This post was most recently updated on January 29th, 2020
Competitive advantage is what makes a brand superior to other brands, it’s the superiority that brand has over its rivals that lead to better profit maximization. It’s about providing more benefits and better value to the end consumer, thus being able to convert him/her into repeat customers.
The Three Determinants of Competitive Advantage:
In order to achieve or maintain competitive advantage you should be aware about the three determinants:
- Competition: Start by identifying your direct and indirect competitors through a competitive analysis and knowing how they can cannibalise your business. This may or may not necessarily relate to companies or businesses related to the same nature of business. For newspapers, other newspapers are not just competition but it’s the internet as well that can give instant updates as and when the news breaks out. Gradually, newspaper started adapting to the change and invested in online assets. Similarly, as far as cameras are concerned, Kodak was too focused on its film camera that it did not foresee the digital revolution and succumbed to bankruptcy in 2012.
- Benefit: You should be able to address the basic question, ‘What is the real benefit that my product provides customers?’. There should be a need for the brand or if it does not exist then it should be created while offering significant value. In doing so, you should be constantly updated about the changing trends and technological advance that may have an impact on your business.
- Target Market: You should know your customers well before selling them your product. This will help ascertain if you need a demand pull strategy or a market push strategy and it all leads down to finding out how you can make their lives better.
Michael Porter, a Harvard Business School professor defined business strategy tools on sustaining competitive advantage in 1979 and defined the factors that ensure it. He explained that a company must set clear and realistic goals, strategies, and channel operations around these to achieve sustainable competitive advantage and eventually the corporate culture must be synced with the goals.
Porter’s Five Forces:
Porter mentioned that companies should to stay up to date with what competitors were doing but beyond that, he encouraged them to look beyond the actions of competitors and find out what other factors could possibly impact the business environment. He penned down five forces that make up the competitive environment. These are:
- Competitive Rivalry: You should start by knowing everything about competitors starting from who they are to how many they are the level of their product quality in comparison with yours. If competition is tough, you can start with aggressive marketing campaigns through which you can keep reminding customers about your product, you can also go for price cuts to attract more customers depending on the type of product that you are selling.
- Supplier Power: This can be determined by knowing how convenient it is for your suppliers to increase the prices of raw materials that they are selling. You should find out all the potential suppliers that you have and how expensive it could get to switch between suppliers. The more options there are the easier it gets to switch to a cheaper alternative.
- Buyer Power: You should know how strong the buyers are in terms of driving prices down and how easy it is for them to switch from one your company’s product to that of others.
- Threat of Substitution: Substitution can easily render your product obsolete especially in the wake of technological advance, something that happened in Kodak’s case as market trends and product dynamics changed. Therefore, you have to be on the lookout for substitutes and continue innovating.
- Threat of New Market Entrants: A company’s position can be profoundly affected by how easy it is for a new entrant to get in the market and acquire a good consumer base. If it’s easy to enter the market then rivals can easily enter and sabotage your position but if there are barriers to entry then you can preserve your favourable market position and maximize profits.