What are the sources of competitive advantage

Build competitive advantage: explanation and examples

Recognize competitive advantages with 4 tools

1. What is a competitive advantage?

In order to generate profitable profits, companies usually need a competitive advantage over their competitors. Because if all companies offer the same services in the same way, competition will only be based on price and the companies' returns will be close to zero. The price can also be a competitive advantage if the company can offer services more cheaply than the competition. But then the low-cost company already differs from the competition because it is obviously cheaper to manufacture. The aim of a company must therefore be to build competitive advantages. The founder must convincingly represent and present these competitive advantages in the business plan. Once the company is on the market, the challenge is to secure, develop and expand these competitive advantages.

Definition: competitive advantage

The term “competitive advantage” comes from business administration and is defined there according to different approaches. The most relevant are:

  • Differentiation: Describes a uniqueness (in a niche) that is important for the customer (e.g. unique quality, special sales channel, better service)
  • Cost leadership: The product / service is offered cheaper than any competitor.
  • Durability / Sustainability: The competitive advantage is not only temporary (e.g. a temporary low price), but permanently anchored in such a way that competitors cannot achieve it.

Competitive advantages can be divided into provider advantages and customer advantages. A supplier advantage exists if only the company itself can make the product available in this way (for example because it has been patented). A customer benefit, on the other hand, means that the company has secured customer loyalty, e.g. B. because of its image or its brand (see Apple).

In what ways does the company have a head start? Aspects of a competitive advantage can be, for example, outstanding technological capabilities, service aspects or also aspects of cost control. A USP (unique selling proposition) can also result in a competitive advantage. While the theory sounds simple, in practice the competitive advantage is not always easy to grasp: Does your own company really have a competitive advantage by definition? The following questions can help to narrow down your own particularities:

  • Does my product / service have advantages that my competitors cannot?
  • Am I working in a niche where, at best, there is little or no competition?
  • Can I offer my product / service at a lower price than all of my competitors - and in the long term?
  • Can my product be patented?
  • Can I offer a special service that my competitors can't compete with?
  • What makes my company / my product / my service really “different” and above all “better”?

To make the concept of competitive advantage more tangible, let's look at different perspectives and specific examples.

The strategic competitive advantage

A strategic competitive advantage fulfills 3 criteria:

  1. The customer appreciates the advantage.
  2. The advantage is unique on the market.
  3. The advantage is permanent.

Such a competitive advantage is the basis for the sustainable success of a company. If a company has developed a strategic competitive advantage, it is important to secure and expand it.

The permanent competitive advantage

Ideally, there is a permanent strategic competitive advantage. The competition is not able to achieve the same competitive strength if, for example, the product or service is effectively protected against imitation and imitation.

2. Examples of competitive advantage

The following examples show entrepreneurs how to build competitive advantage:

Competitive advantageExplanationexample
innovationA company creates something completely new that is in tune with the times.Apple iphone
specializationA focus on a sub-segment of the market leads to sustainable differentiation and growth.123gold.de
Offer qualityQuality is a competitive advantage if the target customer recognizes the quality and is willing to pay a higher price for it.Tailor-made suits, solid wood furniture
logisticsFast delivery, uncomplicated shipping, return options, etc. can be competitive advantages.Amazon
priceIt is not primarily about low prices, but rather about clever pricing, e.g. B. in the form of discounts, attractive offers, etc. The image or reputation of being cheap also plays a role hereFielmann Optik, kik, Aldi
PortfolioIf the portfolio is particularly geared towards customer requirements, a competitive advantage can result, e. B. by the fact that suitable offers are also purchased.Amazon
Effect of employeesThe customer buys where the employees are friendliest. Especially in industries with a similar offering, it is inspired employees, preferably in customer contact, who make the difference.Schindlerhof GmbH
Corporate cultureA competitive advantage can also result from the fact that customers and / or employees are retained over the long term.Wempe
Audience ownershipThis strategy aims to attract a specific group of customers to a company. Target group ownership is achieved when most of the customers within a target group are proud to be a customer of a company.Nobel hairdressers, noble jewelers

Example of competitive advantages in the retail sector

A competitive advantage alone is usually not what defines success in the market. The example of 123gold.de should show how a whole bundle of advantages leads to a leading position in the market. 123gold.de is a franchise chain for partner rings, wedding rings and engagement rings. While partner rings are only part of the range at the classic jeweler, 123gold.de consistently focused on specialization. That alone did not make the success. Further success factors were and are:

Competitive advantageAreaExplanation
Product configurator as an innovationofferWith the configurator for partner rings it was suddenly possible to offer an individual ring design in a multitude of variants. While the classic jeweler was able to show 50 to 200 different partner rings, the configurator suddenly created more than 1 million possible variations.
First mover on the InternetAdvertising, communication123gold.de presented this configurator in the early 2000s on a constantly updated website. At the time, very few local jewelers had an internet presence.
radio advertisingAdvertising, communicationThe company relied on aggressive radio advertising right from the start. Here, too, local competition could not and cannot keep up.
Favorable price imagePricing strategyThe company shows the advantages in purchasing via the end consumer prices. In fact, the company calculates more aggressively than a classic jeweler.
Franchise as a sales strategydistribution123gold.de managed the company's growth with a franchise concept. Thus, within 10 years, 123gold stores were present throughout Germany.
Own ring factoriesDepth of added valueOver time, the company acquired factories for wedding rings and partner rings. 123gold.de is independent of other factories and achieves purchasing advantages.
Founding team and investorsTeam / fundingThe founder of 123gold.de, Alexander Ferch, was not only a resourceful, creative head, but also managed to inspire a group of financially strong business people from the jewelry industry for his concept. In addition to capital strength, these investors also brought with them extensive industry knowledge.

