The cantankerous former CEO of GE, Jack Welch, once said, “If you don’t have a competitive advantage, don’t compete!”
This might seem obvious, but you’d be surprised how many companies would be hard pressed to tell you exactly what their sustainable competitive advantage was if you put them on the spot.
In fact, a better way to think about Welch’s fiery admonition is if you can’t articulate your competitive advantage, you really don’t stand a chance of competing.
So, what do we mean by competitive advantage? What’s the best way to define one for your own business? In what follows we’ll cover these questions and more.
- What is Competitive Advantage?
- Porter’s Competitive Strategies
- How to Create a Sustainable Competitive Advantage
- Why Brand is the Ultimate Competitive Advantage
- Competitive Advantage Examples
- The Takeaway
We dive deep into the nature and importance of competitive advantages, including the ultimate competitive advantage: your brand.
What is Competitive Advantage?
Competitive advantage is the thing your company does better than any of your competitors. It is the reason customers buy from you rather than another company.
When tasked with the question “what is a competitive advantage?” Philip Kotler, who some call the father of modern marketing, defines it as “a company’s ability to perform in one or more ways that competitors cannot or will not match.”
There are a range of value propositions that businesses often cite as competitive advantages. These include:
- Speed of delivery
- Speed to market
- Customer service
The problem is few individual value propositions are defensible as a competitive advantage. And even if they’re tenable at the moment, they are rarely sustainable over time. Are any of the above value propositions sustainable for the long run, in and of themselves? Let’s look at a couple, starting at the top: price.
Even if you claim to offer the lowest cost products or services in your vertical, can this claim withstand the entry of new competitors to the market?
What’s the strategy for a brand that built its positioning on price when a competitor comes along and offers the same product or service at a lower cost? Lower prices?
Price as a competitive advantage quickly becomes a race to the bottom and as such is not a sustainable competitive advantage.
What about speed of delivery? Amazon is currently investing billions of dollars to offer free one-day shipping for all Prime members.
Can any business not selling through Amazon defensibly claim to offer faster free delivery than the largest delivery company in the world?
It isn’t just price and delivery. The problem with choosing any individual value proposition as your competitive advantage is that there will always be the possibility of another brand with a superior claim.
Singular value propositions are rarely sustainable competitive advantages.
Warren Buffet once said, “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”
A competitive advantage must be sustainable, or in Buffet’s words “durable,” if it is to be of any advantage at all.
As we’ll see below, the best way to create a sustainable competitive advantage is to develop a multifaceted framework of differentiators.
Porter’s Competitive Strategies
Perhaps the seminal thinker on competitive advantage is Harvard Business School Professor Michael Porter. His definitive textbook, “Competitive Advantage,” breaks down the idea in terms of competitive scope and competitive advantage.
Competitive scope ranges from broad to narrow focus, while competitive advantage ranges from low to high cost. Where a brand falls on this quadrant determines its sustainable competitive advantage.
Central to Porter’s argument is the fact that companies must create clear goals, strategies, and operations to build sustainable competitive advantage. What’s more the company’s culture and values must be in alignment with those goals.
In researching hundreds of companies, Porter identified three ways companies achieve sustainable advantages: cost leadership, differentiation, and cost focus.
According to Porter, brands who differentiate on cost leadership provide reasonable value at a lower price. One way to do this is to relentlessly improve operational efficiency.
For some businesses this means lower wages compensated by more intangible benefits like stock options, benefits, or growth opportunities.
Other companies use unskilled labor surpluses, benefiting from economies of scale and bulk purchasing as they grow.
For Porter, differentiation simply means delivering superior benefits than other brands in your competitive landscape. One of the best ways to identify opportunities for differentiation is with a competitive brand audit.
As we’ve seen, there are many ways to differentiate, including unique or high-quality products or service, speed in delivery, innovation, and service. Often, differentiation simply boils down to superior marketing.
Effective differentiation enables brands to charge a premium for their offerings, translating into higher profit margins.
Finally, cost focus is when a brand understands its target audience better than its competitors, leveraging either cost leadership or differentiation to target highly specific audience segments.
Brands that excel at cost focus often have niche offerings that appeal to niche demographics. It can be difficult for large businesses to successfully employ a cost focus strategy, which is why smaller businesses often leverage it to their advantage.
Think of the high touch, personal service that small businesses tout in contrast to their big business competitors. This is a great example of a sustainable cost focus advantage based on differentiation.
How to Create a Sustainable Competitive Advantage
As we’ve touched on already, creating a sustainable competitive advantage in business is easier when you don’t try to focus on a singular idea.
By developing a multifaceted framework that incorporates more than one differentiator, you’re more likely to hit upon a competitive advantage that is ownable and sustainable.
We often ask our clients to look at three factors when it comes to defining their competitive advantage:
1. Value: What is the real value you provide?
Your products or services might offer your customer dozens of features or benefits, but what, ultimately, is the problem they solve?
If you offer an analytics platform, for example, the bells and whistles that make your product unique do not constitute the real value it provides. Its real value lies in the confidence it offers your customers to make informed business decisions.
2. Customers: What do your customers truly need?
There are a lot of things your customers like. When the economy is going well and abundance is widespread, customers will pay for all sorts of cool features that are nice to have.
But what will people still need when the next recession inevitably rears its ugly head? What do you provide that is indispensable to your customer’s business?
3. Competition: What do you do better than any other company in the world?
It’s rare for someone to be truly exceptional at more than one thing. Athletes, musicians, artists—those who reach expert professional status generally have a singular discipline at which they are better than 99.9 percent of the population.
What’s your business’s one thing?
What is the real value you provide, that your customers truly need, and that no one else does as good as you? Answering these questions is a surefire way to develop a sustainable competitive advantage.
