the integrity of its natural and organically sourced foods. It also cultivates an in-store atmosphere that makes grocery shopping feel purposeful and is a step up from some of its competitors' traditional grab-and-go shopping experience.

Like Whole Foods, find the attributes that differentiate your product from others and make them central to your brand’s identity.

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2. Customers’ Willingness to Pay

The way you price your products or services can set you apart from your competitors. When doing so, it’s vital to understand your customers’ willingness to pay .

Willingness to pay (WTP) is the maximum price a customer is willing to pay for a product or service. It can be a specific dollar amount or a price range.

By determining your customers’ WTP, you can ensure you’re maximizing profit without turning away customers.

In the context of competition, it’s important to view willingness to pay as a strategic tool. If your customers are willing to pay the same amount for your and your competitors’ products, consider what can be shifted to increase their willingness to pay for yours.

For example, business support system company CSG reports that 47 percent of consumers are willing to pay more for products that are sustainably sourced. Among those consumers, five percent are willing to pay double the price for a sustainable product over a non-sustainable one.

With the knowledge that certain factors could cause your customers’ willingness to pay to increase, you can strategically implement changes that give your business a competitive edge.

Alternatively, if your competitor provides a product at the very top of customers’ willingness to pay, you can gain a competitive advantage by offering a lower price. Tread cautiously, because doing so could start a price war in which you both continue to drop prices to win customers.

3. Price Discrimination

With an understanding of your customers’ willingness to pay, you may find that different types of customers are willing to pay different amounts for your products. In such cases, it can be useful to employ price discrimination, which can be a valuable tool for expanding your company’s reach when competing with others.

“Price discrimination is one of the most common and powerful price strategies for companies,” says Harvard Business School Professor Bharat Anand in the online course Economics for Managers .

In the course, Anand presents several examples of price discrimination, including reduced prices for students, seniors, and veterans. These “special case” prices present an opportunity for your company to earn customers whose willingness to pay may be lower than that of its typical customers.

It’s worth noting that a lower price doesn’t always win consumers over—selecting a strategic price is crucial, but it’s just one factor they consider when determining which product to buy.

4. Bundled Pricing

Another pricing strategy that can prove to be advantageous is bundled pricing.

Bundled pricing is the practice of selling two or more products together in a “bundle,” for which the cost is different than that of purchasing all of the items separately.

Cable companies often leverage bundling. Purchasing voice, video, and data services together often grants the customer a lower price than if they were to purchase the services individually.

“How you think about the logic of pricing should depend on willingness to pay,” Anand says in Economics for Managers . He presents the example of bundling childcare and theater tickets.

“Put two products together that, when consumed jointly, increase consumers’ willingness to pay,” he says. “You might be able to increase the price for both just because it has so much more value for consumers.”

The way you price your products should be strategic, purposeful, and give your business a leg up over its competitors.

5. Human Capital

A company is only as strong as its people. As such, hiring, training, and retaining a team of skilled employees is a competitive advantage for any business.

Putting in the time and care to select outstanding candidates for open positions, train current employees, offer professional development opportunities, and create a culture wherein people feel supported and challenged can pay off.

Gallup reports that business units with highly engaged employees see a 21 percent increase in profit over their less-engaged counterparts.

Employee engagement has been especially important during the coronavirus (COVID-19) pandemic , as many businesses have closed physical offices and transitioned to remote work. By finding ways to effectively engage your team in a virtual setting , you can make them feel supported and empowered from afar.

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Positioning Your Business for Success

Differentiating your product, creating a pricing strategy, and investing in your employees can be the difference between rising to the top of your market and being driven out by a competitor.

By taking a strategy course , such as Economics for Managers , you can bolster your skills in these areas and see competition not as a looming threat, but as a catalyst for growth.

Do you want to learn more about positioning your business for success in a competitive market? Explore our eight-week Economics for Managers course and other online strategy courses to hone your skills.

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How to Write a Competitive Analysis for Your Business Plan

Charts and graphs being viewed through a magnifying glass. Represents conducting a competitive analysis to understand your competition.

11 min. read

Updated January 3, 2024

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Do you know who your competitors are? If you do, have you taken the time to conduct a thorough competitor analysis?

Knowing your competitors, how they operate, and the necessary benchmarks you need to hit are crucial to positioning your business for success. Investors will also want to see an analysis of the competition in your business plan.

In this guide, we’ll explore the significance of competitive analysis and guide you through the essential steps to conduct and write your own.

You’ll learn how to identify and evaluate competitors to better understand the opportunities and threats to your business. And you’ll be given a four-step process to describe and visualize how your business fits within the competitive landscape.

What is a competitive analysis?

A competitive analysis is the process of gathering information about your competitors and using it to identify their strengths and weaknesses. This information can then be used to develop strategies to improve your own business and gain a competitive advantage.

How to conduct a competitive analysis

Before you start writing about the competition, you need to conduct your analysis. Here are the steps you need to take:

1. Identify your competitors

The first step in conducting a comprehensive competitive analysis is to identify your competitors.

Start by creating a list of both direct and indirect competitors within your industry or market segment. Direct competitors offer similar products or services, while indirect competitors solve the same problems your company does, but with different products or services.

Keep in mind that this list may change over time. It’s crucial to revisit it regularly to keep track of any new entrants or changes to your current competitors. For instance, a new competitor may enter the market, or an existing competitor may change their product offerings.

2. Analyze the market

Once you’ve identified your competitors, you need to study the overall market.

This includes the market size , growth rate, trends, and customer preferences. Be sure that you understand the key drivers of demand, demographic and psychographic profiles of your target audience , and any potential market gaps or opportunities.

Conducting a market analysis can require a significant amount of research and data collection. Luckily, if you’re writing a business plan you’ll follow this process to complete the market analysis section . So, doing this research has value for multiple parts of your plan.

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3. Create a competitive framework

You’ll need to establish criteria for comparing your business with competitors. You want the metrics and information you choose to provide answers to specific questions. (“Do we have the same customers?” “What features are offered?” “How many customers are being served?”)

Here are some common factors to consider including:

Market share
Product/service offerings or features
Distribution channels
Target markets
Marketing strategies
Customer service

4. Research your competitors

You can now begin gathering information about your competitors. Because you spent the time to explore the market and set up a comparison framework—your research will be far more focused and easier to complete.

There’s no perfect research process, so start by exploring sources such as competitor websites, social media, customer reviews, industry reports, press releases, and public financial statements. You may also want to conduct primary research by interviewing customers, suppliers, or industry experts.

You can check out our full guide on conducting market research for more specific steps.

5. Assess their strengths and weaknesses

Evaluate each competitor based on the criteria you’ve established in the competitive framework. Identify their key strengths (competitive advantages) and weaknesses (areas where they underperform).

6. Identify opportunities and threats

Based on the strengths and weaknesses of your competitors, identify opportunities (areas where you can outperform them) and threats (areas where they may outperform you) for your business.

You can check out our full guide to conducting a SWOT analysis for more specific questions that you should ask as part of each step.

How to write your competitive analysis

Once you’ve done your research, it’s time to present your findings in your business plan. Here are the steps you need to take:

1. Determine who your audience is

Who you are writing a business plan for (investors, partners, employees, etc.) may require you to format your competitive analysis differently.

For an internal business plan you’ll use with your team, the competition section should help them better understand the competition. You and your team will use it to look at comparative strengths and weaknesses to help you develop strategies to gain a competitive advantage.

For fundraising, your plan will be shared with potential investors or as part of a bank loan. In this case, you’re describing the competition to reassure your target reader. You are showing awareness and a firm understanding of the competition, and are positioned to take advantage of opportunities while avoiding the pitfalls.

2. Describe your competitive position

You need to know how your business stacks up, based on the values it offers to your chosen target market. To run this comparison, you’ll be using the same criteria from the competitive framework you completed earlier. You need to identify your competitive advantages and weaknesses, and any areas where you can improve.

The goal is positioning (setting your business up against the background of other offerings), and making that position clear to the target market. Here are a few questions to ask yourself in order to define your competitive position:

How are you going to take advantage of your distinctive differences, in your customers’ eyes?
What are you doing better?
How do you work toward strengths and away from weaknesses?
What do you want the world to think and say about you and how you compare to others?

3. Visualize your competitive position

There are a few different ways to present your competitive framework in your business plan. The first is a “positioning map” and the second is a “competitive matrix”. Depending on your needs, you can use one or both of these to communicate the information that you gathered during your competitive analysis:

Positioning map

The positioning map plots two product or business benefits across a horizontal and vertical axis. The furthest points of each represent opposite extremes (Hot and cold for example) that intersect in the middle. With this simple chart, you can drop your own business and the competition into the zone that best represents the combination of both factors.

I often refer to marketing expert Philip Kohler’s simple strategic positioning map of breakfast, shown here. You can easily draw your own map with any two factors of competition to see how a market stacks up.

Competitive positioning map comparing the price and speed of breakfast options. Price sits along the y-axis and speed along the x-axis.

It’s quite common to see the price on one axis and some important qualitative factor on the other, with the assumption that there should be a rough relationship between price and quality.

Competitive matrix

It’s pretty common for most business plans to also include a competitive matrix. It shows how different competitors stack up according to the factors identified in your competitive framework.

How do you stack up against the others? Here’s what a typical competitive matrix looks like:

Competitive matrix example where multiple business factors are being compared between your business and two competitors.

For the record, I’ve seen dozens of competitive matrices in plans and pitches. I’ve never seen a single one that didn’t show that this company does more of what the market wants than all others. So maybe that tells you something about credibility and how to increase it. Still, the ones I see are all in the context of seeking investment, so maybe that’s the nature of the game.

4. Explain your strategies for gaining a competitive edge

Your business plan should also explain the strategies your business will use to capitalize on the opportunities you’ve identified while mitigating any threats from competition. This may involve improving your product/service offerings, targeting underserved market segments, offering more attractive price points, focusing on better customer service, or developing innovative marketing strategies.

While you should cover these strategies in the competition section, this information should be expanded on further in other areas of your business plan.

For example, based on your competitive analysis you show that most competitors have the same feature set. As part of your strategy, you see a few obvious ways to better serve your target market with additional product features. This information should be referenced within your products and services section to back up your problem and solution statement.

Why competition is a good thing

Business owners often wish that they had no competition. They think that with no competition, the entire market for their product or service will be theirs. That is simply not the case—especially for new startups that have truly innovative products and services. Here’s why:

Competition validates your idea

You know you have a good idea when other people are coming up with similar products or services. Competition validates the market and the fact that there are most likely customers for your new product. This also means that the costs of marketing and educating your market go down (see my next point).

Competition helps educate your target market

Being first-to-market can be a huge advantage. It also means that you will have to spend way more than the next player to educate customers about your new widget, your new solution to a problem, and your new approach to services.

This is especially true for businesses that are extremely innovative. These first-to-market businesses will be facing customers that didn’t know that there was a solution to their problem . These potential customers might not even know that they have a problem that can be solved in a better way.

If you’re a first-to-market company, you will have an uphill battle to educate consumers—an often expensive and time-consuming process. The 2nd-to-market will enjoy all the benefits of an educated marketplace without the large marketing expense.

Competition pushes you

Businesses that have little or no competition become stagnant. Customers have few alternatives to choose from, so there is no incentive to innovate. Constant competition ensures that your marketplace continues to evolve and that your product offering continues to evolve with it.

Competition forces focus & differentiation

Without competition, it’s easy to lose focus on your core business and your core customers and start expanding into areas that don’t serve your best customers. Competition forces you and your business to figure out how to be different than your competition while focusing on your customers. In the long term, competition will help you build a better business.

What if there is no competition?

One mistake many new businesses make is thinking that just because nobody else is doing exactly what they’re doing, their business is a sure thing. If you’re struggling to find competitors, ask yourself these questions.

Is there a good reason why no one else is doing it?

The smart thing to do is ask yourself, “Why isn’t anyone else doing it?”

It’s possible that nobody’s selling cod-liver frozen yogurt in your area because there’s simply no market for it. Ask around, talk to people, and do your market research. If you determine that you’ve got customers out there, you’re in good shape.

But that still doesn’t mean there’s no competition.

How are customers getting their needs met?

There may not be another cod-liver frozen yogurt shop within 500 miles. But maybe an online distributor sells cod-liver oil to do-it-yourselfers who make their own fro-yo at home. Or maybe your potential customers are eating frozen salmon pops right now.

Are there any businesses that are indirect competitors?

Don’t think of competition as only other businesses that do exactly what you do. Think about what currently exists on the market that your product would displace.

It’s the difference between direct competition and indirect competition. When Henry Ford started successfully mass-producing automobiles in the U.S., he didn’t have other automakers to compete with. His competition was horse-and-buggy makers, bicycles, and railroads.

Do a competitive analysis, but don’t let it derail your planning

While it’s important that you know the competition, don’t get too caught up in the research.

If all you do is track your competition and do endless competitive analyses, you won’t be able to come up with original ideas. You will end up looking and acting just like your competition. Instead, make a habit of NOT visiting your competition’s website, NOT going into their store, and NOT calling their sales office.

Focus instead on how you can provide the best service possible and spend your time talking to your customers. Figure out how you can better serve the next person that walks in the door so that they become a lifetime customer, a reference, or a referral source.

If you focus too much on the competition, you will become a copycat. When that happens, it won’t matter to a customer if they walk into your store or the competition’s because you will both be the same.

Tim Berry is the founder and chairman of Palo Alto Software , a co-founder of Borland International, and a recognized expert in business planning. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning.

Table of Contents

Don't let competition derail planning

10 Min. Read

How to Set and Use Milestones in Your Business Plan

How to Write the Company Overview for a Business Plan

3 Min. Read

What to Include in Your Business Plan Appendix

6 Min. Read

How to Write Your Business Plan Cover Page + Template

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What is a Competitive Advantage? Explained with Examples

Free Competitive Analysis Kit

Aayushi Mistry

December 12, 2023

Competitive Advantages for Business Plan

Competitive advantages are the strengths and opportunities that you have over your competition.

It includes all the factors that help you stand out from your competition. It is also the factor of seeing which your target audiences may decide to go with your product/service over your competitors.

Depending on your industry, there can be many other advantages. However, eventually, it is the factor that earns you more sales and gives you a surplus in profit.

What is a Competitive Advantage?

Competitive advantages are the strengths and opportunities that you have over your competition. It is an attribute that allows a company to achieve superior profits compared to its rivals and generates more value for the company, customers, and shareholders.

11 Common Competitive Advantage Examples

Strong Branding is one of the strongest sustainable competitive advantages. A lot goes into making a brand like building customer relationships, quality service/product, time, and money.

But when the company is identified as a brand in the market, it brings you a positional advantage. And at the same time, your sales become easier and wider.

2. Network Effect

The network effect happens when the value of a product or service depends on the number of its users.

In a positive network effect, the more people use it, the more valuable the product becomes. Once the user base reaches a critical mass, it’s extremely hard for anyone else to achieve the same position.

Scale can give companies a sustainable advantage in several ways. For example, in the retail industry, large chains can use their scale to buy merchandise at low prices unavailable to their smaller competitors.

4. Customer Lock-in

Some businesses make products or services that have very high switching costs for customers. For example, enterprise automation software such as ERP systems is so tightly integrated with critical customer functions that changing an ERP vendor is unthinkable.

5. Patents/Intellectual Property

Patents are essentially a temporary monopoly granted by the governments to stimulate risky R&D. Example: biotech and pharmaceutical companies.

6. Know-how/Monopolies

If a critical enabling element can be kept secret, it can become a source of sustainable advantage.

7. Economies of Scale

The basic tenet of economies of scale is that the cost per unit declines as output increases. The lower cost per unit is largely driven by the presence of fixed costs within the business’s cost curve.

8. Exclusive Access to a resource

Exclusive or near-exclusive access to valuable resources can give a sustainable advantage. For example, China currently provides nearly 95% of the world’s rare earth metals.

9. Exclusive License

Sometimes governments grant exclusive licenses to businesses. For example, Stepan is the only company in the US that is legally allowed to import coca leaves and extract cocaine from them.

10. Cost Advantage

Cost advantage can be achieved through economies of scale. This makes it difficult for competitors to match the low prices.

11. Adapting Product Lines

For products that continuously evolve, many tech companies could fit in this category.

Want to Perform Competitive Analysis for your Business?

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How do I know if a company has a Competitive Advantage?

During competitive analysis , you must have come across a few factors where you stand out from your competitors. If these unique factors bring you any strength or opportunity, then those advantages are valuable. And only then, they can help you thrive.

