What are the sources of sustainable competitive advantage a business can exploit? How can I dominate my niche? How did companies like Apple, Google, Microsoft, Wal-Mart, General Electric, Berkshire Hathaway and Virgin become market leaders? Well, you will find out below.
“If you don’t have a competitive advantage, don’t compete.” – Jack Welch
Most entrepreneurs and business owners know that one of the key to surviving in business is to have a competitive advantage. Every business must have a competitive advantage; if a business doesn’t, then its days are numbered. Companies that have stood the test of time are companies with a strong competitive advantage.
“An organization’s ability to learn and translate that learning into action rapidly is the ultimate competitive advantage.” – Jack Welch
29 Best Sources of Sustainable Competitive Advantage in Business and Examples of Companies Using Them
“If you don’t have a competitive advantage, don’t compete.” – Jack Welch
1. Production Process
The organization and practices of a company is one of its strongest sources of competitive advantage. If you have superior methods of producing results you will definitely enjoy competitive advantage. Processes and practices can be difficult for competitors to replicate, and as such, they would become unique to you, at least for a while.
In 1855, inventor Henry Bessemer took out a patent on a process for the mass-production of steel. The process was so valuable that it reduced the cost of producing steel from £40 per ton to £6 per ton. It went on to become one of the most valuable patents in history.
Bessemer decided to sell the patent, but the person/company that decided to buy the patent didn’t know how to run the process. He just could not get the process to work like Bessemer did because the patent involved some elusive tacit knowledge that was difficult to express on paper.
It turned into a legal tussle, but in the end, Bessemer decided to run his own steel mills. His company became one of the world’s largest and most profitable firms. This was made possible only because his business process was difficult to replicate.
2. High volume production
If your business has the capacity to produce great quantities at a time; then it can gain a sustainable competitive advantage. The company may have to reduce its profit margin, but it will recoup it through high volume sales and turnover.
Example, Ford established an assembly line that enabled its products to be mass produced and as such bringing great profits to the company in the 50s. It was able to produce more than 50 million cars in less than a span of a decade thus enabling it to monopolize the market for long.
3. Human resource
People are the driving force behind most competitive advantage. If your employees are better than others at innovating, creating, producing and establishing relationships, you may achieve competitive advantage.
- For example, if you hire a modern day Thomas Edison who pumps out ground shaking innovation after ground shaking innovation, that is a sustainable competitive advantage worth holding on to. Your competitors may be able to copy your products but they’ll never be able to copy your people. You have to beware though for companies are always on the lookout for highly competent employees to poach.
4. Market Anticipation
If a company is able to anticipate what consumers are likely to make use of, they would gain a lot of competitive advantage for themselves. A lot of companies have stayed ahead of their industry by always anticipating trends and even creating needs that never existed before. Exhaustive marketing would ensure these needs are entrenched in the minds of consumers, and thus providing a steady market for the company’s products and services.
- For example, Facebook is the first platform that really defined social networking. The way it executed its services got people wanting to key into the service. They anticipated a need to keep long lost friends connected, and they went ahead to craft a service that fulfilled that need. In fact, Facebook was able to create a need that wasn’t already in existence, and filled the need it created.
Sustainability delivers competitive advantage. Reports have been produced showing that companies who have embraced sustainability have out-performed companies who have not. Sustainability ensures that the values a company is known for are preserved no matter how much it grows and expands. The companies who have embraced sustainability have a significant competitive advantage over those who have not.
- An example here would be Coca Cola. Coca-Cola sells carbonated sugar water yet they have built one of the most valuable and recognizable brands in the world through product and quality sustainability.
Offering customers’ unique experience whenever they patronize your services is also a great competitive advantage. A good example is Starbucks. A good majority of people would admit that their product is not significantly better than the competition. The reason they are so successful, and people patronize them with such high level of frequency, even to the extent of pre paying for their products, is the experience.
Starbucks knows this and embraces it. The company provides in store content network, free Wi-Fi, phone charging ports, and exclusive music releases etc. There are almost the only company that trains its customers to order a product using not only the right words but in the right order.
7. Brand image
Brand image takes long to build, but once it has been built, and customers trust the brand, then it serves as a huge competitive advantage for the company in question. Also, a brand that says something positive about the customer who buys the brand is a powerful competitive advantage. We all want to convey a positive personal image, and we tend to use favourable brands to do that.
