Competitive Advantage: The Ultimate and Actionable Guide for 2021.
What is a competitive advantage?
Definition of competitive advantage
A competitive advantage is a company’s “superior performance to other competitors in the same industry”.
That superior performance comes from an attribute that is unique to that company and very difficult to replicate, copy, imitate.
That attribute is usually: intellectual property (patents, copyrights, trademarks), brand equity, culture, know-how, reputation, unique competencies…(source)
A more detailed definition of competitive advantage
There are 2 types of competitive advantage:
- Comparative advantage: “A firm’s ability to produce a good or service more efficiently than its competitors, which leads to greater profit margins.” (source). This basically means that a company is able to produce at a lower cost.
- Differential advantage: “A firm’s products or services differ from its competitors’ offerings and are seen as superior.” (source). This basically means that a company is able to make a different or superior product.
Michael Porter’s competitive advantage
Michael Porter, a Harvard business school professor, published many essays on competitive Advantage. He is considered to be one of the most influential thinkers on this topic.
For Porter, companies can achieve competitive advantage through 3 ways (I am going to sum it up in the most concise way I can):
1- Cost leadership = Offering the cheapest option on the market.
2- Differentiation = Delivering more value than any competitor.
3- Focus = Serving a niche better than anyone else.
Other definitions of competitive advantage
Michael Porter is not the only one to have extensively written about this topic. You can also find:
- “Blue Ocean” (Kim and Mauborgne),
- “Uncopyable” (Miller),
- “Differentiate or Die” (Trout),
- “Creating Competitive Advantage” (Smith and Flanagan),
- “Competitive Advantage Champion” (Khalfallah) | #shamelessplug 😊
How to build a competitive advantage?
The academic theory on building competitive advantage
Phase 1) Getting the fundamentals right
The fundamentals are:
1- Defining clearly the value proposition of your company = what you offer and what problem you solve. (The “What”).
2- Defining the target market you want to reach = who has the problem you are trying to build a solution for. (The “Who”).
3- Identifying and mapping the competitors = in what environment do you compete? How is your solution different, better, cheaper than everyone else? (The “Where”).
Phase 2) Developing attributes
Once you have done this, you should focus your organization on developing one of the usual attributes of competitive advantage: intellectual property (patents, copyrights, trademarks), brand equity, culture, know-how, reputation, unique competencies…(source).
Missing the “how”
This process of 1) getting your fundamentals right and 2) developing those coveted attributes is unfortunately poorly documented.
Academic theory on competitive advantage does not give much more detail on the HOW. This is why professional managers and business owners (including myself) can be frustrated when reading some of the classics in this field.
“Produce cheaper, be different, be better…” is, at best, vague advice when you are leading an organization and need to take real-world decisions that can impact people’s jobs and livelihood.
There is a more actionable way to approach this and I am about to show you how.
The actionable theory on building competitive advantage
Differentiation is the new competitive advantage
Let me get straight to the point:
Cost leadership is not a viable strategy anymore.
Being the cheapest option on the market is not a long term option anymore. Markets are more transparent and globalized than ever. Access to inputs, capital, technology, expertise has never been easier — if you are fighting over price, you will lose and it is going to be an ugly fight.
So if cost leadership is not an option anymore, this is what we have left to create a competitive advantage: differentiation and focus.
What is differentiation?
1) Positioning your company,
2) In a specific area of the market where you can be #1,
3) And building the capacities to maintain that position over time.
The 4 differentiation strategies: the actionable way of building a competitive advantage
There are 4 methods of building a differentiated company and de facto a competitive advantage.
1 — The Unique Product Strategy
Designing at least one product feature that: is unique in the market,
and adds value to your target customer.
2 — The Unique Marketing Strategy
Investing an underserved channel that adds value to the target customer,
Creating unique content that adds value to the target customer segment.
3 — The Unique Bundling Strategy
Having a unique bundling/pricing combination, that adds value to the target consumers.
4 — Niching Down
Finding an underserved customer segment with these 3 conditions: a) Has a specific problem; b) Already purchasing products in the category; c) The total addressable market is large enough to sustain your company.
Then, designing the main feature that solves their specific problem significantly better than competing products.
You’ll note that this fourth differentiation strategy is actually similar to Porter’s focus strategy mentioned above.
If you want to understand these 4 differentiation strategies and know how to apply them for your business get my e-book.
Competitive advantage: examples and case studies
The Coolest Cooler
- example of the Unique Product Strategy (see above).