For example, if you have a larger team than your competitor, then it is a competitive advantage. But you also need to look closer and see how this is bringing you any profit. Is this advantage helping you bring more business? Is this advantage helping you serve more customers/clientele? Is this advantage making a positive impact on your branding? If yes, then it is bringing you value. Hence, it is valuable.

Other than that, there are a few different perceptions to look at your competitive advantage:

Is your Competitive Advantage Sustainable?

Sustainable competitive advantages are company assets, attributes, or abilities that are difficult to duplicate or exceed; and provide a superior or favorable long-term position over competitors.

In this case, you have an advantage that your competition can not easily catch up with. It can include having new features for your service/products, initiating new sales and marketing strategies , or introducing new technology. This advantage is simply intuitive. It is so much like a race-Looking at the current situation, the industry knows what is the next step. But whoever implements it first has an advantage.

For example, Apple. Inc had this advantage when they released AirPods. That step was intuitive and groundbreaking and sustainable until their competitors had a similar product.

Is your Competitive Advantage Replaceable?

You may have a great advantage. But you need to know if that is replaceable. For example, people who still don’t use AirPods, still have traditional earphones that work equally well. In fact, you will find a lot of people who would prefer earphones to air pods. In that case, having air pods as an advantage is a replaceable advantage.

Similarly, you may have a large team to cater to your target market and your company. But at the same time, if your competitor can invest in heavy technology and innovation to do the same work, then they have a replaceable advantage.

Is your Competitive Advantage Strategic?

Such an advantage is mostly seen in the R&D department, sales, and marketing as well as in operations.

Is your Competitive Advantage Rare?

In these cases, your competition will not have this feature in their product/service or business. A lot of times, such an advantage lies in the way you operate. It can include having unique raw materials, a unique team management system, quicker transportation, a better-developing team, and so on and so forth. Having a rare advantage can help you become superior sooner. And usually, having a rare advantage is like having that secret ingredient in the recipe-Something, that no one can get a hack of.

You can learn these different perspectives by studying your competition analysis with a detailed overview, gaining better knowledge of the market, brainstorming with your team, and being intuitive with respect to your business.

Steps to derive Competitive Advantages

Determine the right competition
Understand your market situation and your position in it
SWOT Analysis
Porter’s Five Forces
Strategic Group Analysis
Growth-Share Matrix
Perceptual Mapping
Figure out the points where you stand out from your competition.
Those stand-alone points are your competitive advantages.

A table for listing your Competitive Advantages:

Your business name	+ What you are best at	+ Why

Add Competitive Advantage to your Business Plan

Your competitive advantage section will come after you have explained your competition.

In the beginning, you have to explain the competitive environment. If you are going to put it next to the section on competitive analysis, you will not have to go into details. Because you will already have explained those details.

However, if you are to present this section only, you will have to explain your competition . Along with that, you will also have to share analytic comparisons. For this, you can use pie charts, graphs, metrics, and other such diagrams.

And then, finally, you have to start explaining your competitive advantage over your competitors. Note that you have to write this section in the most convincing way. So, your prospects understand your dynamics well and invest in your business. Moreover, it is important for them to know if you have a clear strategic plan to run your business successfully.

A lot of people may want to skip this section of your business plan. But in our opinion, you must never make that mistake. For it is your chance to tell your investors the ways you stand out from your competitors in your industry.

Important of Competitive Advantages

You get a chance to highlight your business’s strengths and opportunities
Your investors can have an idea that you have crystal clear ways to thrive in your business
You restore your investors’ faith in you.
You explain why your business would be their best choice to invest in.

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About the Author

Since childhood, I was in awe of the magic that words bring. But while studying computer science in college, my world turned upside down. I found my calling in being a copywriter and I plunged into a world of words. Since then, there is no looking back. Even today, nothing excites me to find out the wonders the words can bring!

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What Are Core Competencies?

Understanding core competencies.

In Business
In Individuals
Identifying Core Competencies
Core Competency Importance
Pros and Cons
Core Competencies FAQs

The Bottom Line

Business Essentials

Core Competencies in Business: Finding a Competitive Advantage

Investopedia / Joules Garcia

Core competencies are the resources and capabilities that comprise the strategic advantages of a business. A modern management theory argues that a business must define, cultivate, and exploit its core competencies in order to succeed against the competition.

Key Takeaways

Core competencies are the defining characteristics that make a business or an individual stand out from the competition.
Identifying and exploiting core competencies is seen as important for a new business making its mark or an established company trying to stay competitive.
A company's people, physical assets, patents, brand equity, and capital can all make a contribution to a company's core competencies.
The idea of core competencies was first proposed in the 1990s as a new way to judge business managers compared to how they were judged in the 1980s.
Examples of companies that have core competencies that have allowed them to remain successful for decades include McDonald's, Apple, and Walmart.

A successful business has identified what it can do better than anyone else, and why. Its core competencies are the "why." Core competencies are also known as core capabilities or distinctive competencies. Core competencies lead to competitive advantages .

Core competency is a relatively new management theory that originated in a 1990 Harvard Business Review article, “The Core Competence of the Corporation.” In the article, C.K. Prahalad and Gary Hamel review three conditions a business activity must meet in order to be a core competency:

The activity must provide superior value or benefits to the consumer.
It should be difficult for a competitor to replicate or imitate it.
It should be rare.

The article pointed out the contrast of how businesses operated in the 1980s versus how they should operate in the 1990s. The article asserted that in the 80s, business managers were "judged on their ability to restructure, declutter, and delayer their corporations. In the 1990s, they'll be judged on their ability to identify, cultivate, and exploit the core competencies that make growth possible."

The core competencies that distinguish a business vary by industry. A hospital or clinic may focus on excellence in particular specializations, while a manufacturer may identify superior quality control.

Core Competencies in Business

A business can choose to be operationally excellent in a number of different ways. Below are common core competencies found in business:

Greatest Quality Products. This core competency means the company's products are most durable, long-lasting, and most reliable. The company will likely have invested in the strongest quality control measures, technically proficient workers, and high-quality raw materials.
Most Innovative Technology. This core competency means the company is an industry leader in its sector. The company will likely have invested heavy amounts of capital into research & development, holds many patents, and hires experts in respective fields.
Best Customer Service . This core competency means customers have the greatest experience during (and after) their purchase. The company will likely have invested in training for staff, large numbers of customer service representatives, and processes to manage exceptions or issues as they arise.
Largest Buying Power. This core competency leverages a company's economy of scale. This company will likely have invested in mergers or acquisitions and have built up strong relationships with vendors to gain favorable pricing or service.
Strongest Company Culture. This core competency promotes the internal atmosphere of the business. The company aims to attract the best talent by investing heavily in employee recognition, development, or collaborative, fun events.
Fastest Production or Delivery. This core competency means the company is able to make or ship items the fastest. The company will likely have invested in connected software systems as well as production processes and distribution relationships.
Lowest Cost Provider. This core competency means the company charges the lowest price among comparable goods. The company will likely have invested in the most efficient processes the reduce labor or material input.
Highest Degree of Flexibility. This core competency allows the company to quickly pivot in response to business opportunities or challenges. The company will likely have invested in cross-training across employees or nimble software solutions.

Core Competencies in Individuals

A variation of the principle that has emerged in recent years to pivot towards individuals looking for a new job. The variation recommends that job seekers focus on their personal core competencies in order to stand out from the crowd.

These positive characteristics may be developed and listed on a resume . Some personal core competencies include analytical abilities, creative thinking, and problem resolution skills. The notional of individual or personal core competencies gives an individual a platform during interviews (i.e. a candidate can identify themselves as the most experienced, most creative, or most technically sound candidate).

The core competencies an individual lists on their resume should be tailored to suit the job and demonstrate actual, highly proficient skills necessary for the role.

How to Identify Core Competencies

Some core competencies develop naturally, while other core competencies must be consciously and strategically formed over time. Whether a company is yet for form or has existed for a while, here are ways for organizations to identify what their core competencies are or could be.

Review the company's mission statement , value statement, or slogan. If a company has invested time and effort into developing a brand, chances are it has already put some effort into considering what it wants to be known for. A company's mission statement, value statement, or other branded content may identify what the company wants to be or how it wants to seen by customers.

Compare the company to its competitors. A core competency is a unique element that can not be easily replicated by other companies. Therefore, a company can identify its core competencies by thinking through how the company is different from other businesses. This includes differences in products, processes, market areas, delivery customs, pricing, or employee base.

Interview internal staff or major customers. Different key stakeholders of a company may have insights into its strengths (or weaknesses) of a company. In some cases, the day-to-day staff may have a better sense of what the company excels in. In addition, primary customers that have the most real-world experience with the company's products or services may yield feedback as well.

Brainstorm what benefits the company provides customers. Core competencies often relate back to the product or service the company provides. For example, is the product the lowest cost, most user-friendly, or highest quality? If customers gain a benefit from the company's goods (i.e. they pay the lowest prices), that can often be leveraged into a core competency.

Understand the processes required to make goods. In addition to considering the specific products, a company should review what it takes to make the products. This includes the labor, materials, knowledge, processes, equipment, or research that must be refined in advance.

Identify unique aspects of the company. If all else fails, it may be simplest to just consider what about the company is unique. This may relate to the company's history, certain benefits it can give its employees, the industry it resides in, or what it aims to achieve in the world.

Consider hiring an external consultant to evaluate your company's framework to determine what your core competencies are or could be.

Why Core Competencies Are Important

Core competencies allow a company to better understand how to allocate its resources. For example, it may make sense for a company to outsource certain tasks if it does not care to develop those tasks into company strengths. This also includes stronger direction on the staff to hire and what training to incur.

Core competencies also reduce a company's market risk . By being exceptional or proficient in specific areas, a company can rely on these areas to maintain consistency and reliability in operations. For example, companies with strong internal cultures will experience less employee turnover, training expenses, product deficiencies due to lack of knowledge, or unhappy workers.

As companies determine what they are best at, customers may often recognize and associate the company with that core competency. Therefore, core competencies help a company develop a stronger brand image or market presence. For example, many consumers associate Apple products with being the most cutting-edge and innovative.

Last, core competencies may help create stronger relationships between a company and its employees or customers. Both employees and customers may associate with a company better, knowing its strength or identity; in the example above, employees may take pride in creating the most innovative products, while customers gain satisfaction knowing they possess the most creative solutions.

Some core competencies do expire. Consider Sears' long-term dominance as the major retailor due to their catalog. Now, that core competency has faded, and an in-home printed catalog may no longer be viewed as a strength.

Advantages and Disadvantages of Core Competencies

Core competencies are difficult to imitate. It often takes a long period of time (or large sums of capital) to develop core competencies. Once a company has achieved a core competency, it often has a major advantage over its competitors in the marketplace.

Core competencies may also be transferrable across different industries or product lines. For example, with a platform of being an incredibly innovative company, Apple has expanded into new product lines, different sectors, and varying geographical regions. An advantage of a company may be able to be applied widely.

Last, core competencies naturally enhance the marketability of a product. Spirit Airlines' core competency of offering the cheapest flights on average is not only its strength, it doubles as a company slogan. Though this may mean some consumers are naturally adverse to the company, it also means Spirit's brand image is clearly defined and recognizable.

Disadvantages

Just as difficult as a core competency is to create, it may be equally as difficult to change. This may inadvertently cause the company's brand image to falter and be confusing. For example, McDonald's was once known for indoor playgrounds and Ronald McDonald. Though the company has shifted away from this culture, long-time consumers may still associate the brand with old core competencies.

Core competencies also naturally limit the flexibility of a company. Consider a low-price retailer such as Wal-Mart. The company may struggle to launch high-end, more expensive product lines with greater margins because consumers may not appropriately associate the product with the company.

A company may also "lose the forest among the trees" if it gives too much attention to developing a core competency. The ultimate goal of a company is not to possess core competencies; its purpose is to generate revenue through the sale of products. Therefore, companies may spend tremendous amounts of time or capital without an overarching strategy that makes sense.

Core Competencies

Are not easily replicable since they take long or large investments

Is often difficult for competitors to overcome once a core competency has been achieved

May be able to be translated to different products, sectors, or business opportunities

Enhances the company's brand image and may make marketing endeavors more easily understood

May result in a company being tied to an outdated, no-longer-used core competency

May reduce the overall flexibility of a company

May require large time or capital requirements

May result in a company focusing too heavily on core competencies instead of a single cohesive strategy

Real-World Example of Core Competencies

Part 1 of Amazon's 2021 annual report discusses the nature of the company's business. The company strives to "be Earth's most customer-centric company." As much, it discusses the following business activities:

Amazon has a core competency of operating scale as their stores "enable hundreds of millions of unique products to be sold by us and by third parties".
Amazon has a core competency of advanced technology as "customers can access our offerings through our websites, mobile apps, Alexa, devices, streaming, and physically visiting our stores".
Amazon has a core competency of being a budget-conscious option as it seeks "to offer our customers low prices, fast and free delivery, easy-to-use functionality, and timely customer service".
Amazon has a core competency of flexibility and product diversification as it serves "developers and enterprises of all sizes including startups , government agencies, and academic institutions" though a broad set of technology services.
Amazon has a core competency of self-reliance as it serves authors with its own publishing company (Kindle Direct Publishing, Amazon Publishing) to yield products in its own store (Kindle Store) for use on its own physical devices (Kindle).
Amazon has a core competency of innovation as it regards "our trademarks , service marks, copyrights, patents, domain names, trade dress, trade secrets, proprietary technologies, and similar intellectual property as critical to our success".

What Are the Main Types of Core Competencies?

Core competencies in business often relate to the type of product delivered to a customer or how that product is delivered. For instance, the main types of core competencies include having the lowest prices, best reliable delivery, best customer service, friendliest return policy, or superior product.

How Does a Company Develop Core Competencies?

A company should internally assess what it does best, and it should also assess how its competition approaches the market. Then, a company should evaluate where it feels it has the best chance to be industry leader. Though these areas may not currently be a company's strength, it can make capital investments and process changes to develop core competencies over time.

What Is the Best Type of Core Competency?

One type of core competency is not necessary better than the rest. However, some core competencies may be more difficult for other companies to overcome. For example, consider the Coca-Cola brand. The company's core competency of brand recognition may be very difficult for a new beverage company to overtake. However, Coca-Cola's approach to customer service or company culture may be easier for a competing company to overtake.

Why Do Core Competencies Matter?

Core competencies lead to operational excellence which leads to superior products, happier customers, and/or greater profitability. When a company is able to doing part of the sale process exceptionally well, it gains a positive reputation for its core competence. This reputation may lead to stronger sales, happier employees, and better business operations.

Core competencies are the advantages that one company has over its competitors. It's the areas of business that the company excels at, and it's often what the company is known for. Ranging from yielding the highest quality products to having the best customer service to being the low-cost provider, core competencies define a company's identity and guide its operational strategy.

Harvard Business Review. " The Core Competence of the Corporation ."

Smithsonian. " The Rise and Fall of Sears ."

Amazon. " 2021 Annual Report ."

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How to create a competitive analysis (with examples)

Competitive analysis involves identifying your direct and indirect competitors using research to reveal their strengths and weaknesses in relation to your own. In this guide, we’ll outline how to do a competitive analysis and explain how you can use this marketing strategy to improve your business.

Whether you’re running a business or playing in a football game, understanding your competition is crucial for success. While you may not be scoring touchdowns in the office, your goal is to score business deals with clients or win customers with your products. The method of preparation for athletes and business owners is similar—once you understand your strengths and weaknesses versus your competitors’, you can level up.

What is a competitive analysis?

Competitive analysis involves identifying your direct and indirect competitors using research to reveal their strengths and weaknesses in relation to your own.

Direct competitors market the same product to the same audience as you, while indirect competitors market the same product to a different audience. After identifying your competitors, you can use the information you gather to see where you stand in the market landscape.

What to include in a competitive analysis

The purpose of this type of analysis is to get a competitive advantage in the market and improve your business strategy. Without a competitive analysis, it’s difficult to know what others are doing to win clients or customers in your target market. A competitive analysis report may include:

A description of your company’s target market

Details about your product or service versus the competitors’

Current and projected market share, sales, and revenues

Pricing comparison

Marketing and social media strategy analysis

Differences in customer ratings

You’ll compare each detail of your product or service versus the competition to assess strategy efficacy. By comparing success metrics across companies, you can make data-driven decisions.

How to do a competitive analysis

Follow these five steps to create your competitive analysis report and get a broad view of where you fit in the market. This process can help you analyze a handful of competitors at one time and better approach your target customers.

1. Create a competitor overview

In step one, select between five and 10 competitors to compare against your company. The competitors you choose should have similar product or service offerings and a similar business model to you. You should also choose a mix of both direct and indirect competitors so you can see how new markets might affect your company. Choosing both startup and seasoned competitors will further diversify your analysis.