You could offer the most valuable product in the world, but if your customers don’t truly need it, it isn’t a competitive advantage.
Or you could offer a service that meets an urgent need of your ideal customer, but if a competitor can fill the same need with a superior service, it isn’t much of an advantage at all.
At the end of the day, there might be nine things your company does exceptionally well. Your customers might desperately need three of them. But only one of these you do better than anyone else. This is your competitive advantage.
That’s the framework that meets what author Brian Tracy says are the ultimate criteria for any competitive advantage in business: a proposition that is “perceivable, promotable, and something the market will pay for.”
Why Brand is the Ultimate Competitive Advantage
Defining your competitive advantage is a critical step for any brand. But it’s only one step of many. In fact, the only way to get the most out of a well-defined competitive advantage is by building an equally strong brand around it.
At the end of the day, a strong brand is the ultimate competitive advantage.
What is a strong brand? Multinational market research firm Kantar Millward Brown, defines a strong brand as one that is:
- Meaningful: It appeals more, generates greater love, and meets customers’ expectations and needs.
- Different: It is unique in a positive way and stays ahead of the curve for the benefit of the consumer.
- Salient: It comes to mind spontaneously as the brand of choice for key needs.
As we’ve pointed out before, customers are willing to drive a little farther, wait a little bit longer, and pay a little more for a brand they love.
In his report “Why Aren’t We Doing This?” legendary global marketing consultant Peter Field sums up the unparalleled advantage of a strong brand this way:
“Brand building delivers sustainable competitive advantage in a world where there are few other sources. By creating and reinforcing desirable associations for their brands, companies can create demand for their products even if they enjoy no tangible advantage over those of their competitors.”
In many industries these days, the tangible differences between competing companies are slim.
What is the tangible difference between Coke and Pepsi, for example? A minor variation on the same flavor whose relative superiority is entirely subjective.
True differentiation comes with a brand experience that resonates with customers on a deep and lasting level.
The ultimate competitive advantage is a brand that customers seek to identify themselves in terms of, as with Apple. It’s difficult to quantify the amount of brand equity that is comes from such a scenario.
Competitive Advantage Examples
For examples of powerful, sustainable competitive advantages, one need look no further than the world’s top brands.
Each of the following three brands has leveraged a different competitive advantage to a create a defensible moat around its market dominance for years.
While its dominance has been built on several advantages, Amazon’s competitive advantage comes from scale and aggregation. This goes for sellers as well as customers.
Amazon learned early on that the more sellers and customers it had in its marketplace network, the lower the prices it could offer.
Lower prices attracted more customers; more customers attracted more sellers; more sellers meant a better selection and better prices; better selection and prices attracted more customers; and so on.
Over the years, Amazon has expanded into new verticals, added new features, and even built new marketplaces that compete with its own marketplace—all with the aim of driving user engagement and fueling the self-perpetuating cycle of growth.
When Amazon enters a new market, it does so with the full heft of its scale and aggregation advantage, as well as a willingness to go toe-to-toe in industries with razor-thin margins. This is the strategy that has enabled it to expand from a small bookseller to the world’s “everything store.”
Google’s competitive advantage started with a relatively simple innovation, better web search, the formula for which became a recipe for disrupting a range of other services.
Google’s early PageRank algorithm was based on site relevance—the number of times a website had been linked to by other sites—unlike existing site-ranking algorithms that simply prioritized keywords.
With this somewhat simple difference, Google quickly became the internet search engine of choice. Some five billion searches are made on Google every day, making it the most popular website in the world.
Over time, Google’s dominance in search allowed it to gather sizable data and build a durable advantage in advertising as well. Add to this the fact that so many searches are made with intent to buy and it makes Google advertising that much more valuable.
Google’s ongoing accumulation of data from an increasingly wide array of sources, means the company can offer smart, personalized results in everything from shopping to transportation. The more personalized its services become, the less likely its users are to give up those conveniences and use a competitive service.
Apple’s competitive advantage isn’t its technology. The technological difference between Apple and its closest competitor, Samsung, is increasingly very little.
The difference between the quality and functionality of each brand’s product line is all but negligible these days.
The one thing Apple has always had over its competitors is its brand.
Apple has spent decades masterfully crafting a brand design and brand experience that are second to none. The sleek, minimalist Apple visual identity is one that a generation of customers now identify with.
The forward-thinking, seamless experience of the Apple brand feels like home to a legion of devoted followers. You literally couldn’t pay them to use anything else.
Its brand has given Apple increased pricing power, enabling it to dictate prices without the risk of losing brand loyal customers. The decades of methodical brand management into which Apple has invested have paid off exponentially.
Apple is proof positive that brand-building drives long-term profitability far more effectively than short-term, data-driven marketing initiatives. That’s why the ultimate competitive advantage is your brand.
Defining a sustainable competitive advantage is critical for any business looking to differentiate itself from its competitors. Just as critical is clearly articulating your competitive advantage to your target audience.
For most businesses, however, a singular value proposition like price or speed of delivery will never be sustainable as a competitive advantage.
Developing a framework that takes into consideration your business’s unique value, the customers you serve, and the competition you’re up against is the best approach to defining your competitive advantage.
At the end of the day, however, no competitive advantage is as powerful or sustainable as a strong brand. A strong brand enables you to compete whether or not you have a tangible advantage over your competitors or not.
Is Starbucks really the world’s best cup of coffee? Not by a long shot. Will millions of people go out of their way to pay $6 for a cup of Starbucks coffee tomorrow morning? Without a doubt.
What are they really driving a little farther and paying a little more for? The answer is simple: brand.
Editor’s Note: This post was originally published in September 2019 and has been updated with additional insights.