- For example, Nike. Nike has a great brand image that confers sophistication on the user of their product. The company creates a running experience through marketing mostly, rather than trying to win minds with technological developments in the area of footwear.
8. Technological advancement
The world of technology is racing ahead of everything else, and companies are using superior technology to carve a unique niche for themselves. By being the first inventors or innovators of a particular product, they gain exclusive rights to its production and marketing.
- Apple and the iPhone are great examples here. This company has held its leadership position using innovation as a competitive advantage.
9. Corporate reputation
Companies struggle through various means to maintain a good reputation for themselves, because reputation breeds consumer loyalty. Corporate reputation is a form of sustained competitive advantage that companies such as Price Waterhouse have leveraged to become world class entities.
10. Low pricing
A competitive advantage that is yet to fail companies is low pricing. With the poor economic situation, a lot of people prefer to shop where they can get discounts. This is the sole reason why companies like Walmart are still holding on to a large chunk of the grocery market.
Innovation is another way to gain competitive advantage. If a company is constantly thinking up new things or releasing new features or products, then it would very much stay ahead of its competitors and even lead industry trends.
- Example, Google is the number one search engine and the best website for optimization searches that returns the most accurate results in no time. Google has achieved a competitive advantage by offering innovative services such as Google Search, Gmail, Google Finance, Google Docs, and more, thus maintaining an incredibly powerful infrastructure and occupies 70% of the internet market.
12. Strategic Alliance
Forming strategic alliance is quite beneficial for a business as such alliances open up hitherto un-assessed routes for the business. Most firms cannot get anywhere in the business world riding on their own individual capabilities, and as such, they need to form alliances.
Strategic alliances are joint ventures that businesses use to pool resources and gain themselves exposure at the expense of other competitors not in the alliance. Granted that most alliances formed end in failures, but any alliance that solidifies can become a great competitive advantage for the organization.
- For example, Spotify and Uber can be referred to as a genius partnership. When you enter an Uber car, you are welcomed by your favorite playlist, and this provides added value, thus providing a source of competitive advantage and exclusivity for Uber cars. For Spotify, it provides an incentive for users to upgrade to the premium level that Pandora, iTunes or YouTube don’t have.
13. Market Penetration
One growth strategy in business is market penetration. A small company uses market penetration strategy when it decides to market existing products within the same market it has been using. The only way to grow using existing products and markets is to increase market share. Market share is the percent of unit and dollar sales a company holds within a certain market vs. all other competitors.
One way to increase market share is by lowering prices. McDonald’s for instance offers what other quick serve restaurants do, including speed service, but they were able to gain the massive market they have because of their initial extensive market penetration strategies.
14. Exclusive re-selling or distribution rights
Holding exclusive distribution right is another source of sustainable competitive advantage Exclusive distribution is an agreement between a supplier and a retailer granting the retailer exclusive rights within a specific geographical area to carry the supplier’s product. When a company holds exclusive rights to a product within a given territory; that product can only be sourced from the distributor or holder of such rights.
Few competitive advantage processes work better than this. An example of exclusive distribution agreement is one that was undertaken between Laser Shot, Inc. in Texas and Lamperd Less Lethal, Inc. in Canada. Laser Shot, Inc. developed forearms simulators and Lamperd Less Lethal was the only company licensed to sell those items in Texas.
15. Organizational Culture
Organizational culture is said to be the shared habits, behavior, beliefs, mission, norms and symbols of an organization. For an organizational structure to be a source of competitive advantage, the employees need to have a common mission.
You could have the best and brightest workforce on the planet, but it would be of no effect if they have no common mission. An effective culture focuses the energies and abilities of their employees on producing meaningful results. An example of a company that uses company culture as a competitive advantage is Twitter.
Employees of Twitter can’t stop raving about the company’s culture including their rooftop meetings, friendly coworkers and a team-oriented environment in which each person is motivated by the company’s goals. No only these, but they get yoga classes, vacations and various other perks that helps them remain loyal to the brand.
16. Method of Sale
Dell transformed the PC industry by cutting out the middlemen. It invested in direct sales channels to increase consumer preference and undercut its competitors with lower prices. Innovations in sales techniques can open up new markets while cutting costs.