Tip: To find competitors in your industry, use Google or Amazon to search for your product or service. The top results that emerge are likely your competitors. If you’re a startup or you serve a niche market, you may need to dive deeper into the rankings to find your direct competitors.

2. Conduct market research

Once you know the competitors you want to analyze, you’ll begin in-depth market research. This will be a mixture of primary and secondary research. Primary research comes directly from customers or the product itself, while secondary research is information that’s already compiled. Then, keep track of the data you collect in a user research template .

Primary market research may include:

Purchasing competitors’ products or services

Interviewing customers

Conducting online surveys of customers

Holding in-person focus groups

Secondary market research may include:

Examining competitors’ websites

Assessing the current economic situation

Identifying technological developments

Reading company records

Tip: Search engine analysis tools like Ahrefs and SEMrush can help you examine competitors’ websites and obtain crucial SEO information such as the keywords they’re targeting, the number of backlinks they have, and the overall health of their website.

3. Compare product features

The next step in your analysis involves a comparison of your product to your competitors’ products. This comparison should break down the products feature by feature. While every product has its own unique features, most products will likely include:

Service offered

Age of audience served

Number of features

Style and design

Ease of use

Type and number of warranties

Customer support offered

Product quality

Tip: If your features table gets too long, abbreviate this step by listing the features you believe are of most importance to your analysis. Important features may include cost, product benefits, and ease of use.

4. Compare product marketing

The next step in your analysis will look similar to the one before, except you’ll compare the marketing efforts of your competitors instead of the product features. Unlike the product features matrix you created, you’ll need to go deeper to unveil each company’s marketing plan .

Areas you’ll want to analyze include:

Social media

Website copy

Press releases

Product copy

As you analyze the above, ask questions to dig deeper into each company’s marketing strategies. The questions you should ask will vary by industry, but may include:

What story are they trying to tell?

What value do they bring to their customers?

What’s their company mission?

What’s their brand voice?

Tip: You can identify your competitors’ target demographic in this step by referencing their customer base, either from their website or from testimonials. This information can help you build customer personas. When you can picture who your competitor actively targets, you can better understand their marketing tactics.

5. Use a SWOT analysis

Competitive intelligence will make up a significant part of your competitor analysis framework, but once you’ve gathered your information, you can turn the focus back to your company. A SWOT analysis helps you identify your company’s strengths and weaknesses. It also helps turn weaknesses into opportunities and assess threats you face based on your competition.

During a SWOT analysis, ask yourself:

What do we do well?

What could we improve?

Are there market gaps in our services?

What new market trends are on the horizon?

Tip: Your research from the previous steps in the competitive analysis will help you answer these questions and fill in your SWOT analysis. You can visually present your findings in a SWOT matrix, which is a four-box chart divided by category.

6. Identify your place in the market landscape

The last step in your competitive analysis is to understand where you stand in the market landscape. To do this, you’ll create a graph with an X and Y axis. The two axes should represent the most important factors for being competitive in your market.

For example, the X-axis may represent customer satisfaction, while the Y-axis may represent presence in the market. You’ll then plot each competitor on the graph according to their (x,y) coordinates. You’ll also plot your company on this chart, which will give you an idea of where you stand in relation to your competitors.

This graph is included for informational purposes and does not represent Asana’s market landscape or any specific industry’s market landscape.

[inline illustration] Identify your place in the market landscape (infographic)

Tip: In this example, you’ll see three companies that have a greater market presence and greater customer satisfaction than yours, while two companies have a similar market presence but higher customer satisfaction. This data should jumpstart the problem-solving process because you now know which competitors are the biggest threats and you can see where you fall short.

Competitive analysis example

Imagine you work at a marketing startup that provides SEO for dentists, which is a niche industry and only has a few competitors. You decide to conduct a market analysis for your business. To do so, you would:

Step 1: Use Google to compile a list of your competitors.

Steps 2, 3, and 4: Use your competitors’ websites, as well as SEO analysis tools like Ahrefs, to deep-dive into the service offerings and marketing strategies of each company.

Step 5: Focusing back on your own company, you conduct a SWOT analysis to assess your own strategic goals and get a visual of your strengths and weaknesses.

Step 6: Finally, you create a graph of the market landscape and conclude that there are two companies beating your company in customer satisfaction and market presence.

After compiling this information into a table like the one below, you consider a unique strategy. To beat out your competitors, you can use localization. Instead of marketing to dentists nationwide like your competitors are doing, you decide to focus your marketing strategy on one region, state, or city. Once you’ve become the known SEO company for dentists in that city, you’ll branch out.

[inline illustration] Competitive analysis framework (example)

You won’t know what conclusions you can draw from your competitive analysis until you do the work and see the results. Whether you decide on a new pricing strategy, a way to level up your marketing, or a revamp of your product, understanding your competition can provide significant insight.

Drawbacks of competitive analysis

There are some drawbacks to competitive analysis you should consider before moving forward with your report. While these drawbacks are minor, understanding them can make you an even better manager or business owner.

Don’t forget to take action

You don’t just want to gather the information from your competitive analysis—you also want to take action on that information. The data itself will only show you where you fit into the market landscape. The key to competitive analysis is using it to problem solve and improve your company’s strategic plan .

Be wary of confirmation bias

Confirmation bias means interpreting information based on the beliefs you already hold. This is bad because it can cause you to hold on to false beliefs. To avoid bias, you should rely on all the data available to back up your decisions. In the example above, the business owner may believe they’re the best in the SEO dental market at social media. Because of this belief, when they do market research for social media, they may only collect enough information to confirm their own bias—even if their competitors are statistically better at social media. However, if they were to rely on all the data available, they could eliminate this bias.

Update your analysis regularly

A competitive analysis report represents a snapshot of the market landscape as it currently stands. This report can help you gain enough information to make changes to your company, but you shouldn’t refer to the document again unless you update the information regularly. Market trends are always changing, and although it’s tedious to update your report, doing so will ensure you get accurate insight into your competitors at all times.

Boost your marketing strategy with competitive analysis

Learning your competitors’ strengths and weaknesses will make you a better marketer. If you don’t know the competition you’re up against, you can’t beat them. Using competitive analysis can boost your marketing strategy and allow you to capture your target audience faster.

Competitive analysis must lead to action, which means following up on your findings with clear business goals and a strong business plan. Once you do your competitive analysis, you can use the templates below to put your plan into action.

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Business Strategy – Competitive Advantage

Competition is at the heart of modern business, and determines the behaviors of companies, professionals, and potential customers. Gaining and maintaining a competitive advantage takes more than great timing or a single solution. Sustainable advantage requires a well-designed and well-executed strategy. This course is designed to give you the tools and frameworks to develop and execute a successful competitive strategy.

In this online course, you’ll learn how to evaluate your strategy, and how to identify internal, external, and dynamic opportunities to gain a competitive advantage. Additionally, you’ll learn to assess the strategic impact of your competitors’ moves, and understand what drives and sustains a competitive advantage, while identifying organizational barriers to change.

By the end of this course, you’ll be able to assess and redesign your current strategy, and develop strategies for effective implementation to give your firm a competitive advantage.

What You’ll Learn

How to evaluate your present and future strategic environment
How to identify the differences between organizational effectiveness and strategic positioning
How to map core and supporting activities of your firm and how they interact with each other
How to locate organizational barriers to strategy implementation and organizational change
How to engage in a strategic planning process that works

Why Study Competitive Advantage?

In the modern era, evaluating your firm’s competition and adjusting your strategy is an absolute necessity. A competitive advantage sets a company apart from its competitors, and sets distinctions to the customer. Prices, brand loyalty, culture, product design, and overall strategy are all informed by competitive analysis. The competitive advantage empowers your business to grow, even as your competition innovates.

Program Details

Start Dates: Immediately

Duration: 6 weeks

Commitment: 2-4 hours per week

Program Format: 100% Online

Program Tuition: $585

Overview of Modules:

Module 1: analyze your firm's internal fit.

What is strategy?
The difference between organization effectiveness and strategy
The importance of tradeoffs
The value chain
Interactions among strategic choices
Mapping your firm’s activity system

MODULE 2: ANALYZE YOUR FIRM'S EXTERNAL FIT

The concept of “value”
Industry analysis
Willingness-to-pay and cost drivers for different customer segments
Your value proposition
Strategic positioning

MODULE 3: MAINTAINING YOUR FIRM’S DYNAMIC FIT

The origins of your firm’s strategy
Drivers of strategy evolution
Barriers to organizational change (perception, knowledge, motivation, and coordination challenges)
Disruptive technological changes

MODULE 4: CREATING NEW STRATEGIES AND INITIATIVES

Creating new strategic possibilities
Identifying conditions for success for each possibility
Designing empirical tests
Selecting strategic possibilities
Important shifts in mindsets

Faculty for this Course

The Business Strategy: Competitive Advantage course is taught by Nicolaj Siggelkow, PhD, the David M. Knott Professor at the Wharton School, and a co-director of the Mack Institute for Innovation Management.

Professor Siggelkow has been the recipient of numerous Wharton MBA and Undergraduate Excellence in Teaching Awards. Among his awards are the Class of 1984 Award, which recognizes the faculty member with the highest teaching rating in the MBA classroom, the Helen Kardon Moss Anvil Teaching Award, the Wharton Award, and the Wharton Graduate Association Student Choice Award. His research has been published in the Academy of Management Journal , Administrative Science Quarterly , the Journal of Industrial Economics , Management Science , Organization Science , and Strategic Organization .

His research focuses on the strategic and organizational implications of interactions among a firm’s choices of activities and resources. He studied Economics at Stanford University and has an MA in Economics and a PhD in Business Economics from Harvard University and Harvard Business School.

Research Interests:

Strategic and organizational implications of interactions among a firm’s choices of activities and resources
How firms grow, develop, and adjust actions over time

We want to help you take your learning to the next level. Click below to begin the conversation.

The Wharton School is accredited by the International Association for Continuing Education and Training (IACET) and is authorized to issue the IACET CEU.

The Wharton School is accredited by IACET

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6 strategies to gain competitive advantage from michael porter, the author of “competitive advantage”.

Competitive advantage plays a key role in business success, but not all companies know how to gain a competitive advantage and differentiate themselves in the current extremely competitive, or even cutthroat, market.

To build an edge over the competition, leaders need to be cognizant of competitors’ behavior and industry structure to be able to build sustainable value for customers. By offering something more valuable and different from what the competition is providing, companies have a chance to translate it into a sustainable competitive advantage and gain a leading place in the market.

Each successful company has found its own competitive advantage , which lies at the core of strategic management and all strategic decisions.

If you want to create and later leverage competitive advantage in your own business, you need to understand why it matters and how it works. Finding and maintaining a competitive advantage can secure a company a leading place in the industry, generating increased profit over the long term.

In this article, we’ll dive into various aspects of competitive advantage and cover the best strategies on how to build an effective competitive advantage , described by Michael Porter in his book “Competitive Advantage” .

6 Strategies to Gain Competitive Advantage from Michael Porter, the Author of “Competitive Advantage”

What is a competitive advantage, so what does it mean to have a competitive advantage, why do companies need a competitive advantage, 1. analyze the attractiveness of the target industry. , 2. lower the costs., 3. be different., 4. be focused. , 5. avoid being stuck in the middle., 6. plan with a competitive advantage in mind..

Competitive advantage is a unique characteristic of a company, differentiating it in the marketplace, which gives it an edge over rival firms by providing greater value to customers through lower prices or extra benefits that justify higher prices. Competitive advantage stems from the value a firm is able to create for its buyers that contenders are not able to provide.

A competitive advantage is anything that distinguishes a company from its competitors, giving it an edge to win customers and the biggest market share.

According to Michael Porter , the author of “Competitive Advantage,” “Competitive advantage grows fundamentally out of value a firm is able to create for its buyers that exceeds the firm's cost of creating it.”

There are two basic types of competitive advantage: cost leadership and differentiation.

Competitive advantages are associated with various factors, including quality, branding, cost structure, intellectual property, technological innovation, or customer service. They enable a company to provide customers with products or services of higher value than the competition, generating higher margins or more sales.

A company can normally sustain a competitive advantage only for a limited time since there is a great number of rival firms intending to decrease the power of its competitive advantage by imitating it.

Successful companies are successful for a reason. Their competitive advantage is strong enough to give them an edge over the competition, attracting more and more customers and helping them build a leading position in the market.

Which brings us to the question: Why do those customers buy from this particular company rather than the competition?

Since customers are different, they have different preferences and make buying decisions for a lot of different reasons. Some of the deciding factors include quality, prestige, technological advancement, location, a wide choice of products or services, special relationships with a seller, and many more. However, for some commoditized markets with less diversified services or products, for instance, the agriculture industry, answering this question can be very tricky. In such markets, the price and volume are often the only determining factors.

Everybody wants to be unique, but few manage to stand out from the flood of copycats. Especially nowadays, when both individual and wholesale purchasers are seeking goods or services with particular characteristics, a strong and distinct competitive advantage is essential. Differentiation and niching down are the keywords that rule with a rod of iron in the current markets. Even if companies decide to copy some other businesses’ solutions, they need to offer an old product or service with a brand-new characteristic or application.

Founders of start-ups are constantly trying to outstrip each other and distinguish in the market, launching new technologies or products which are to solve some sophisticated problems of their potential customers. By implementing new ideas, they hope to provide their companies with sustainable competitive advantages . However, it is challenging and, according to the Small Business Administration , just one out of ten startups survives in the market since it’s more and more difficult to meet customers' needs as they are pickier and pickier.

As the business world is becoming more and more demanding and competitive, only a few businesses selling products or services of premium quality, with extraordinary features or offering something truly unique are able to stay on the market. A key point to understand is that competitive advantage is a make-or-break factor and it needs to be more sophisticated and value-based since gone are the days when price and volume played a crucial role in business success.

Even in the agriculture industry, previously considered as purely price and volume-driven, companies are trying to find their edge over the competition by differentiating themselves with special modes of production (i.e. organic, human, or natural) or providing value-added components such as pre-washed salads mixes.

There is a misconception that a competitive advantage once achieved is sustainable. It can be detrimental to the business since companies invest a lot of effort, money, and time in systems, people, and assets built around those advantages which can disappear in the blink of an eye. The business world is very dynamic and our contenders are actively seeking to copy our competitive advantages. Since it is extremely difficult to sustain a competitive advantage, leaders need to be ready to pivot at any moment and avoid putting all eggs in one basket.

6 Strategies How to Build a Competitive Advantage

To create a successful strategy on how to gain a competitive advantage, you need to scrutinize very thoroughly the target industry and understand the rules which exist there.

Michael Porter pinpoints the following 6 competitive forces which govern each industry:

the entry of new competitors,
the rivalry among the existing competitors,
the bargaining power of buyers,
the bargaining power of suppliers,
the threat of substitutes.

Since all the listed forces influence the costs, prices - the overall industry profitability, they should be carefully analyzed before entering a particular market. According to Michael Porter , “the collective strength of these five competitive forces determines the ability of firms in an industry to earn, on average, rates of return on investment in excess of the cost of capital.”

Strong buyer power impacts the prices that companies charge, generally lowering them, however, buyers with strong negotiating power usually require premium products or services which increases companies’ costs and investments. In this case, we can observe a strong pressure that is exerted on businesses to decrease their margins, which eventually lowers their profitability. Moreover, another decisive force is the bargaining power of suppliers, which affects the price of raw materials and other basic components used for production. Also, both the power of competition and the substitution threat influence prices as well.

In terms of profitability, there are no two identical industries, therefore the power of these forces is different in different industries. There are industries, such as soft drinks or pharmaceuticals, with quite lower pressure from the competitive forces, while there are industries with very strong competitive forces where it’s quite difficult to reach profitability and enjoy hefty returns.

It happens that seemingly mundane industries may be highly profitable, whereas more prestigious, high-class, and high-technology industries are hard to break into, and while finally being inside, they may not provide its participants with high rewards in the form of superior margins or returns.

Companies that set out to pursue a cost leadership strategy typically have a broad scope, serving many industry segments, or even operating in related industries. Their sources of competitive advantage based on costs reduction depend on the structure of the industry include economies of scale, proprietary technology, easy access to cheap raw materials, low overhead, low-cost labor, or full automation of production.

Low-cost producers usually try to find and exploit all sources of cost advantage by selling standard and no-frills products.

By laying an emphasis on gaining scale or cost advantages from all sources, a company can set prices that are the same or lower than its competitors’ prices and receive higher returns to become an above-average performer, and eventually a cost leader.

