If you have a business you probably spend a lot of time thinking about how to gain an edge over your competitors. Gaining a competitive advantage over your rivals can be highly lucrative and help secure the future of your business.
In this post I will discuss some useful concepts around competitive advantage that have helped me find kick start new ideas in the past.
What is Competitive Advantage
As outlined in the diagram below, Michael Porter has a very popular theory in which he outlines three different approaches that can be used to gain competitive advantage.
The primary focus is to create the product at a lower cost than the competitors. This can be achieved through methods such as increasing efficiency or negotiating better contracts with your suppliers.
This advantage would allow you sell the product at a lower price, in the way that budget airlines do, or you could simply retain the original price and make a better margin.
Using differentiation you develop a product that offers the customer something that they value which unique or different that they can’t get from anywhere else. You need to have access to a lot of Innovation and Creativity within your business if you are to succeed with this approach.
The rewards are high as you are able to charge a higher price for your product. Apple and Dyson are good examples of companies that have used differentiation.
Focus Or Niche
With Focus you design your product in such a way that it appeals to a smaller, more focussed niche than you otherwise would. Within that segment you would either proceed with a differentiation strategy or a cost leadership strategy. This approach is favoured by smaller companies that cannot afford to compete against larger ones for a broader market.
An example would be a company such as Waitrose who target a wealthier demographic of shopper in comparison with someone like Tesco.
The diagram below helps to illustrate the different strategies available, and the way the Focus strategy can be used with Cost Leadership and Differentiation.
Final Thoughts on Competitive Advantage
While porter’s strategies have been very popular it is worth pointing out that there are a few shortcomings. Porter says that you need to pick either a cost based or differentiation strategy and not be stuck in the middle. However I think that that a lot of businesses are both different and low cost, it seems counterintuitive to just focus on one of these things and ignore the other.
I believe these strategies are a good starting point when looking for ways to improve your business, or are considering the launch of a new product.