Many of these competitive advantages already existed when the company was founded, and these competitive advantages were gradually expanded as the company grew.

With the Canvas business model, you can develop a whole range of competitive advantages.

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3. Build a competitive advantage

Now, of course, the question arises as to how you as an entrepreneur can gain a real competitive advantage in practice. The basis for this is first of all a thorough market analysis and competition analysis. It is also crucial to have a clear view of your own customer benefits and the target group. What do entrepreneurs and founders have to do?

Basically, you have several options for gaining a competitive advantage:

  • innovation
  • Choice of a clear market niche
  • Service quality: special flexibility in responding to customer requests
  • Flexibility in pricing

If you succeed in clearly differentiating yourself from all existing offers in a niche, this can create a competitive advantage - provided that it remains in place over the long term. Perhaps, however, you are also relying on an innovative sales channel that enables you to acquire customers more effectively than your competitors. Or you offer a pricing model that convinces your customers more than your competitors can.

Avoid similarity traps

In any case, it is important to avoid the "similarity trap": As soon as your offers are too similar to those of your competitors, there is no longer any competitive advantage. So take a critical look at what your competitors are offering - and what you can do better to fill a niche in the market. This is how you perfect your business idea piece by piece. If this is fully developed, you can think about having the business idea protected.

Property rights: legal protection of competitive advantages

Competitive advantages can also be secured legally. The main tools are:

What to do if, at first glance, the business model does not allow a competitive advantage?

Let's say a founder wants to open an ice cream parlor. Then the "ice cream parlor" concept per se is no guarantee of a competitive advantage. On the contrary, a critical banker who reads the business plan could say: "Ice cream parlors are a dime a dozen."

What can the founder of an ice cream parlor do?

  • Choose a smart concept name
  • Concentrate the product range on certain types, for example vegan ice cream.
  • Offer services that other ice cream parlors do not have and that positively surprise and delight customers.
  • Breaking new ground in advertising: Post ice cream creations on Instagram. Systematically post ice cream offers on Google My Business.

The aim must be to position yourself "differently" and "new" in a market with supposedly interchangeable products.

A single competitive advantage or a bundle of advantages?

This is also a different approach. Especially in industries with apparently interchangeable services, the path to competitive advantage can be to offer many different services instead of relying on a single competitive advantage. This bundle of advantages is then also communicated in this way in advertising. It is different if the company has a very clear single competitive advantage.

4. Common questions about competitive advantage

  • Intangible competitive advantage
  • Customer loyalty through high switching costs
  • Cost-benefit ratio
  • Network effect
  • Cost advantages
  • Marketing and image advantages

A USP (Unique Selling Proposition) is a unique selling point that can result in a competitive advantage. However, it does not in itself represent a competitive advantage. On the one hand, the USP must also be used sensibly and strategically. On the other hand, a real competitive advantage is sustainable and must be perceived as valuable by the customer - whether this applies to the USP must be checked in each case.

All of the factors that build up competitive advantages and thus ensure future success.

The price is a competitive advantage if the company is actually able to offer services more cheaply than the competition. Often, however, it is also the image of a low price that is built up through clever advertising.

If products and services are interchangeable, competition is usually only based on price. As a result, the company's return on investment is approaching zero. Only those who have a competitive advantage can enforce higher prices on the market. Conversely, those who have the lowest manufacturing costs can score points with price as a competitive factor.

An unfair competitive advantage arises when a company circumvents applicable competition law, e.g. B. makes inadmissible agreements with competitors or withholds negative information from consumers.

There are different approaches in business administration to describe the competitive advantage. In general, however, it can be said that a competitive advantage only exists if it is valued by the customer, is unique on the market and persists.

There are 3 competitive strategies aimed at building competitive advantage.

  • Differentiation: The competition here is based on a unique position in terms of offer, service and quality. This unique position allows the company to enforce a higher price.
  • Cost leadership: Here the company manages to provide a certain service at the lowest possible cost. This enables the company to offer a best price guarantee.
  • Specialization: Here the company concentrates on a lucrative niche in the overall market
  • Hybrid strategies: Here, a competitive advantage is built on both the cost level and the image level. Typical examples of this are textile concepts such as H&M or Zara

There are also typical competitive strategies for certain industries: in retail this is, for example, company type profiling or adventure retail.

Here management consultants speak of 3 levels of quality:

  • Basic quality: The aim here is to provide the services properly and without errors. The focus here is on avoiding breakdowns.
  • Quality of expectations: The aim is to meet the expectations of a specific customer group. An example is the glass of sparkling wine at the luxury jeweler or the café at the hairdresser's.
  • Surprise quality: This is considered to be the real chance to gain a competitive advantage. Perform certain services in such a way that the customer is enthusiastic and possibly even the press writes about them.

It is important that the basic quality, i.e. faultless service provision, must be right before the entrepreneur thinks about the quality of expectations and the quality of surprises.

Through clever marketing, companies can build competitive advantages, but not only. Technology, sales, good people, and good people management are also sources from which competitive advantage can emerge. The same applies to digitization.

5. Conclusion: competitive advantages as a permanent task

A sustainable competitive advantage is the basis for a company's long-term success. In order to create such a competitive advantage, careful market analysis and competitor analysis should be carried out. You should also differentiate your own services and offers down to the smallest detail and critically examine what is too similar in comparison to the competition. A competitive advantage is not even set and then never touched again. Rather, the competitive advantage belongs in marketing, in the business plan and on the agenda of every strategy meeting. It must be continuously checked and, if necessary, adjusted. The Business Model Canvas is a helpful tool not only to look at the market as a whole, but above all to clearly grasp the competitive advantages. Use our free tool to create your own business model canvas.

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