However, to gain a sustainable competitive advantage and land a stable position on the market, a low-cost company needs to produce not only cheap products or services but also goods that are perceived by buyers as attractive. Otherwise, a low-cost producer will be forced to discount prices well below competitors’ prices, which may significantly reduce its profits.

The key point of the strategy based on the cost leadership idea is to become the cost leader, not just one of a few companies competing for this position.

Example of the firm following a cost leadership strategy:

Founded in 1985, Ryanair is an Irish low-cost airline headquartered in Dublin which follows a cost-leadership strategy to achieve its mission of becoming the main European low-cost carrier (LCC).

A company that pursues a strategy based on differentiation wants to be exceptional in its industry in terms of some factors that are regarded by buyers as valuable. To gain an edge, it usually chooses one or more dimensions that plenty of buyers perceive as significant and tries to figure out how to approach them in a unique way, completely different from their rivals.

By meeting the buyer's needs more effectively than competitors, the firm positions itself as a market leader and top provider and can charge clients premium prices for the uniqueness of their products or services and build a sustainable business around this one or two attributes.

To gain a competitive advantage based on differentiation, a company needs to be remarkable and truly different from the competition and customers need to view it as extraordinary to be ready to pay a premium price.

Unlike a cost leadership strategy which is based solely on one attribute - price, a successful differentiation strategy may take different forms at different companies, even in the same market, as buyers value various attributes which can stand at the heart of particular strategies.

However, the key to high profitability is a premium price higher than the cost of differentiating. A firm needs to set proper prices which exceed the extra costs incurred to differentiate itself and constantly look for ways of cost-effective differentiation as an inferior cost position may nullify a competitive advantage gained due to premium, but not high enough, prices.

Example of the firm following a differentiation strategy:

Louis Vuitton

Founded in 1854, Louis Vuitton, a French luxury goods company and fashion house, follows a differentiation strategy based on the generic strategy model, selling high-quality products, including luxury leather goods and ready-to-wear accessories, at premium prices.

As the focus strategy is based on narrowing down a competitive scope within an industry, a company chooses a particular segment in the industry and optimizes its strategy for the selected sector, excluding entirely other segments. By adjusting the strategy to the target market, a firm gains a competitive advantage in its target market only due to focusing its efforts on this selected segment, even without having an overall competitive advantage.

In “Competitive Advantage,” Michael Porter wrote: “the focuser selects a segment or group of segments in the industry and tailors its strategy to serve them to the exclusion of others.”

There are two variations of the focus strategy:

Differentiation Focus

Companies with the cost focus strategy are for cost advantage in their target sector, whereas those with the differentiation focus strategy search for differentiation in their target segment. The key attribute of both variants of the focus strategy is based on differences between a target segment and other segments in the industry.

To gain a competitive advantage successfully, buyers of the target segments need to have special needs which are markedly different from the needs of buyers in other segments. Companies following the cost focus variant exercises disparities in cost behavior, whereas those following differentiation focus will benefit from the particular buyers' needs in specific segments.

By committing to one industry segment exclusively, a company achieves a significant competitive advantage mainly due to a lack of competitors' specialization. Rival firms who try to be everything to everybody serving all segments at the same time may miss some buyers’ needs or meet them inadequately.

Additionally, they don’t present themselves as specialists commanding specialized expertise, which doesn’t improve their brand image in the eyes of customers from this particular industry segment. Consequently, it increases the odds of gaining an edge by a company with the focus strategy in place, which is able to provide much higher quality to buyers from a narrowed down segment.

As the overall differentiation strategy and the differentiation focus strategy are often mistaken, let’s explicitly set forth the difference between both strategies by providing examples.

Let’s take the IT market as an example.

IBM follows the overall differentiation strategy, focusing on widely valued attributes. Producing and selling computer software, hardware, and middleware, IBM is the overall differentiator in computers, providing a wide range of computer products and services. As a multinational technology company with substantial resources, its main focus is the computer market in the broad sense. IBM doesn’t differentiate itself even further, focusing on one market segment and chooses to stay quite a generic company in the IT market.

Whereas, Nvidia Corporation is a perfect example of the differentiation focuser, trying to satisfy the special needs of its target segment. It designs graphics processing units (GPUs) for the gaming market and systems on chip units (SoCs) for the automotive and mobile computing market. By a high level of differentiation, the company is able to meet the needs of its end-users from specific market segments much better than its broadly targeted competitors, gaining a sustainable competitive advantage over them.

Some companies have very generic strategies or even no strategies at all and don’t benefit from their strategic advantages as they haven’t recognized them or haven’t created them, and as a result, they have stuck in the middle of the market. Surrounded by laser-focused competitors, they have little chance of surviving in the market.

According to Michael Porter , “becoming stuck in the middle is often a manifestation of a firm’s unwillingness to make choices about how to compete,” which may have long-term consequences. Having no clear strategy in place may be extremely dangerous, putting a company at a disadvantage and eventually out of business as competitors with clearly defined strategies have a significant competitive advantage.

It happens that companies tend to neglect their strategies in pursuit of mushroom growth, ending up with no strategy at all. It often relates to firms with the focus strategy which have dominated their target segments. To increase their sales and accelerate growth, they decide to compromise on the leading strategy, losing sight of the foundations of their success. Taking actions that are not consistent with the chosen strategy, which leads to blurring their brand image and compromising on the key pillars of their strategy.

Much has been said about strategic planning, but without taking into account competitive advantage, carefully devised strategic plans often don’t guarantee superior performance. However, plenty of companies focus on the planning process for its own sake, instead of creating a strategic plan based on a competitive advantage resulting from an in-depth analysis of industry structure. Additionally, they tend to build their strategies focusing on prices and costs projections, which often prove to be wrong.

According to Michael Porter, “many strategic plans are lists of action steps without a clear articulation of what competitive advantage the firm has or seeks to achieve and how.”

Some companies also use market share as a benchmark for determining their competitive position, however, setting a goal of becoming a leader in the industry is not always a proper competitive strategy . Although winning a number one place in the market is usually taken at face value as desirable, but surprisingly, it may be sometimes even dangerous.

Although market share is typically associated with competitive position due to economies of scale, “industry leadership is not a cause but an effect of competitive advantage.” Firms that are in a constant quest for industry leadership may never gain a competitive advantage or even lose the one that they have as their executives tend to get entangled in never-ending discussions referring to particular strategies on how to win the biggest market share without a big picture competitive advantage in mind.

What may seem surprising, not all market leaders, for instance, Continental Illinois Bank, achieve profitability as aspiring for market leadership may divert the firm’s attention from the most relevant goal of gaining and sustaining competitive advantage .

Generally, companies shouldn’t just strive to grab the biggest market share, but most importantly, they should aim to achieve a sustainable competitive advantage in the target market.

Conclusion

Finding and sustaining a competitive advantage should be the main objective of each leader since it determines all further strategic decisions, and consequently, the whole firm’s future performance and profitability. Certainly, pinpointing a competitive advantage may be a challenging task, especially for startups; however, it’s well worth the effort as it may provide hefty future returns, and save lots of money.

Like our content? Follow BUSINESS POWERHOUSE on LinkedIn , Twitter , Facebook , Instagram , and Pinterest to stay up-to-date on our latest articles.

"Competitive Advantage: Creating and Sustaining Superior Performance" by Michael E. Porter

" Competitive Strategy: Techniques for Analyzing Industries and Competitors" by Michael E. Porter

All articles are for informational purposes only. Under no circumstances should any of these articles or any information herein be construed as business or investment advice.

Author: Justine Ilone Siporski is Editor-in-Chief & CEO of BUSINESS POWERHOUSE , the founder and CEO of LANGUAGE EMPIRE, coach, trainer, investor, and columnist dedicated to the advancement of entrepreneurs, investors and the C-suite (CEOs, CMOs, CFOs, CIOs). Her key mission is to support leaders, business people, and investors in achieving their highest potential, making the right business and investing decisions, and expanding their horizons.

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More Like this

How to identify competitive advantages, review – what is a competitive advantage.

A competitive advantage is a strength or capability that enables an organization to meet a customer or market need better than the competition. Competitive advantages are core organizational strengths that are difficult for competitors to recreate or duplicate. See the complete overview on competitive advantage here.

Watch the Video

The Checklist for a Competitive Advantage

The biggest and best of your core strengths. Your identified competitive advantages are also the best of the best from your organization’s core strengths. We recommend completing your organization’s SWOT analysis before considering your organization’s competitive advantages.
What your customers value most from your organization. What do your customers value most from your organization? If a customer was to enter the marketplace right now, what do they value the most from your organization, and why would they choose you over your competitors?
An advantage is difficult to replicate. True competitive advantages are difficult, expensive, or impossible for your competitors to replicate. The idea is that your organization uses these advantages long-term to further differentiate or create a competitive moat from the competition.

An Exercise to Identify Competitive Advantages for Your Business

Identifying your competitive advantages really comes down to two critical actions.

First , you need to do a competitive analysis to examine your competitors. Second , you look at your organization’s current-state to examine which of your strengths are your competitive advantages.

Part I: How to Conduct a Competitor Analysis

The first part of this exercise is to examine your current competitive landscape to understand what your competitors are best at, why they win business, and why they lose.

Having a complete competitor analysis is important for three core reasons:

You need to know the players in your space, and how closely you compete.
Competitive advantages are unique, so you need to know what you are best at, and what your competitors are best at to decipher what is an advantage and what is just table stakes.
A clear understanding of your competitive landscape informs how you’ll work to further differentiate your organization, or what you need to strengthen to create a new competitive advantage.

There is also another toolset, called a VRIO framework , that is also a great tool for how to identify competitive advantages.

Step 1: Set Up the Comparison Grid

As a shortcut to analyze your competitors, we’ve developed this exercise to help your team answer three core questions to paint a clear picture of your competitive market.

To set this up, we recommend using a standard whiteboard or a whiteboard tool like Miro or Mural . In practice, the whiteboard looks like this:

Why do they win? Think about your competitor’s core strengths and why those core strengths are valuable to your customers or market. If they win business over you, why?
Why do they lose? Alternatively, it’s nice to think about why they lose business, either to your organization or to your competitors. What are their weaknesses?
What do we believe is their bold vision of success? It’s not always clear, but sometimes you can make a hypothesis about your competitor’s direction and 5-year BHAG (Big Hairy Audacious Goal). A few examples might be a competitor starting to focus on an enterprise market where they’ve concentrated on mid-market organizations in the past.

Looking at it from a different context helps you understand a few essential ideas from a different perspective. First, it allows you to understand what your competitors are good at and where you think they are going in the future. Secondly, it will enable you to consider why they lose and how you might capitalize on that in your growth strategy.

Step 2: Finish the Grid for Each Competitor

In a group discussion [or breakout groups for larger teams] , ask the three questions in the grid for each competitor.

As you work through each competitor, it’s important to listen for any competitor strengths that could be a competitive advantage. If a competitor’s strength is unique and valuable to your customers, and is hard to imitate, it’s probably one of their competitive advantages.

Pro Tip: It is helpful to star items you believe are your competitor’s advantages. Do this as you go and put questions in a parking lot.

Step 3: Identify Your Competitor’s Advantages

After finishing the exercise, focus on the “why they win” and “their big, bold vision” columns. As a team, discuss which you believe are your competitive advantages.

Pull out the best notes from this column and place them below the grid. Compare each against these traits to see if they are a competitive advantage:

The biggest and best of your competitor’s strengths.
It is valued by your customers. It needs to be valued by your customers or market, or it is not a competitive advantage.
Difficult to replicate. It must be really challenging for you or another competitor to recreate. If it’s easily copied, it’s not a competitive advantage.

If they satisfy each item on the checklist, they are your competitor’s advantages. Read our article where we highlight some great competitive advantage examples !

Output: A list of competitor advantages used later in this exercise.

Step 4: Rank Your Competitors

After completing the discussion, we recommend reviewing your competitors and ranking their level of competitiveness. We like using High, Medium, and Low level of competition as the labels.

Output: A list of competitors and their competitiveness.

Part II: Identify Your Competitive Advantages

The second part of this exercise is to examine your current state, identify your competitive advantages, identify critical actions you can take to improve your market position, and go on the offense against your competitors.

During this part of the exercise, you will:

Identify why you’re winning, why you’re not, and what competitive moves you can make.
Determine what your competitive advantages are.
Consider what strengths you might improve upon so they become competitive advantages.
Decide what weaknesses you need to shore up.
Determine how you might make offensive moves against your competitors.

Step 1: Complete the Exercise for Your Org

Once you’ve completed the exercise for your competitors, work on completing the same grid for your organization with a few edits.

Pro Tip We recommend completing your SWOT Analysis before this exercise. Check out the SWOT Analysis guide here .

Instead of answering the question about the vision statement, have your team consider the question, “what competitive moves can we make.”

The idea is to prompt your planning team to consider what you might consider acting on to create a new competitive advantage or battle one of your competitor’s advantages.

Step 2: Identify Competitive Advantages Unique to Your Business

After finishing the exercise, focus on the “why we win” column. As a team, discuss which you believe are your competitive advantages.

The biggest and best of your core strengths. Your identified competitive advantages are also the best of the best from your organization’s core strengths.
Difficult to replicate. It must be really challenging for a competitor to recreate. If it’s easily copied, it’s not a competitive advantage.

If they satisfy each item on the checklist, they are a competitive advantage that should be used in your growth strategy.

Output: A list of 2-3 core strengths that articulate why you win in the market to be used as the base of your growth strategy.

Step 3: Examine Other Strengths that Could Be Developed into Advantages

Once you’ve identified your competitive advantages from the “why we win” column, look at the other strengths. Are there any strengths that should be advantages, but aren’t?

If you look at your current set of strengths and see a strength that is not yet a true competitive advantage, consider setting a set of objectives or goals to turn that strength into a competitive advantage.

Pro Tip: Ask the question, “What do you need to invest in to make a strength a competitive moat?”

Output: A list of strengths to improve into competitive advantages.

Step 4: Examine Weaknesses to Shore Up

Examine the middle column and identify 2-3 weaknesses your organization should shore up to better win business in your space.

This is similar to the output of your weaknesses from your SWOT analysis, but just make sure you set goals or objectives to address these weaknesses.

Output: A list of 2-3 weaknesses to be used as objectives in your plan to improve core functions of your organization.

Step 5: Outline Competitive Moves to Make to Dethrone a Competitor’s Advantage

Using the data in the far-right column and your identified competitor advantages from the earlier exercise, what actions could you take to target your competition?

Advantages take significant investment to achieve, but how might targeting your competitors better your organization’s position?

Output: 1-2 objectives to offensively target your competitor’s position in the market.

Don’t Forget to Put This Exercise to Work!

This exercise is a simple and powerful way to look at your competitive market and organization’s current state. But it’s important to put all of this work into practice!

Make sure that you are using all the outcomes above to inform your organization’s growth strategy, strategic objectives, and initiatives. It’s all about improving your market position, so make sure this is reflected in your plan!

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Identifying your competitive advantage and value proposition

To stay ahead, you must show the unique value your business offers. Understanding your customers and your competitors can help you develop your value proposition.

Find your competitive advantage in 3 steps

Your competitive advantage is the combination of marketing elements that sets your business apart. It's about the unique benefit customers get when they do business with you. Practical examples include:

free home delivery
a money-back guarantee
personalised service.

Finding your competitive advantage will help you to make the most of your existing strengths and to prioritise improvements. A strong competitive advantage will:

highlight customer benefits
reflect your business strengths
be clear, simple and unique
change over time to adapt to new conditions.

The following 3 steps can help you find your competitive advantage.

To uncover gaps in the market, you need to analyse and understand your customers and competitors. This will show why you're making sales (the drivers for your business) and the reasons why not (the barriers against your business).

Use the free market research kit and refer to your marketing strategy .

Action item: Know your customers

Ask yourself:

why do customers buy from my business?
why do customers buy from my competitors?
why do potential customers choose not to buy at all?

Competitor profile chart

An easy way to better understand your competitors is to complete a competitor profile chart. It can show you:

where there are gaps in the market
how you can stand out from the competition.
download the print-optimised version of the competitor profile chart to fill out and save for future reference
use the online template to profile your competitors .

When customers buy a product or service, they actually buy the benefits they expect to get from it. They are buying the experience and the outcome.

How does your competitive advantage benefit your customers? For example:

do your products make their life simpler, or more exciting?
do your services make them feel better?

Remember that different benefits may appeal to different customers.

Imagine you're running an award-winning sandwich shop. You:

source fresh, chemical-free, local ingredients
make high-quality gourmet sandwiches to order.

