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What Competitive Advantage Really Means

        posted by , June 27, 2016

A business with competitive advantage is like a star professional athlete: they're in a league of their own. They're not necessarily good at everything but they do a few things very well.

What's Competitive Advantage?

Competitive advantage is anything (important) that you do better than your competition. This can include:

  • know-how
  • operational excellence (faster, cheaper, higher quality operations)
  • talent
  • products
  • customer experience
  • intellectual property
  • marketing position
  • customer relationships
  • location
  • capital
Collectively these (above list) are referred to as business capabilities.

Definition: Competitive Advantage

Competitive advantage is a business capability that an organization or individual does better than the competition.

Competitive advantage is the primary goal of most business strategies.

Why Is Competitive Advantage So Important?

If an amateur plays in a professional sports league he/she doesn't have much of a chance. The same goes for a firm without competitive advantage that faces a competitive market.

Markets tend to be survival-of-the-fittest. Every firm must have at least a niche-capability that's stronger than all competitors to survive.

Examples of Competitive Advantage

Competitive advantage is everywhere. Examples are easy to spot:

  • A search engine has faster, higher quality results than the competition.
  • A coffee shop has better coffee and a more relaxing atmosphere.
  • A sports store is the only shop in town that sells nothing but kayaks. It has the best selection and advice.
  • An electronics manufacturer designs devices that customers prefer.
  • A telecom company holds a monopoly on infrastructure in an area. Customers have no real choice.
  • A hotel is directly connected to a popular convention center.
  • A restaurant offers the best view of the city.
  • A car dealership has a good relationship with a large number of customers.
  • A social network is easy to use and popular.
  • An email service respects customer's privacy.
  • A manufacturer produces industrial glass that's much higher quality than the competition.
  • An IT consulting company has lower costs than its competition.
  • An airline has friendly service.
more: 7 examples of sustainable competitive advantage

Sustainable Competitive Advantage

There's a big difference between a professional athlete who stars for half a season and one who stars for a decade.

Competitive advantage comes and goes. A sustainable competitive advantage is an advantage that lasts for decades.

In a competitive market, your competitors will quickly follow your successes. If you're the only kayak shop in town the market might be small enough for competition to stay away. However, if you start pulling in large revenues — it's likely someone will notice and move in to compete.

Generally, the larger the market the more competition. It's difficult to hold a competitive advantage in a large market for long. If you hire friendly staff, your competitors will hire even friendlier staff. If you design cool mobile devices, your competitors will design even cooler mobile devices.

There are five ways of sustaining a competitive advantage:

  1. Avoid attracting competition. This is usually only possible if you choose a small niche.
  2. Improve faster than your competition. By the laws of physics, if you're moving twice as fast as anyone else they won't catch you.
  3. Own something that's difficult or impossible to buy such as a telecom network, railroad or patent.
  4. Lock your customers in with long contracts and big investments (high switching costs).

How to Establish a Sustainable Competitive Advantage

Unless you have the cash to buy a railroad, your best bet for establishing competitive advantage is to more faster and smarter than your competition. The following strategies are known to work:

  • Innovation
    Create something new of value.
    more: innovation guide

  • Talent
    Most sustainable competitive advantage springs from the talent of people. If you're the restaurant with the best chef in town, that's hard to beat. Keep your chef engaged and your advantage is sustainable.

  • Corporate Culture
    Create a company that's capable of innovation, productivity, sustainability, quality, managing risk and creating a compelling customer experience.
    more: corporate culture

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