17. Market Responsiveness
Market responsiveness is a great competitive advantage especially for companies that retail products. The company should be able to respond to consumer demands quickly, or even anticipate their needs. H&M is the second largest clothing retailer in the world, and they bring designs from the runway to its stores with remarkable speed, neglecting the six months wait before clothes are expected to hit the shelves.
18. Company Flexibility
The success of manufacturing companies in today’s business environment depends on their ability to keep up with the constantly changing marketplace. The ability to change swiftly is a strength and source of sustained competitive advantage that Microsoft leveraged upon to become the largest software company in the world.
Businesses have quickly realized that speed can be used to develop competitive advantage. Speed can include speed to market, speedy delivery and speedy service, the most important thing is that things are done with speed. Any time a business can do something faster than the competition, they are going to experience some level of success. A company that has mastered this need for speed is Amazon Prime.
Not only are they extremely efficient and accurate at delivery service, but speed is a major priority. Through Amazon Prime, the company’s flagship paid membership service, customers can get guaranteed two-day delivery on all products that are Prime eligible.
20. Product Differentiation
Differentiation is a strategy that businesses often use to set themselves apart from their competitors. Businesses that differentiate themselves typically look for one or more marketable attributes that they have that can set them apart from their competitors.
They then find the segment of the market that need those attributes or products and market to them. The process can also work in the other direction with businesses conducting research to determine which things consumers find most important and then developing a niche market for those products or characteristics.
Whole Foods was able to go beyond grocery into building on their staff, molding them into content generators and thought leaders, thus making their marketing team a mix of tech-savvy and traditional marketers.
21. Strong research and development capabilities
A business can gain a strong competitive advantage in its industry if it has strong research and development capabilities. Strong research and development reflects in the company’s product development processes. Companies with strong research capabilities often lead the market with innovation.
22. Access to intellectual properties
The next source of sustainable competitive advantage a business can exploit is the holding of an intellectual right; which can exist in the form of trademarks, trade names, copyrights and patents.
23. Ownership of capital equipment
This source of competitive advantage is mainly exploited by companies operating in industries where heavy machinery is needed. Example of such industries where ownership of capital equipment is a competitive advantage includes publishing, manufacturing, oil exploration, construction and mining.
24. Economic factors
The seventh source of sustainable competitive advantage is the economic factor of a region within a speculated time frame. A manufacturing company operating from China or India will have competitive advantage over a company manufacturing in the United States because the economic system in China is more favorable with respect to start up overhead and labor cost.
25. Superior database management and data processing capabilities
This source of competitive advantage is quite clear and understandable. A company that demonstrates the capacity to process data speedily will have a competitive advantage over other firms with lower processing capacity. This source of competitive advantage usually plays itself out in the banking industry, telecommunication industry and the service industry in general.
26. Strong marketing strategy
In the market place, the company with the best marketing strategy wins. No doubts about it. The competition to gain a stronger competitive advantage in the marketplace is the reason why giant corporations spend millions of dollars on marketing research and advertising annually.
27. Access to working capital
Access to working capital is one of the strongest sustainable competitive advantages a business can have over its competitors. Access to working capital is the difference between a billion dollar company and a million dollar company or a small business and a big business.
28. Excellent management team and operations
Show me a business that is a market leader in its industry and I will show you a business backed by a strong management team. Exploiting other sources of competitive advantage without a strong business team on ground will only be a futile attempt. A business management team is essential to harnessing opportunities that create the needed competitive advantage.
29. Barriers to entry or monopoly
Some businesses have gained competitive advantage because the entry in their industry has been limited by surrounding circumstances. A good example of industry where barriers to entry creates competitive advantage is the oil exploration and mining sector (industries where licenses are needed to gain entry because there is government restriction on entry).
Monopoly is also a sustainable competitive advantage and can be gained by having strong ties with the government. There are a lot of other ways companies can gain competitive advantage over companies in the same line of business.
Superior product or customer support, barriers to entry, localization, business processes, production system, technological advancement, employee engagement, cost leadership, etc are also tried and trusted methods. The key to gaining competitive advantage is for the company to find what it is good at and strive to do it better than the competition.