Different customers will be attracted by different benefits. They may, for example:

like to have gourmet sandwiches for lunch
need sandwiches made to order to accommodate food allergies
want to support local growers and farmers.

It's about the customer

Find out what trends are shaping the market and what benefits your customers want. Then find practical ways to address those needs.

Action item: Determine your difference

Use our template for reviewing your 7 Ps of marketing to help identify:

the benefits you're offering
what makes your business unique.

While doing this, ask yourself:

how important are the added benefits you're offering to customers?
how well does your business offer these benefits compared to your competition?

Focus on, and promote, benefits:

that customers value
in areas where your business outperforms your competitors.

Check that your marketing collateral includes the most compelling benefits.

One way to stand out from your competitors is to innovate. Focus on solving problems, even problems your customers are not yet aware of. You could, for example, change existing or design new:

experiences
business processes.

Action item: Look at your customers' journey

Map out the end-to-end customer journey to see where customers might:

experience issues when doing business with you (pain points)
be pleasantly surprised or impressed (wow factors).

This will help you plan and make business improvements.

Clarify your customer value proposition (CVP)

Your marketing programs will be more focused and effective when you:

know what your competitive advantage is
have a unique and relevant brand positioning .

Improve this further by being clear about your customer value proposition (CVP).

A good CVP is a short, powerful statement about how you deliver value to your customers.

It answers the question:

What value do you promise to deliver to customers in exchange for payment?

A business typically has 1 value proposition. It's about the big picture—your main and consistent difference.

Your value proposition links your:

business plan (business model and operations)
target segments (customer needs and expectations).
is often used as a core statement in business plans and marketing strategy documents
guides external communication and how you go to market. For example, it will enable you to promote your difference, effectively pitch to stakeholders and increase sales conversion .

Use these 3 points to clarify your CVP:

You know how... (the problems)
Well, what we do... (our solutions)
In fact... (our wow factors)

Example CVP

Think about the sandwich shop offering a gourmet alternative to customers.

You know how… it's hard to find a quality sandwich at a reasonable price in our local area? Lunch time can become just another chore in your day.
Well, what we do… is ask you what you really want. We then make every sandwich to order using the best, chemical-free, locally sourced ingredients.
In fact… we get to know you by name—and your favourite sandwich. And we like to have a chat. That's all part of our award-winning service.

To write a more comprehensive CVP, answer these questions:

What are the problems we're solving for our customers?
What outcomes do they want to achieve?
What benefits do customers get from our products and services? This can be practical or emotional.
What sets our brand apart from the competition in terms of value? Why should customers choose and use our brand?

Think about the sandwich shop and how it compares to a chain of sandwich shops.

'Lunch time should be your time. Time to relax and enjoy. Time to get away from it all. Something to look forward to. But all too often it's the opposite of these things—more stress and heavy food. That's why our sandwiches are made with love, for what you love.

Choose your ingredients and we'll make every sandwich fresh to order.

You'll be supporting the local growers and farmers and you'll be supporting us, a family-owned business in the local community. You'll enjoy the friendly chat and the gourmet food, without the gourmet price. It's the award-winning service and taste that will keep you coming back.'

Business is about exchanging value. Value is based on what the customers thinks about the price they paid relative to the benefits they received. What will the answer be if a customer asks: What's in it for me (WIIFM)?

Read more about pricing products and services .

Keep the following in mind when you evaluate your customer value proposition:

existing business capability – current state
proposed enhancements – ideal future
the roadmap to get there – action plan.

Customer value proposition template

Develop your customer value proposition (CVP) by:

reading the information above
searching online for 'customer value proposition examples'
using the template to write your CVP .

Create unique selling points (USPs)

Based on your competitive advantage, you'll have one or more unique selling points (USPs).

is a short, snappy and memorable line
conveys what sets you apart from competitors
is mostly used for marketing communications
is also known as a 'unique selling proposition'.

Why should customers buy from you?

You'll need a USP, or a series of USPs, when you run a marketing campaign. You'll also need to add it to the creative brief if you partner with an agency .

The most effective way to stand out in a crowded market is with a unique selling point and a distinctive brand .

The USP must convey the benefit you deliver, relative to competitors, that your target persona values most. This benefit may be real or perceived.

You'll likely need many versions of your USPs, depending on your:

products and services
target segments
direct competitors.

To create and deliver high-impact marketing communications, follow these steps:

Analyse your market research insights.
Identify potential gaps/opportunities.
Consider the needs of your customers.
Draft and test your USPs.

Use the name 'unique selling point' as a guide:

unique – highlight a meaningful difference
selling – deliver the message in a persuasive way
point – deliver a single-minded message.

Think about potential areas like:

products or services not currently offered by competitors
customer groups not currently catered for by competitors
aspects of your business that are different from competitors.

Your USPs should be true to your business—you must be able to deliver the promise.

Example USPs

Using the local sandwich shop as an example and looking at its CVPs, we can identify the main points of difference and write USPs to match:

Service: 'Every single sandwich made fresh with love.'
Choice of ingredients: 'Only the finest, chemical-free ingredients.'
Local: 'Our local farmers and growers say thanks.'

Meet your legal obligations

While competition may be fierce, it's important to still follow fair and legal practices. Every business must comply with the relevant laws while trying to find a position in the market.

The most important legislation to be aware of is the Competition and Consumer Act 2010 . It provides a fair and competitive operating environment and covers:

contract law and unfair contract terms
consumer rights when buying goods and services
product safety
unsolicited consumer agreements, including door-to-door and telephone sales
penalties, enforcement powers and the rights of consumers to seek compensation.

To understand your rights and responsibilities in the field of competition law, you can read:

Australian Consumer Law guidance – advice on how to comply with the Competition and Consumer Act 2010
Office of Fair Trading sales practice guidance – advice on making your sales practices are fair and legal.

Maintain your relevance

The only constant in business is change. That's why it's important to regularly review the trends that are shaping your market. These could include things like new:

technologies
competitors

You may need to evolve your business, but change also creates opportunities. This will require change management. Find out more about how to adapt and change your business .

The marketing field is always changing too. There's often an overemphasis on 'shiny new things.' It's good to stay up to date, but always:

refer to the fundamentals of marketing
adopt a strategic approach.

Your goal is to achieve your marketing objectives. To support this journey, make sure you refer to industry sources and external partners for:

Visit the Australian Marketing Institute to find information on best practice and standards.

Also consider...

Find help to write a marketing strategy and plan .
Learn more about branding your business .
Find information on how to become a customer-focused business .
Access tips and calculators to help you successfully price products and services .
Find out more about writing a business capability statement .
Watch our Price and profitability webinar for information and advice on how to price your products and services.
Last reviewed: 29 Aug 2022
Last updated: 8 May 2024

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Types of Competitive Advantage For Building Business Success

Published: 31 December, 2023

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In a business environment , achieving and sustaining a competitive advantage has become a paramount objective for organizations aiming to thrive. At the forefront of this pursuit is Digital Leadership, a pioneering digital strategy and execution firm.

Competitive advantage isn’t a mere concept; it’s a linchpin linking innovation, business strategy, and sustained success. At Digital Leadership, we understand that this advantage isn’t one-size-fits-all; it’s a tapestry woven with diverse threads, from differentiation to cost leadership. As a testament to our commitment, we provide a Business Model Strategy service meticulously designed to help businesses navigate this intricate landscape and navigate you to the complexities of competitive advantage .

Competitive advantage isn’t a mere concept; it’s a linchpin linking innovation, business strategy, and sustained success. At Digital Leadership, we understand that this advantage isn’t one-size-fits-all; it’s a tapestry woven with diverse threads, including Porter’s generic strategies of differentiation, cost leadership, and focus. As a testament to our commitment, we provide a Business Model Strategy service meticulously designed to help businesses navigate this intricate landscape and guide you through the complexities of competitive advantage, As we provide Innovation blueprint service as an initial step to

Find out how we can help you

Corporate training, innovation consulting and much more.

In this article, we will delve into a journey into the multifaceted realm of competitive advantage with a focus on types of competitive advantage . Our exploration centers around uncovering the array of diverse types that propel businesses toward success, meticulously dissecting strategies that elevate organizations above their competitors. Furthermore, we offer valuable insights into the art of measuring and amplifying your competitive edge. Join us as we navigate through the strategic foundation that sets businesses on the path to sustained growth and innovation, ultimately helping you harness the power of various types of competitive advantage .

What is Competitive Advantage

Before we embark on our exploration of the various types of competitive advantage , it’s crucial to establish a comprehensive understanding of what competitive advantage truly signifies.

In the intricate landscape of business, competitive advantage serves as the compass that guides organizations toward success. It encapsulates the exceptional attributes, strategies, and resources that empower a company to outshine its competitors and carve a distinctive niche within the market.

Defining Competitive Advantage

In the complex landscape of business, competitive advantage serves as the cornerstone of success. It encapsulates the unique set of attributes, strategies, and resources that empower a company to surpass its rivals and secure a distinct position in the market.

This advantage manifests in various forms—be it cutting-edge products that redefine industry standards, streamlined processes that optimize efficiency, exceptional customer service that fosters loyalty, or groundbreaking business models that revolutionize entire sectors. The crux of competitive advantage lies in its ability to create a significant gap between a company and its competitors, elevating the former to a superior echelon.

Companies that effectively harness competitive advantage not only enhance their market share but also bolster profitability and ensure long-term sustainability. It’s a strategic leverage that translates into heightened brand recognition, increased customer loyalty, and the agility to navigate dynamic market shifts.

In a world where innovation is relentless and market dynamics are ever-changing, defining and cultivating a competitive advantage is imperative. It’s the driving force that enables businesses not only to thrive but to lead, forging a path of continual growth and influence within their respective industries.

How Does Competitive Advantage Work

Competitive advantage operates as a harmonious interplay of various factors, converging to create a distinctive edge for a business. This unique advantage often stems from a combination of the following elements:

Innovative Product Design: Crafting products that push boundaries and set new industry benchmarks fosters a competitive advantage . Innovative design not only fulfills existing needs but also anticipates emerging ones, captivating customer interest.
Efficient Production Processes: Streamlining production procedures and supply chains enhances a company’s cost-effectiveness and speed. This operational efficiency translates into competitive pricing and quicker delivery, setting the stage for an advantage.
Strong Brand Recognition: A powerful brand presence cultivates trust and familiarity among customers. This recognition can sway purchasing decisions in the company’s favor, even amidst alternatives.
Exceptional Customer Service: Providing unparalleled customer experiences sets a business apart. Superior service generates customer loyalty, repeat business, and positive word-of-mouth, all contributing to a competitive edge.
Niche Expertise: Establishing expertise within a specialized niche can render a company irreplaceable for certain customer needs. This focused prowess enhances a company’s position in that specific market segment.
Technological Innovation: Staying at the forefront of technological advancements allows a company to introduce cutting-edge solutions. This keeps them ahead of the curve and appeals to tech-savvy customers.
Talent and Culture: A skilled and motivated workforce contributes to a company’s competitive advantage. Employee expertise, creativity, and commitment can fuel innovation and exceptional performance.

Benefits of Competitive Advantage in Business

The advantages reaped from establishing a competitive edge are manifold, encompassing a spectrum of business dimensions. These benefits include:

Premium Pricing: A successful competitive advantage empowers a company to command premium prices for its products or services. This premium reflects the unique value the business offers, contributing to enhanced revenues and profitability.
Customer Loyalty and Retention: A robust competitive edge fosters a loyal customer base. Clients are drawn not only by the product itself but by the distinct experience, service, or value proposition the company provides. This loyalty translates into repeat business and extended customer lifecycles.
Barrier to Entry: An intricate web of competitive advantages acts as a barrier for potential new entrants in the market. Replicating or surpassing this unique combination becomes a formidable challenge, thus deterring newcomers and solidifying the company’s position.
Market Resilience: Businesses with a competitive edge are better poised to weather market fluctuations. Their distinctive offerings and loyal customer base offer stability amidst turbulent market conditions.
Enhanced Brand Equity: A strong competitive advantage often bolsters brand recognition and equity. The company’s ability to meet unique customer needs engrains it in the consumer’s mind as a reliable solution provider.
Innovation Driver: Nurturing a competitive edge necessitates constant innovation and improvement. This culture of innovation permeates the organization and drives ongoing development.
Operational Efficiency: Streamlining processes to maintain a competitive edge often leads to operational efficiency. Efficient operations not only contribute to cost savings but also enable quicker response to market changes.
Talent Attraction and Retention: Companies with a strong competitive advantage often attract top-tier talent seeking to be part of a winning team. The work environment becomes dynamic and rewarding, enhancing employee retention.

Competitive Advantage vs. Comparative Advantage

Competitive Advantage: Competitive advantage centers on a company’s strategic approach to standing out within its industry. It involves aspects such as innovation, unique product features, exceptional customer service, and effective branding. This strategy aims to create a solid market position, attain a larger share of the market, and cultivate customer loyalty. For example, Apple’s iPhones’ distinct features and ecosystem set them apart from competitors, driving customer loyalty and premium pricing.

Comparative Advantage: Comparative advantage transcends industries and borders, focusing on a nation’s ability to produce specific goods or services more efficiently than others. It’s a foundation of international trade, promoting specialization and mutual benefit. Comparative advantage takes into account factors like resource availability, technology, and labour. For instance, Japan’s expertise in automobile manufacturing due to advanced technology and skilled labour illustrates a comparative advantage, enabling them to produce cars more efficiently than some other nations.

Aspect	Competitive Advantage	Comparative Advantage
	Industry-specific differentiation	International trade and resource allocation
	Within a particular market or industry	Across nations and global trade
	Outperforming rivals in a market segment	Producing goods with lower opportunity cost
	Capturing market share, premium pricing, customer loyalty	Enhancing global trade efficiencies, specialization
	Competing with industry peers	Enhancing trade between countries
	Market dominance, profitability, brand recognition	Enhanced resource allocation, economic growth
	market positioning	International economics, trade policies
	Apple differentiating its iPhones	Japan’s comparative advantage in automobile manufacturing
	Innovation, branding, customer experience	Focuses on industry dynamics and staying ahead of the competition
	Industry-specific	Cross-border, international trade
	Establishes brand leadership, sustains growth	Enhances trade balance, impacts economic specialization
	Focuses on industry dynamics and staying ahead of competition	Considers global market trends and competitive advantages
	Requires continual innovation and market responsiveness	Evolves with changing economic landscapes

Strategies to Build a Competitive Advantage

Erecting a sustainable competitive advantage requires a well-considered strategy that aligns with your organization’s strengths, values, and market dynamics. Delve into these strategies to pave the path toward differentiation and success:

Creativity and Innovation : Innovation is often a cornerstone of competitive advantage . Foster a culture of innovation that encourages novel ideas, constant improvement, and the development of breakthrough products or services that resonate with customers.
Differentiation Strategy : Develop a clear differentiation strategy that highlights what makes your offerings distinct. This could be through product features, quality, branding, or customer service.
Cost Leadership: Focus on operational efficiency to reduce costs and provide competitive pricing. Delivering value at lower prices while maintaining quality can attract cost-conscious consumers.
Focus Strategy: Concentrate your efforts on a specific niche or segment of the market where you can excel. By tailoring your offerings to address particular needs, you can become a dominant player in that space.
Customer-Centric Approach: Center your strategies on understanding and serving customer needs. Going above and beyond in customer service, personalization, and engagement creates lasting relationships.
Brand Development: Cultivate a compelling brand that evokes emotions and connects with consumers. A strong brand fosters trust and loyalty, encouraging customers to choose your offerings.
Technology Integration: Embrace technology to optimize operations and enhance customer experiences. Technological advancements can give you a competitive edge in efficiency and innovation.
Strategic Partnerships: Collaborate with complementary businesses to expand your reach and offerings. Partnerships can leverage each other’s expertise, resources, and customer bases for mutual growth.
Continuous Learning: Stay attuned to market trends, emerging technologies, and evolving customer preferences. A commitment to learning allows you to adapt swiftly and seize opportunities.
Talent Cultivation: Develop a skilled workforce and empower employees to contribute innovative ideas. A motivated team can propel your business toward novel solutions and operational excellence.
Agility and Flexibility: Develop an agile mindset to pivot swiftly in response to market shifts. Flexibility enables you to capitalize on emerging trends and adapt to changing customer demands.
Sustainability Initiatives: Integrate environmentally responsible practices into your operations. Demonstrating social and environmental responsibility can appeal to conscious consumers and enhance your reputation.
Global Expansion: Venture into new markets to diversify revenue streams and grow your customer base. Customize your offerings to cater to local tastes and preferences.
First-Mover Advantage: Seize the opportunity to introduce innovative products or services before competitors. Being a first-mover can establish you as an industry leader and capture an early market share.
Data-Driven Insights: Utilize data analytics to understand customer behaviour, preferences, and market trends. Data-driven decision-making empowers you to fine-tune strategies for maximum impact.

