What gives a business its competitive advantage?

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Australian Economy, Macro Economics

The term “competitive advantage” refers to a unique advantage a company can have over its competitors that offers similar goods and services and allows it to generate a higher sales volume or attract more customers. In other words, something that places a company above the competition in the market. This attribute to various factors such as highly skilled labor, geographic regions, high entry barriers, low-cost power sources, etc., as applicable to the type of operations the company is into. The most important thing for the company is to maintain its leadership position within its peer group. A general school of teaching says that there are three main strategies which firms can utilize to build their competitive advantage over rivals: cost advantage (low cost strategy), differentiation advantage and focus advantage.

Cost advantage is when a business provides similar products and services as compared to its competitors at a lowest possible price to a targeted set of customers. This strategy is very effective for a company that has a sustainable cost advantage and economies of scale which enable it to maintain its cost leadership position in the marketplace. Kogan.com Ltd (ASX: KGN) can be considered to be an emerging example in this category, as it is launching nbn services for mobile business at a reduced price into the Australian telcos industry.

Differentiation advantage is when a business provides better products & services to the customer as compared to its competitors within the same market. This helps in winning the customers through factors other than the price such as a higher product quality along with superior services. Great examples of differentiation leadership include that of Supermarket brand, Woolworths Group Ltd (ASX: WOW). The brand in consumer staple industry achieves significant economies of scale; and does not solely rely on a cost leadership strategy to compete. The group’s business and brands are also built on persuading customers so that they become loyal to the brand.

In Focus strategy, the company must focus on specific segment within the industry. This may include specialized ‘know-how’ or offering a specific service which is different from the peer group or not offered by the competitors. In other words, focus involves concentrating on its specific customer requirement and creating an excellent “value proposition” that drives the company in top position within the group.

Thus, any company which fails to maintain its position in the market is vulnerable to an attack from its competitors through challenging quality products along with superior services.


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