What is your Competitive Advantage?
For every business, whether it is a mature industry or a new one, there is competition. RichmondPath consultants spend a fair amount of time speaking to businesses about having a competitive advantage. Indeed a lot of businesses exist without it yet for how long they exist is another matter. Competitive advantage is defined as an advantage a firm maintains to generate above-average profits compared to their competitors. Achieving a sustainable competitive advantage is the goal when developing a business strategy.
Harvard Professor Michael Porter breaks competitive advantage down to cost advantage and differentiation advantage. Cost advantage exists when a firm is able to offer the same value as competitors but at a lower cost. This could be due to superior operation efficiency, supply chain management, input costs or another factor that provides a comparable product to the marketplace at a lower cost. Cost advantages can also be gained from:
- Economies of scale
- Production techniques
- Product Design
- Managerial Efficiency
IKEA’s competitive advantage is a cost advantage because it stems from providing quality, functional products at low prices. IKEA’s furniture is minimalist inspired, and manufactured in a cost efficient way through great contracts with suppliers. Their target market is young married couples, students in college, and young people in the 20 to 30 age group.
Some would argue IKEA’s funny advertisements like the one below have also distinguished its brand. However the core strategy has always been to provide functional and trendy designs at low prices to customers. With continued profitable supplier and manufacturing agreements, IKEA can enjoy a sustainable competitive cost advantage.
A firm that delivers a different value aside from its competitors and is able to obtain a price premium has a differentiation advantage. Differentiation can be gained through:
- Brand reputation
- Quality of product
- Fast delivery
- Customer service
There are several firms that deploy a differentiation strategy and Intel is one that is very successful. They produce a product that most of us never see yet most buyers will not buy a PC without the Intel brand attached. Intel is ranked according to Forbes as the world’s 6th most powerful brand. Intel spends $2.1B in advertising which is higher than no.1 ranked Apple and no. 2 ranked Microsoft. Intel enjoys brand reputation like no other in the semi-conductor business and is recognizing the price premium in the market. Intel is now looking to expand its brand presence beyond the PC market.
When developing a business strategy consider your competitive advantage and assess its long-term sustainability. An advantage today can quickly change, and therefore continuous assessment of the marketplace is a necessary component of a winning strategy.
If you need any guidance developing your strategy and competitive advantage, please do contact the RichmondPath team and we would be happy to support you in achieving your business goals.