Types of Competitive Advantage

In business, competitive advantage manifests in a variety of forms, each presenting unique pathways for enterprises to thrive. These primary categories of competitive advantage encapsulate strategic methodologies that companies can harness to set themselves apart and attain prosperity:

1- Innovation Competitive Advantage

The innovation advantage refers to the strategic utilization of inventive thinking, cutting-edge technologies, and novel methodologies by organizations to introduce pioneering products, services, or processes that transcend conventional norms. This approach enables businesses to differentiate themselves in the market, captivate customer interest, and establish a position of leadership within their industry. At its core, the innovation advantage represents a commitment to continuous improvement, adaptability, and the pursuit of groundbreaking solutions that resonate with customers and drive sustained success.

The innovative competitive advantage empowers organizations to stand out in the market by fostering inventive thinking. However, businesses must weigh the benefits against the challenges associated with investment, risk, and aligning innovations with customer preferences.

Aspect	Advantages	Disadvantages
	Sets the business apart with unique offerings	While differentiation can attract a specific customer base, it may not appeal to all segments. Overemphasis on novelty might lead to the loss of core customers.
	Captivates customer interest and loyalty	Innovations generate excitement, encourage repeat business, and foster brand loyalty. However, untested or poorly executed innovations can lead to customer dissatisfaction.
	Establishes the organization as an industry pioneer	Being the first to introduce innovative solutions positions the business as a thought leader. Yet, pioneering efforts can be capital-intensive and risky, especially in emerging markets.
	Drives long-term success and growth	Continuous innovation enables adaptation to changing market conditions, securing a competitive edge. However, not all innovations yield immediate returns, requiring patience.
	Enhances the company’s ability to adapt to changes	An innovative culture promotes agility, ensuring the company can respond to market shifts. Yet, pursuing multiple innovations simultaneously may stretch resources thin.
	Creates a strong barrier to entry for competitors	Unique innovations deter new entrants, as they must match the offerings. However, imitators might quickly replicate successful innovations, eroding the advantage.
	Elevates brand image and reputation	A reputation for innovation enhances brand perception. Yet, unsuccessful innovations can tarnish the brand image, necessitating careful execution.

Innovation Competitive Advantage Examples

1- Google’s Innovation Advantage:

Google, renowned for its innovation prowess, has continuously redefined the tech landscape with groundbreaking advancements. Here are remarkable instances of how Google’s commitment to innovation has transformed industries:

Search Algorithms: Google’s innovative journey begins with its pioneering search algorithms. The introduction of PageRank revolutionized online information retrieval, ensuring users access the most relevant content effortlessly.
Google Maps: In the realm of navigation, Google Maps stands as a hallmark of innovation. By providing accurate real-time mapping and directions, Google Maps transformed how individuals navigate the world, making journeys more convenient and efficient.
Google Drive: Another testimony to Google’s innovation is the cloud-based storage and collaboration platform, Google Drive. This innovation empowers users with efficient data management and seamless sharing, enhancing productivity and teamwork.
Android OS: Google’s innovation extends to mobile technology with the Android operating system. As an open-source platform embraced by diverse devices, Android fosters innovation at both hardware and software levels, shaping the smartphone landscape.
Research and Development: Google’s commitment to innovation is embedded in its ongoing research endeavours. From advancements in artificial intelligence to ambitious projects in self-driving technology, Google’s dedication to cutting-edge research keeps it at the forefront of technological innovation.

2- Microsoft Innovation Advantage :

Microsoft’s journey through innovation has left an indelible mark on the tech landscape, reshaping how we interact with technology. Here are notable instances that exemplify Microsoft’s unwavering commitment to innovation:

Windows OS: Microsoft’s legacy of innovation is epitomized by its Windows operating system. Over the years, Microsoft has consistently evolved Windows to meet changing user needs and technological trends. By introducing new features, enhancing user interfaces, and adapting to the digital age, Microsoft’s innovation has been instrumental in shaping modern computing.
Microsoft 365: In a rapidly evolving workplace landscape, Microsoft’s commitment to innovation is reflected in Microsoft 365. This comprehensive suite of productivity tools and cloud services caters to modern business needs. By offering collaboration, communication, and productivity solutions in a cohesive package, Microsoft 365 exemplifies the company’s dedication to adaptive innovation.
Microsoft Azure: Microsoft’s innovative prowess extends to the realm of cloud computing through Azure. This platform empowers businesses with scalable and flexible infrastructure solutions, enabling them to build, deploy, and manage applications with ease. Microsoft’s cloud innovations have transformed the way businesses operate in the digital age.
GitHub and LinkedIn: Microsoft’s strategic innovation includes the acquisitions of GitHub and LinkedIn. By integrating developer communities through GitHub and connecting professionals through LinkedIn, Microsoft taps into synergies that further its mission of fostering collaboration and growth.
Innovation Legacy: Microsoft’s historical contributions to innovation are profound, with software like Microsoft Office and Windows shaping the digital landscape. Through continuous advancements and strategic acquisitions, Microsoft remains a trailblazer in technology and business solutions.

2- Cost Leadership Competitive Advantage

Cost leadership is a strategic business approach in which a company aims to become the low-cost producer or provider within its industry or market segment. This strategy involves focusing on achieving and maintaining the lowest possible costs of production, distribution, and operation while still delivering products or services of acceptable quality to customers.

The cost leadership advantage is achieved when a company can consistently produce goods or deliver services at a lower cost compared to its competitors. This allows the company to offer its products or services to customers at competitive prices while maintaining healthy profit margins. By being the low-cost provider, a company can potentially attract a larger customer base, fend off competition, and weather market fluctuations more effectively.

Achieving cost leadership involves various tactics, such as optimizing production processes, improving supply chain efficiency, minimizing waste, leveraging economies of scale, and adopting advanced technologies. However, it’s important to note that cost leadership isn’t just about cutting corners or sacrificing quality; it’s about finding innovative ways to reduce costs without compromising customer value.

It’s also worth mentioning that cost leadership isn’t suitable for all industries or businesses. Some industries may prioritize differentiation or innovation over cost, and pursuing cost leadership in those contexts might lead to a race to the bottom without creating sustainable competitive advantages.

Cost leadership competitive advantage can yield significant benefits, but it also comes with risks and challenges. To be successful, companies must carefully balance their cost reduction efforts with maintaining product or service quality, staying attuned to market changes, and remaining open to necessary investments in innovation and adaptation.


	Offers products/services at lower prices, attracting price-sensitive customers and larger market share		Striving for the lowest cost may lead to compromised product/service quality, damaging the reputation
	Establishes a barrier for new entrants due to hard-to-match low-cost structure		Prioritizing cost reduction may discourage innovation investments, hindering adaptation to changing trends
	Operating at a larger scale reduces unit costs, enhancing		Relying heavily on suppliers can make the company susceptible to disruptions in the supply chain
	Maintains healthy profit margins despite lower prices		Competitors identifying successful strategies may replicate them, reducing the advantage over time
	Better equipped to withstand price wars due to efficient		Rapid shifts in technology or market dynamics can impact the strategy’s effectiveness

Cost Leadership Competitive Advantage Examples

1 – Walmart Competitive Advantage

Walmart’s cost leadership strategy is a multi-faceted approach that involves optimizing supply chain operations, leveraging bargaining power with suppliers, maintaining low operational costs, and focusing on delivering everyday low prices to customers. This strategy has played a pivotal role in Walmart’s growth and dominance as one of the world’s largest retailers.

Supply Chain Efficiency: Walmart is known for its highly efficient supply chain management. The company has implemented advanced technologies to track inventory levels in real time, which helps reduce excess inventory and associated carrying costs. This “just-in-time” inventory management approach ensures that products are available when needed, minimizing storage costs and stockouts.
Everyday Low Prices: Walmart’s “Everyday Low Price” (EDLP) strategy involves consistently offering low prices on a wide range of products rather than relying on frequent sales or discounts. This approach attracts price-conscious shoppers and builds customer loyalty.
Scale Advantages: Walmart’s enormous scale gives it a significant advantage in achieving cost efficiencies. Its large customer base and extensive store network allow the company to spread fixed costs over a vast volume of sales, reducing per-unit costs.
Lean Operating Model: Walmart has a lean organizational structure and minimizes unnecessary expenses. This includes keeping administrative costs in check, optimizing staffing levels, and using advanced technology to enhance operational efficiency.
Data Analytics: Walmart leverages its data analytics capabilities to predict consumer demand and optimize inventory levels. This helps reduce overstocking and markdowns, which can erode profits.

2 – McDonald’s Competitive Advantage

McDonald’s, a household name in the fast-food industry, has masterfully adopted the cost advantage strategy . Through streamlined and standardized processes, McDonald’s consistently delivers quality and affordability across its expansive fast-food chain. Operational efficiency is at the heart of its strategy, allowing McDonald’s to maintain a cost advantage while serving millions of customers worldwide. This approach not only ensures consistent customer experiences but also sets McDonald’s apart as a cost-efficient industry leader.

Standardized Processes: McDonald’s is known for its highly standardized operating procedures. This consistency across its global network of restaurants allows the company to achieve uniform quality and reduce variations in food preparation, leading to efficiency gains.
Efficient Kitchen Design: McDonald’s restaurant layouts are meticulously designed for efficiency. The kitchen stations are organized to minimize movement and optimize workflow, reducing the time it takes to prepare orders.
Limited Menu: McDonald’s offers a focused menu that includes its most popular items. This simplifies operations, reduces the need for a wide range of ingredients, and accelerates service speed.
Lean Supply Chain: McDonald’s has developed a robust supply chain system to ensure timely delivery of ingredients to its restaurants. This system minimizes stockouts and waste, which contributes to cost savings.
Bulk Purchasing: Due to its global scale, McDonald’s can negotiate favourable terms with suppliers. Bulk purchasing allows the company to secure lower prices for the ingredients it uses in its menu items.
Automation and Technology: McDonald’s has integrated technology into its operations, such as self-order kiosks and mobile apps for ordering and payment. Automation reduces the need for additional staff, enhances order accuracy, and speeds up the ordering process.

3- Differentiation Competitive Advantage

A d ifferentiation competitive advantage is a strategic approach that focuses on creating and offering products or services that possess unique and valuable qualities, setting them apart from competitors in the market. This strategy aims to make customers perceive the company’s offerings as superior or distinct, justifying a premium price.

This type of competitive advantage centres on creating unique and valuable products or services that stand out from competitors. Differentiation can stem from features, quality, design, or brand reputation.

To understand the multifaceted nature of differentiation advantage, it’s essential to delve into its advantages and disadvantages. By examining both sides of the coin, businesses can make informed decisions about implementing differentiation as a central pillar of their competitive strategy.


Premium Pricing	Differentiated offerings can command higher prices due to perceived added value	Higher Costs	Developing and maintaining unique features can lead to increased research, design, and production expenses
Reduced Price Sensitivity	Customer willingness to pay more for unique attributes reduces susceptibility to price changes	Imitation Risk	Success may attract competitors attempting to replicate unique features, eroding differentiation
Brand Loyalty	Differentiation can lead to increased customer loyalty	Niche Market Limitation	Excessive differentiation might limit market reach, appealing to a narrow segment rather than a broader audience
Barriers to Entry	Unique features create obstacles for new entrants	Overemphasis on Innovation	Focusing solely on differentiation might lead to neglect of other aspects like operational efficiency
Reduced Competition	In less competitive markets, differentiation can provide an advantage	Customer Education	Educating customers about unique features can require substantial time and resources
Flexibility in Pricing	Pricing can be adjusted based on perceived value	Changing Customer Preferences	Shifting customer preferences can reduce the relevance of unique attributes
		Complexity	Managing a range of differentiated products can introduce operational complexities and inventory challenges

Differentiation Competitive Advantage Examples

1- mercedes-benz competitive advantag e.

Mercedes-Benz differentiates itself in the automotive market by emphasizing luxury, performance, and advanced technology. Its vehicles are known for their elegant design, cutting-edge features, and attention to detail.

Mercedes-Benz has successfully differentiated itself in the competitive automotive market. Its emphasis on luxury, performance, advanced technology, and attention to detail has created a strong brand identity that appeals to a diverse range of customers seeking a premium driving experience.

Emphasis on Luxury and Elegance: Mercedes-Benz has established a reputation for luxury that extends beyond its vehicles’ performance. The brand emphasizes premium materials, sophisticated design, and a comfortable interior, appealing to customers seeking a refined driving experience.
Performance and Engineering Excellence: The company’s focus on performance sets it apart in the automotive market. Mercedes-Benz vehicles often feature powerful engines, advanced suspension systems, and precise handling, catering to enthusiasts and drivers who prioritize driving dynamics.
Cutting-Edge Technology: Mercedes-Benz consistently incorporates advanced technology into its vehicles. From safety features like collision prevention systems to entertainment and connectivity options, the brand’s commitment to innovation enhances the driving and ownership experience.
Attention to Detail: Every aspect of a Mercedes-Benz vehicle is meticulously designed and crafted. The attention to detail is evident in the fit and finish of interiors, the quality of materials used, and the overall build quality, contributing to the brand’s premium image.
Distinctive Brand Identity: The Mercedes-Benz logo, also known as the three-pointed star, is instantly recognizable and symbolizes the brand’s commitment to excellence and innovation. This emblem has become synonymous with luxury and quality.
Exceptional Customer Experience: The brand’s commitment to providing exceptional customer service, from dealership interactions to post-purchase support, contributes to its differentiation. The ownership experience aligns with the luxury image.

2- Tesla Competitive Advantag e

Tesla’s electric vehicles offer cutting-edge technology, long ranges, and autonomous driving capabilities, setting them apart in the automotive industry. Tesla’s brand image emphasizes sustainability and innovation.

Tesla has positioned itself as a trailblazer in the automotive industry. Its focus on electric technology, cutting-edge features, sustainability, and disruptive innovation has resonated with a growing customer base, setting Tesla apart as a unique and influential player in the market.

Pioneering Electric Vehicles: Tesla’s emphasis on electric vehicles (EVs) differentiates it from traditional automakers. The company’s commitment to sustainable transportation aligns with evolving consumer preferences for environmentally friendly options.
Cutting-Edge Technology: Tesla’s vehicles are known for incorporating advanced technology, such as over-the-air updates, large touchscreens, and autopilot features. These innovations provide an enhanced driving experience and set Tesla apart in terms of vehicle tech.
Long Range and Performance: Tesla’s EVs offer impressive ranges compared to other electric vehicles, addressing the concern of range anxiety. Additionally, the acceleration and performance of Tesla’s electric cars rival those of high-performance gasoline cars.
Autonomous Driving Capabilities: Tesla’s Autopilot and Full Self-Driving (FSD) features set the company apart in the realm of autonomous vehicles. While not fully autonomous yet, Tesla’s advancements in autonomous technology are a major differentiation point.
Supercharger Network: Tesla’s development of the Supercharger network is a crucial differentiator. This fast-charging infrastructure addresses the inconvenience of long charging times and supports long-distance travel for Tesla owners.
Unique Design and Aesthetics: Tesla’s vehicle designs are distinctive and modern, emphasizing a sleek and minimalist aesthetic. This design language contributes to the brand’s differentiation and recognition.
Brand Image of Innovation: Tesla’s brand is synonymous with innovation and disruption. The company’s ability to challenge established norms and introduce new technologies has contributed to its strong brand identity.
Sustainability and Environmental Focus: Tesla’s commitment to sustainability resonates with consumers concerned about climate change. The brand’s image aligns with eco-conscious values, attracting environmentally aware customers.
Direct-to-Consumer Sales: Tesla’s unique distribution model, selling vehicles directly to consumers, differentiates it from traditional dealerships. This approach allows the company to maintain a tighter control over the customer experience.
Cultural Appeal: Tesla’s appeal extends beyond transportation; it’s also seen as a lifestyle brand and a symbol of progress. Many consumers are drawn to the brand’s mission and vision, further enhancing differentiation.

Other Types of Competitive Advantage

While innovation, differentiation, and cost leadership are prominent pillars of competitive advantage , the landscape of business strategy offers a spectrum of other strategic avenues to achieve distinction. Each of these alternative approaches provides organizations with unique ways to excel and thrive. In this section, we will delve into a diverse array of competitive advantage types that encompass strategic approaches enabling businesses to carve their niche and shape their success. From focusing on customer service to leveraging location advantages, let’s explore the multifaceted strategies that fuel competitiveness and drive business growth.

1- Focus Competitive Advantage

The focus advantage revolves around concentrating efforts on a specific market segment or niche. By tailoring products or services to meet the exact needs of a well-defined customer group, businesses can foster robust customer loyalty within that demographic. This approach allows companies to deeply understand and cater to the unique preferences and pain points of their chosen segment. This customer intimacy often results in higher customer satisfaction and retention rates.

2- Operational Excellence Advantage

Among the types of competitive advantage, companies that achieve operational excellence stand out for their streamlined processes, resource optimization, and waste reduction. This not only minimizes costs but also enhances the overall value provided to customers. Such organizations can consistently deliver products or services with high quality and minimal errors. Operational excellence can translate to faster delivery, reduced lead times, and improved responsiveness to customer demands.

3- Customer Service Advantage

Exceptional customer service isn’t just a transactional function; it’s a powerful among the types of competitive advantage. Businesses that prioritize customer satisfaction create memorable experiences, forging lasting relationships. Satisfied customers often become loyal brand advocates, spreading positive word-of-mouth and boosting reputation. Moreover, outstanding customer service mitigates customer churn and promotes long-term revenue growth.

4- Brand Advantage

A strong brand identity and reputation resonate deeply with customers among the types of competitive advantage. Businesses that cultivate a powerful brand advantage enjoy customer loyalty and trust. Brand recognition establishes an emotional connection with consumers, making them more likely to choose familiar brands over competitors. A strong brand identity enhances marketing effectiveness, facilitates product launches, and supports premium pricing.

5- Network Advantage

Organizations with extensive networks, partnerships, or alliances hold a unique among the types of competitive advantage. They can offer customers access to resources, services, or markets that others lack. This advantage enables them to provide comprehensive solutions and a broader range of offerings, creating additional value for customers. Strong networks also bolster innovation through collaborative efforts and shared expertise.

6- First-Mover Advantage

Being the first to introduce a new product, technology, or service confers a significant among the types of competitive advantage. This first-mover advantage allows companies to capture early adopters and set industry standards. Pioneering offerings often enjoy stronger brand recognition and customer loyalty, as they become synonymous with innovation and leadership.

7- Quality Advantage

Prioritizing superior quality in products or services not only meets customer expectations but also builds among the types of competitive advantage. Companies that consistently deliver high-quality offerings stand out in the market and establish a reputation for reliability. This strategy appeals to customers seeking long-term value, resulting in repeat business and positive referrals.

8- Technological Advantage: Digital Leadership

Leveraging cutting-edge technology and digital innovations can reshape customer experiences and streamline operations among the types of competitive advantage. Businesses that harness technology gain a competitive edge in the digital landscape. From personalized customer interactions to process automation, technological advantages enhance efficiency, responsiveness, and overall competitiveness.

9- Sustainable Advantage

Incorporating sustainable practices aligns businesses with environmentally conscious customers and regulatory trends among the types of competitive advantage. Sustainability becomes part of their unique selling proposition, appealing to consumers who prioritize ethical and eco-friendly choices. A sustainable advantage also minimizes risks associated with environmental concerns and positions companies as responsible corporate citizens.

10- Talent Advantage

A skilled and motivated workforce is a formidable asset among the types of competitive advantage. Companies that invest in talent development and create a culture of innovation attract top professionals. A talent advantage leads to the creation of better products, improved services, and innovative solutions. Moreover, employees who feel valued and empowered contribute to enhanced customer experiences and overall organizational success.

11- Location Advantage

Geographical advantages can significantly influence competitiveness among the types of competitive advantage. Proximity to resources, markets, or transportation hubs can impact cost efficiencies, market access, and distribution capabilities. Businesses strategically positioned in advantageous locations can optimize their supply chain, reduce transportation costs, and quickly respond to market demands.

12- Supply Chain Advantage

Effective supply chain management ensures timely delivery, quality control, and cost-efficiency among the types of competitive advantage. Companies with a well-orchestrated supply chain can meet customer demands promptly, reduce stockouts, and minimize excess inventory. A streamlined supply chain contributes to smoother operations, shorter lead times, and enhanced overall customer satisfaction.

The Connection to the Business Model Canvas and Porters Generic Strategy:

The Business Model Canvas , developed by Alexander Osterwalder and Yves Pigneur, is a strategic tool that provides a holistic view of a business’s key components. It plays a vital role in aligning business strategy , business purpose , and competitive advantage. By visually connecting value propositions, resources, and customer segments, the canvas becomes a dynamic tool for strategic coherence, enhancing communication and driving sustained success. You can download it now.

Your download is now available!

You can now access the complete Business Model Canvas Package, including a full presentation, related models and instructions for use.

The UNITE Business Model Canvas

It consists of nine building blocks that capture the essential elements of a business model. The canvas serves as a visual framework for understanding how a business creates, delivers, and captures value. Here’s how competitive advantages are linked to the Business Model Canvas:

Value Proposition : A strong competitive advantage aligns closely with the value proposition offered by a business. It outlines the unique benefits that customers receive from the products or services provided.
Key Resources and Key Activities : The resources and activities required to deliver a competitive advantage are depicted in these canvas sections. For instance, a cost leadership advantage might require efficient supply chain management, while a differentiation advantage may require investments in research and development.
Customer Segments : Competitive advantages often target specific customer segments. By identifying these segments in the canvas, businesses can tailor their offerings to better meet the needs of their chosen audience.

A competitive advantage does not exist in isolation; it is intricately intertwined with a business strategy . Let’s explore how competitive advantages integrate with various business strategies:

Cost Leadership Strategy : A cost leadership strategy is underpinned by achieving operational efficiencies to offer products or services at a lower cost. This strategy aligns with a cost leadership competitive advantage.
Differentiation Strategy : A differentiation strategy focuses on creating unique and superior products or services that customers are willing to pay a premium for. This strategy complements a differentiation competitive advantage.
Focus Strategy: A focus strategy is about concentrating efforts on a specific market segment. This strategy complements both cost-focus and differentiation-focus competitive advantages.

Uncover profound insights in our book, “How to Create Innovation” – the ultimate guide to business strategy . Within its pages, you’ll find a diverse array of groundbreaking tools and models that will enrich your understanding and empower you to refine your approach, guaranteeing unmatched success in the competitive business landscape.

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In parallel, Porter’s generic strategies—differentiation, cost leadership, and focus—offer strategic pathways to achieving competitive advantage. The alignment between these strategies and the Business Model Canvas is significant. For instance, a differentiation strategy is reflected in the value proposition and customer relationships sections of the canvas, highlighting the distinct offerings that set a company apart. A cost leadership strategy is mirrored in the key resources and activities sections, emphasizing operational efficiency and optimization. Similarly, a focus strategy corresponds to the identification of specific customer segments and tailored value propositions.

The Value Chain Model dissects a company’s activities into primary and support functions, providing a comprehensive view of how value is generated and delivered to customers. It helps identify areas for optimization, cost reduction, and differentiation, ultimately leading to a more robust alignment between strategy and execution. You can download it now.

You can now access the complete Porter’s Value Chain Model Package, including a full presentation, related models and instructions for use.

Porter’s Value Chain Model

By integrating Porter’s generic strategies with the Business Model Canvas, businesses can strategically map their competitive advantage initiatives onto tangible operational components. This holistic approach ensures that competitive advantage is not just a theoretical concept but a well-defined and executable strategy intricately woven into a company’s business model. As a result, organizations can navigate market dynamics more effectively, adapt to changing conditions, and position themselves for sustained success.

In summary, the relentless pursuit of recognizing and capitalizing on a range of competitive advantage types assumes paramount importance within the ever-evolving business ecosystem, as organizations ardently pursue lasting success. This pursuit transcends theoretical abstractions, embodying a tangible link that seamlessly binds innovation, business strategy , and sustained accomplishments. By embracing and adapting to these dynamic factors, businesses can navigate the intricate landscape of competition with precision and agility. As the contemporary business landscape continues to evolve, the steadfast commitment to understanding and harnessing diverse competitive advantages stands as an indispensable pillar for ensuring enduring growth and remaining ahead in the competitive race. Through this strategic approach, organizations are poised to not only navigate change but also to shape their own success stories in the complex world of commerce.

Frequently Asked Questions

1- What is a sustainable competitive advantage?

A sustainable competitive advantage is a unique and enduring advantage that sets a company apart from its competitors in a way that is difficult for rivals to replicate. It often stems from factors such as strong brand loyalty, proprietary technology, efficient processes, or exclusive access to resources, providing the company with a lasting edge in the market.

2- Among the various competitive advantage types, which ones are considered the best?

There isn’t a definitive “best” type of competitive advantage, as the effectiveness of each type depends on various factors such as the industry, market conditions, and the company’s strategic goals. Different types of competitive advantage can be advantageous under specific circumstances:

Cost Leadership: This type can be beneficial when there is a strong emphasis on price in the market, and the company can achieve economies of scale and operational efficiencies to offer products or services at a lower cost than competitors.
Differentiation: Differentiation advantage is valuable when customers place a high premium on unique features, quality, or brand identity. It can lead to customer loyalty and allow a company to command higher prices.
Focus Strategy: Focusing on a niche market can be advantageous when a company can serve that segment exceptionally well. It allows for targeted marketing and tailoring products or services to specific customer needs.

Ultimately, the “best” type of competitive advantage depends on a company’s strengths, resources, and the market it operates in. Often, a combination of strategies might be most effective, such as achieving differentiation while focusing on a specific niche. Companies should assess their capabilities, market dynamics, and customer preferences to determine the most suitable competitive advantage strategy for their unique situation.

3- What is Apple’s competitive advantage?

Apple’s competitive advantage rests on its seamless integration of hardware, software, and services, creating a unique ecosystem that enhances user experience. The company’s commitment to design excellence, customer loyalty, and constant innovation through products like iPhones, Macs, and services like the App Store contributes to its distinctive edge.

4- How can a company gain competitive advantage?

Companies can gain competitive advantage through various means, including differentiation (offering unique products/services), cost leadership (providing products/services at a lower cost), focus (targeting specific market niches), and innovation (developing novel solutions). Analyzing market trends, understanding customer needs, and investing in key resources are essential steps to achieve this advantage.

5- How do I know if a company has a competitive advantage?

Companies with a competitive advantage often exhibit strong financial performance, sustained growth, and a distinctive market position. They might enjoy higher profit margins, customer loyalty, and unique offerings that set them apart from competitors. Researching a company’s market position, customer reviews, and industry recognition can provide insights into its competitive advantage.

6- How can a company increase its competitive advantage?

To enhance competitive advantage, companies can invest in research and development, continuously innovate, optimize their supply chain, enhance customer experiences, and foster employee skill development. Regularly analyzing market trends and adapting strategies accordingly is vital to stay ahead of competitors.

7- Why do larger companies often have competitive advantages?

Larger companies can leverage economies of scale, broader resources, and established brand recognition to gain competitive advantages. Their ability to invest in research, development, and marketing often gives them an edge in terms of product development, customer reach, and operational efficiencies.

8- How is competitive advantage different from comparative advantage?

Competitive advantage pertains to a company’s distinct qualities that give it an edge over rivals in a specific market, while comparative advantage focuses on a country’s ability to produce goods or services at a lower opportunity cost compared to other countries. Comparative advantage is more centered around international trade and resource allocation on a national level.

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More From Forbes

Two analyses that are key to strategic planning in business.

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José Luís González Rodriguez is a Partner of ActionCOACH Spain.

In my previous article , I noted that strategic planning continues to be an essential tool for the success and survival of companies. The ability to anticipate, adapt and direct resources toward specific goals is crucial in a competitive environment where changes are exponentially rapid.

In that article, I highlighted the numerous advantages of strategic planning supported by information from a survey involving 576 entrepreneurs and executives from various industries. We concluded that many companies see the need for a strategic plan, although in most cases, this plan isn't actioned out. Today, I want to present key tools for actually implementing strategic planning.

Strategic planning is a continuous process that allows organizations to establish long-term goals, identify their vision and mission, and analyze both internal and external environments. This approach encompasses the formulation of strategies, the implementation of actions and constant evaluation and adaptation.

To conduct effective planning, it can be wise to involve external advisors who can provide fresh perspectives and innovative proposals that respond to market changes. These strategic sessions, ideally held in a relaxed environment away from daily pressures, enable the executive team to develop a more realistic plan aligned with the company's needs. And it prevents the process from being improvised.

Strategic planning improves decision-making by providing a solid framework that facilitates the evaluation of options and the making of well-informed choices aligned with corporate objectives. Defining and clearly communicating goals and objectives enhances team alignment, fostering collaboration and ensuring a unified approach toward common goals.

Additionally, flexibility in planning is essential in a volatile business environment because it allows the company to quickly adapt to new challenges and maintain its competitiveness and innovation.

Conduct A SWOT Analysis

The first basic tool that should be incorporated into your strategic planning process is the SWOT analysis. SWOT is an acronym for strengths, weaknesses, opportunities and threats, and it's an indispensable tool.

This comprehensive analysis is divided into four key components, each of which provides a unique perspective on your company's position.

Strengths: These are the internal advantages and assets that your company possesses. They may include highly skilled human resources, cutting-edge technology, a strong financial base or a recognized brand. Identifying your company's strengths helps maximize your competitive advantage.
Weaknesses: Weaknesses are internal limitations or deficiencies that may hinder business performance. They may include poor management, lack of staff training or inefficient processes. Identifying weaknesses allows your company to work on ways to improve and become more efficient.
Opportunities: Opportunities are positive external factors that your company can leverage. They may arise from market changes, technological advances, changes in regulation or emerging trends. Recognizing and capitalizing on opportunities is essential for growth and expansion.
Threats: Threats are negative external factors that can affect your company. They may include aggressive competitors, unfavorable economic changes or unexpected events like pandemics. Identifying threats allows your company to take proactive steps to mitigate risks.

Conduct An Environmental Analysis

The second tool or activity key to strategic planning is to conduct an environmental analysis.

The business environment is dynamic and ever-changing. Factors such as global economic conditions, disruptive technological advances, changes in government regulations and changing consumer preferences can have a significant impact on your company. An environmental analysis is a key method for better anticipating challenges and capitalizing on opportunities, which are crucial for survival and growth.

AI tools can be helpful here, as they can synthesize information into a comprehensive presentation that you can continuously update with new content.

Here are some examples of factors to consider:

Market Competition: Who are your direct and indirect competitors, and what are their strategies and market share? Identifying their strengths and weaknesses can even help develop effective, competitive strategies.

Economic And Technological Trends: Staying in touch with current and future economic and technological trends is vital for remaining relevant in the market. This might include adopting emerging technologies or adapting to changes in consumer demand.

Human Resources And Internal Capabilities: Take stock of your current workforce and readily available skill sets in your company. Identifying areas for improvement and training needs can enhance internal efficiency and productivity.

Legal And Regulatory Factors: Staying informed of changes in laws and regulations affecting the industry is essential for compliance and avoiding potential sanctions or legal issues.

Being armed with information is crucial for leading a company. In my next article for this series, we'll take a look at new tools that can allow us to look to the future with less uncertainty and more flexibility in the face of possible change.

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AI Won’t Give You a New Sustainable Advantage

Jay B. Barney
Martin Reeves

Generative artificial intelligence (gen AI) has the potential to radically alter how business is conducted, and there’s no doubt that it will create a lot of value. Companies have used it to identify entirely new product opportunities and business models; to automate routine decisions, freeing humans to focus on decisions that involve ethical trade-offs, empathy, or imagination; to deliver customized professional services formerly available only to the wealthy; and to develop and communicate product and other recommendations to customers faster, more cheaply, and more informatively than was possible with human-driven processes.

But, the authors ask, will companies be able to leverage gen AI to build a competitive advantage? The answer, they argue in this article, is no—unless you already have a competitive advantage that rivals cannot replicate using AI. Then the technology may serve to amplify the value you derive from that advantage.

But using it may amplify the ones you already have.

Idea in Brief

Early adopters of gen AI can eclipse rivals by using it to identify entirely new product opportunities, automate routine decisions and processes, deliver customized professional services, and communicate with customers more quickly and cheaply than was possible with human-driven processes.

The Reality

Far from being a source of advantage, even in sectors where its impact will be profound, gen AI will be more likely to erode a competitive advantage than to confer one, because its very nature makes new insights and data patterns almost immediately transparent to anyone using gen AI tools.

The Silver Lining

If you already have a competitive advantage that rivals can’t replicate using gen AI, the technology may amplify the value you derive from that advantage.

History has shown that technological innovation can profoundly change how business is conducted. The steam engine in the 1700s, the electric motor in the 1800s, the personal computer in the 1970s—each transformed many sectors of the economy, unlocking enormous value in the process. But relatively few of these and other technologies went on to become direct sources of sustained competitive advantage for the companies that deployed them, precisely because their effects were so profound and so widespread that virtually every enterprise was compelled to adopt them. Moreover, in many cases they eliminated the advantages that incumbents had enjoyed, allowing new competitors to enter previously stable markets.

JB Jay B. Barney is a Presidential Professor of Strategic Management and the Lassonde Chair of Social Entrepreneurship at the University of Utah’s David Eccles School of Business. He is a coauthor, with Manoel Amorim and Carlos Júlio, of The Secret of Culture Change .
Martin Reeves is the chairman of Boston Consulting Group’s BCG Henderson Institute. He is a coauthor, with Jack Fuller, of The Imagination Machine (Harvard Business Review Press, 2021) and a coauthor, with Bob Goodson, of Like: The Button That Changed the World (Harvard Business Review Press, April 2025).

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Remote Deposit Capture: A Primer

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To remain competitive, financial institutions continually look for ways to cut costs, attract new customers, and boost revenues. Remote deposit capture (RDC) technology helps to streamline and improve the efficiency of one area of bank operations: processing check deposits. RDC allows financial institution customers to “deposit” checks electronically at remote locations, usually in the customers’ offices, for virtually instant credit to their account. Paper checks are digitally scanned, and an image of the check is electronically transmitted to the customer’s bank.

Most RDC customers are merchants who want to reduce the costs of transporting paper checks to their financial institution and gain faster access to their funds. Funds from a paper check are typically available within five business days. However, with RDC, funds from checks remotely deposited on Monday often are available on Tuesday or Wednesday of the same week—a significant financial advantage to all businesses, particularly for small- and medium-sized businesses. Some banks are marketing RDC to doctors and lawyers, two professions that often receive payment for their services by check. 1 Other types of businesses that are customarily paid in cash or by credit card, such as restaurants, would not necessarily benefit from RDC.

This article discusses the development and recent growth in the use of the RDC technology, identifies risks to financial institutions that offer this service, and highlights appropriate risk management techniques described in recently issued Federal Financial Institutions Examination Council (FFIEC) guidance.

The Check Clearing for the 21st Century Act (Check 21 Act), which took effect October 28, 2004, paved the way for the development of RDC. The Check 21 Act created a new negotiable instrument called a “substitute check,” which is the legal equivalent of an original check. A substitute check contains an image of the front and back of the original check that can be processed as the original check. 2 The customer transmits this image electronically, usually via the Internet, to the depository financial institution. The substitute check is cleared and settled electronically, thereby expediting credit to the customer’s account.

First Tennessee Bank in Memphis was one of the first financial institutions to implement RDC. It introduced the “First Deposit Plus” product 3 in 2003 as a way to expand its deposit base. As of March 2008, First Tennessee had customers in 46 states using its RDC service. 4 In July 2007, Forrester Research, an information technology research company, reported that 88 percent of the top 25 U.S. banks were offering RDC to their business customers. 5 For example, Bank of America, Citibank, and PNC offer RDC to their commercial customers. 6

As of year-end 2008, Celent, an international financial services consulting firm, estimated that two-thirds of all U.S. banks were offering RDC services. 7 And in March 2008, the ABA Banking Journal published the 12th Annual Community Bank Competitiveness Survey, which reported that 38 percent of the community banks surveyed offered RDC, and another 26 percent were planning to offer the service by year-end 2008.The survey noted that the adoption rate for RDC is “much faster than we saw with bank Web sites." 8

For financial institutions using RDC, the numbers are impressive. For example, in 2008, Zions Bancorporation in Utah and its affiliates reported that more than 11,000 customers were using their RDC service, depositing more than $400 million daily. Zions reported adding 45 new RDC customers per week. 9

Some banks offer RDC for free on the condition that the customer maintains a certain minimum deposit balance. Others charge a fee, perhaps $60 a month. 10 Specialized scanners record and transmit images of the front and back of the check being deposited. 11 Scanners, which cost between $225 and $2,500, can be purchased by the customer or leased from the financial institution as part of the RDC service. One bank reports that RDC costs less than $10,000 to implement, well below the $300,000 minimum capital cost of a new branch office. 12

Although RDC offers considerable benefits to financial institutions and their customers, the service is not without risks. For example, an institution no longer has the opportunity to examine the physical item being deposited, which heightens risk in the check-clearing process. The operational, legal, and compliance risks associated with RDC are discussed below, with particular emphasis on the risk of fraud.

Managing RDC Risks

In response to the increasing use of RDC, in January 2009, the FFIEC issued guidance to help financial institutions identify risks in their RDC systems and evaluate the adequacy of controls and risk management practices. 13 The guidance also should be useful to bank examiners, especially those who may be examining a bank offering RDC for the first time. Examination procedures targeting the use of RDC, which are consistent with the guidance, are scheduled to be published in a revised and updated version of the FFIEC Retail Payment Systems Booklet . 14

The risks associated with the use of RDC should be identified within the financial institution’s overall risk assessment process. The primary risk is the potential for fraud. When an institution takes a risk-sensitive function, in this case accepting items for deposit and credit to a customer’s account, and allows it to be conducted outside the “trusted zone” that includes its internal network and closed check-processing environment, the risk of fraud increases. A financial institution can control what occurs on its internal network or in its check-processing facility, including the implementation of fraud prevention processes, but it cannot exert the same control over items deposited remotely.

The FFIEC guidance identifies three categories of risk to financial institutions that offer RDC: operational, legal, and compliance. The following discussion identifies these risks and outlines effective risk management strategies.

Operational Risks and Controls

The FFIEC guidance covers several issues that require management attention. Many of these risks relate directly to the potential for fraud, while others may also result in fraud in certain circumstances. Some of the key risks are as follows:

Redeposit of items/duplicate presentment
Alteration of deposited items/forged endorsement
Deposit of counterfeit items
Poor image quality
Safety and integrity of deposited items held by customers (i.e., protection of personal information)
Proper disposal of deposited items by customers
Customer authentication when accessing the RDC system
Data security of and lack of encryption in the RDC system
Reliability of the RDC vendor

Customer Screening

Customer screening is the single most effective risk mitigation technique that financial institutions should implement when offering RDC. Not all customers need RDC services, and not all may qualify for them. The institution should consider whether the customer is a long-standing client with effective management and close control of financial processes or a new customer whose business characteristics and transaction history are relatively unknown. Many financial institutions offering RDC services require customers to maintain minimum deposit balances to insulate the institution from the risk of fraudulent deposits or items that do not clear owing to insufficient funds.

Financial institutions also should consider the customer’s business line, geographic location, and client base. In evaluating a customer’s client base, the institution should carefully scrutinize those from higher-risk industries, such as mail order or Internet retailers, adult entertainment, offshore businesses, and online gambling. These industries have demonstrated a greater risk of fraud and nonpayment than more traditional, domestic, face-to-face businesses. Customers that serve these higher-risk businesses may not be appropriate candidates for RDC or may be required to maintain higher deposit balances or agree to more stringent on-site audit procedures.

To date, the federal financial institution regulatory agencies have not observed increased fraud rates related to RDC services. In fact, the RDC fraud rate is lower than the average for general item processing. 15 The consensus among the agencies is that this is due primarily to satisfactory customer screening on the part of financial institutions offering RDC. 16

Monitoring and Reporting

Financial institutions should regularly produce internal reports on the status of their RDC service. For example, the reports should cover duplicate deposits, violations of deposit thresholds (the total value of checks that may be deposited daily via RDC), velocity metrics (the number of items being deposited daily), transaction dollar volume, return item dollar volume, the number of checks rejected owing to poor image quality or other factors, and other adjustments made after deposit owing to discrepancies in the check amount. Management should review these reports in a timely manner, and any aberrations should be addressed promptly within the institution or with the customer or the RDC vendor.

Vendor Screening

Most banks offering RDC services work with a vendor that provides, installs, maintains, and updates the hardware and software. Although this is generally a sound approach, management should evaluate the track record of RDC vendors to ensure that they are reputable and competent. Financial institutions should look for vendors with experience in providing RDC services and should check references. Either the institution or the vendor should ensure that the customer’s employees are trained in the use of the RDC system. The FFIEC Outsourcing Technology Services Booklet contains information and recommendations on how financial institutions should screen, evaluate, and monitor technology vendors, including those providing RDC services. 17

Customer Audits

After determining that a customer’s business is suitable for RDC services, the institution may consider evaluating the customer’s operational controls (i.e., separation of duties, implementation of dual controls, endorsement of items to prevent redeposit, and secure storage and disposal of original checks) on-site; assessing how the customer’s employees responsible for depositing items will be trained; and reviewing the physical and logical security measures surrounding the RDC system. Confirming that the customer securely stores and disposes of the original paper checks is particularly important as these items contain sensitive financial information (name, address, bank name, and account number) that can be used by identity thieves. In some cases, an independent audit of the customer may be warranted.

Business Continuity Planning

The FFIEC requires every financial institution to have a business continuity plan (BCP) in place. 18 If an institution offers RDC, its BCP should describe actions to be taken if the RDC system fails and the steps to return the RDC service to operation.

Change Control Processes

As is the case with any technology system, RDC hardware, software, and procedures will need to be updated over time. Financial institutions and, if appropriate, their RDC vendor should have in place written change control procedures (i.e., mutually agreed-upon procedures governing how software and hardware will be updated and how policies will be revised) with all customers using the RDC service. Thus, all parties will be on the same page when software or hardware is updated or policies and procedures are revised. Change control procedures can help avoid glitches from checks not being deposited or funds not being credited to the customer’s account.

Financial institutions should investigate whether commercial insurance coverage is available to protect them from liability in the event of problems with the RDC service. Management will need to determine whether the amount of coverage available justifies the cost of the insurance.

Legal Risks and Controls

When a bank accepts a check image for deposit through its RDC system and clears and settles the check, it exposes itself to certain legal risks under the Check 21 Act, Regulation CC, 19 Regulation J, 20 and applicable state laws, as well as under clearinghouse rules or other agreements. Most legal risks associated with offering RDC services can be mitigated through the use of appropriate contracts and customer agreements. The RDC service agreement should describe the responsibilities and liabilities of the financial institution and its customer, including record retention periods for the original deposited items, physical and logical security measures protecting the RDC scanner, and proper disposal of the original deposited items once the retention period has expired. The agreement also should describe the types of items that can be deposited remotely, individual item dollar limits, overall per-day dollar limits, and minimum image quality standards. The institution should consider requiring a periodic audit of RDC processes at the customer location and, if so, include such terms in the agreement. Banks also should ensure that customer agreements describe the policies and procedures that must be followed at the customer’s RDC location, including applicable operational controls to help mitigate possible fraud, such as dual controls and appropriate separation of duties.

Compliance Risks and Controls

Financial institutions must determine whether and to what extent the use of RDC systems increases exposure to the risk of money laundering or other suspicious activities. Institutions should refer to the FFIEC Bank Secrecy Act/Anti-Money Laundering Examination Manual for a description of their responsibilities. 21 In general, when less personal interaction occurs between a bank and its customers, or a bank’s ability to examine financial instruments is limited, the risk of violating laws and regulations in these areas increases.

Financial institutions and their customers are legally obligated to comply with laws and regulations implemented to help prevent and detect money laundering and international terrorist financing. Banks offering RDC services should ensure their own Bank Secrecy Act compliance experts or outside consultants, if used, consider how these laws and regulations may impact RDC and develop policies, procedures, and processes to mitigate this risk. Bank staff responsible for RDC services should receive appropriate training to ensure compliance with bank policies and procedures as well as existing laws and regulations.

Because of the significant business advantages provided through the use of RDC, the number of financial institutions offering RDC services and the number of customers using these services are expected to continue to increase in the near term. However, along with the advantages comes the responsibility of bank management and examiners to be aware of the risks associated with providing RDC services and how those risks should be mitigated.

The primary risks are operational, specifically the risk of fraud, and these risks can be mitigated by using effective risk management techniques, such as those outlined in the FFIEC guidance. These techniques are not costly or complex, and they can easily be implemented by both large and small banks. All risk management strategies described in this article should be considered; however, customer screening is the first step financial institutions should take when deciding to provide RDC services to a particular customer.

Future Prospects

When considering what lies ahead for the use of RDC technology in the longer term, institutions should note that the number of checks being written in this country has declined steadily since 1995. Conversely, the number of electronic payments has grown, and as of 2003, exceeded the number of checks for the first time. These statistics suggest that RDC may be a “gap” technology that perhaps will exist only for the next five to ten years.

In the very near future, financial institutions may apply RDC technology in other ways to reduce deposit-processing costs and expand their deposit base. The first way is making RDC available to retail customers in their homes. Consumers would not need to visit a branch or ATM to deposit checks, but rather would simply run the check through a scanner connected to a personal computer with Internet access. 22

The second is offering RDC to mobile professionals who travel to client sites and are paid in person by check. The technology exists to enable these individuals to deposit checks at a client’s location or in their car using a cell phone camera. 23 Although neither of these applications is now in widespread use, both suggest intriguing opportunities for the future of RDC for banks and customers alike.

Jeffrey Kopchik Senior Policy Analyst Division of Supervision and Consumer Protection [email protected]

1 Anonymous, “Cherry–Picking Remote Deposit Customers,” US Banker , August 2008, pp. A8–10.

2 See FIL–116–2004, “Check Clearing for the 21st Century Act,” October 27, 2004.

3 First Tennessee Bank, “Every Office Needs a Time Machine” brochure, 2008, http://www.chattbar.org/downloads/FTBFirstDepositPlus_1.pdf .

4 Peggy Bresnick Kendler, “Can Remote Deposit Capture Drive Growth?” Bank Systems & Technology, March 2008.

5 Forrester Research, “Coming Soon: Remote Deposit Capture for Consumers?” research note, July 27, 2007; updated August 3, 2007.

6 Bank of America, “Bank of America Expands Remote Deposit Service Globally,” press release, September 16, 2008, http://newsroom.bankofamerica.com/index.php?s=press_releases&item=8257 ; Citibank, “Citibank Introduces Remote Electronic Deposit Service for Business Clients,” press release, June 7, 2007, https://www.citigroup.com/global/news/press-release/2007/citibank-introduces-remote-electronic-deposit-service-for-business-clients ; PNC, “PNC Bank to Offer Ease of Online Deposit Service Integrated with QuickBooks to Small Businesses,” press release, July 24, 2006, http://www.prweb.com/releases/pnc/remotedeposit/prweb414847.htm .

7 Celent, “State of Remote Deposit Capture 2008: Sprint Becomes a Marathon,” press release, October 15, 2008.

8 12th Annual Community Bank Competitiveness Survey, ABA Banking Journal , March 2008, http://www.aba.com/News/CBOnline_Mar08_1.htm .

9 Anonymous, “Remote Deposit Capture Partnerships for Success,” US Banker , August 2008, p. A11.

10 Orla O’Sullivan, “Prized Deposits Grow for Boston Bank Using RDC,” Bank Systems & Technology, November 2008, p. 41.

11 Financial institutions generally recommend specialized scanners that read a check’s magnetic ink character recognition line and optical character recognition to determine the dollar amount of the check in characters and words.

12 O’Sullivan, “Prized Deposits Grow for Boston Bank Using RDC”.

13 FIL–4–2009, “Risk Management of Remote Deposit Capture,” January 14, 2009. See https://www.fdic.gov/news/news/financial/2009/fil09004.html .

14 FFIEC IT Examination Handbook, Retail Payment Systems Booklet , March 2004.

15 Risk Management of Remote Deposit Capture, internal presentation for FFIEC supervisory staff, January 28, 2009.

17 FFIEC IT Examination Handbook, Outsourcing Technology Services Booklet , June 2004.

18 FFIEC IT Examination Handbook, Business Continuity Planning Booklet , March 2008.

19 Regulation CC governs the availability of funds.

20 Regulation J governs check collection and funds transfer.

21 FFIEC Bank Secrecy Act/Anti–Money Laundering Examination Manual , pp. 189–190, https://bsaaml.ffiec.gov/ .

22 CheckFree, Remote Deposit Capture for Consumers, https://www.fiserv.com/en/solutions/deposit-solutions/remote-deposit-capture.html . (Note: CheckFree is now Fiserv.)

23 J&B Software, Using Your Mobile Phone for Remote Capture, http://www.jbsoftware.com/webinars.php?id=13 .

Last Updated: June 6, 2023

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