Heard of the Coolest Cooler? This cooler was launched on Kickstarter in 2014, and it is one of the most-funded Kickstarter campaigns ever. The campaign raised over $13 million. The Coolest Cooler immediately stood out in a market that was pretty much commoditized. What made it stand out is an impressive list of features. It had Bluetooth speakers, compartments for valuables, a magnetic bottle opener, a corkscrew, integrated plates, a ceramic knife, a cutting board and divider, rubber wheels, a blender, a USB charging port… And the list goes on!
The first time I saw the product I thought to myself: “Hmm…Do you really need a blender to enjoy a picnic?”. I honestly did not understand the success of the campaign. The product looked gadgety, at best. For the target audience, however, a blender in your cooler was a compelling offer. It added value. Hence, the $13 million. Even though the list of features was exceptionally long and looked a bit ridiculous to an untrained eye, the product was unique. In the old and commoditized cooler market, the Coolest Cooler could just not be ignored. This product is a good example of the unique product strategy you will discover in this book. Even though unfortunately, it turned out to be an unsuccessful and extreme example. Despite throwing one of the greatest Kickstarter campaigns of all time, the Coolest Cooler company shut down in 2019. They probably over-promised, and years after the campaign, backers were still waiting for the cooler they paid for. What you learn in this book is not about over-promising. Product-led differentiation is subtle. It is an art. Let me show you in my free e-book.
- example of the Unique Marketing Strategy (see above).
Patagonia is an outdoor clothing company that has built a solid brand in a very competitive market. Their competitors include Columbia, Craghoppers, Gelert, Helly Hansen, Karrimor, KJUS, L.L. Bean, Marmot, Millet, Nevica, North Face, Odlo, Regatta, Salewa, Salomon, Spyder…To name just a few! The company, founded in 1973, had an estimated revenue of $1 billion in 2018 according to Inc. magazine. They have the best revenue per employee ratio in the market topping Columbia, in 2018.
This financial performance is amazing considering how competitive the outdoor clothing/gear market is. It is also amazing considering how Patagonia is trying to convince its customers not to buy from them. They are famous for a campaign called “Don’t buy this jacket”.
Don’t buy this jacket.
REDUCE: We make useful gear that lasts a long time. You don’t buy what you don’t need.
REPAIR: We help you repair your Patagonia gear. You pledge to fix what’s broken.
REUSE: We help find a home for Patagonia gear you no longer need. You sell or pass it on to someone who needs it.
RECYCLE: We will take back your Patagonia gear that is worn out. You pledge to keep it out of landfills.
REIMAGINE: Together we reimagine a world where we take only what the planet can replace.
With any other brand, “Don’t buy this jacket” would sound terribly fake and cringy. Not with Patagonia. You have to be familiar with the brand and its environmentalism to understand this campaign.
Environmentalism in itself is not new in this industry. Many brands already use it as a communication tactic. So, what makes it different with Patagonia? What makes it genuine? What makes their customers love them when they say “don’t buy this jacket”? Clever reverse psychology aside, “don’t buy this jacket” works because environmentalism is the core component of Patagonia’s brand. Their environmentalism is not just another campaign tactic. It is their core content. They are intense about protecting the environment, so the campaign works without sounding fake. While other brands care about protecting the environment. Patagonia cares more about protecting the environment.
Patagonia’s differentiation comes from this nuance. That intensity in their content is unique and caters to a specific population. Patagonia’s mission statement is: “We’re in business to save our home planet”. Of course, it is still a clothing/gear brand but everything they do shows that they want to be a movement first and a business second. Movements have fans, followers, activists, not customers. Columbia’s customers care about the environment, but at the end of the day, they probably care more about product features, design, and price. Patagonia is for people who intensely enjoy the outdoors, intensely want to be closer to nature, intensely want to protect the environment. Patagonia is the only brand carrying that intensity. Of course, their products also contribute to their success but it is not their main differentiator. They have a unique marketing strategy, which enables them to create unique content. Let me show you how you can replicate this in my free e-book.
How to maintain a competitive advantage? And prevent getting copied?
If you are successful at developing a competitive advantage, others will be tempted to copy you.
And you have a problem because it has never been easier to copy a business.
Access to capital, distribution, and technology has never been easier. If a team decides to copy even the most differentiated company, given enough time, they will succeed.
So how can you prevent being copied once you are a differentiated company?
What you can do, however, is discourage anyone from trying.
Differentiation is about finding a market spot where you can be #1. And differentiation requires a long-term allocation of resources.
That is how you discourage copy-cats. You outrun them. Make sure you get that #1 market spot in your category and commit to your differentiation strategy in the long-term. It will appear like a waste of time to go against you.
- Competitive advantage is a superior performance given by a unique and uncopyable attribute
- Academic theory on building competitive advantage is poorly documented and not actionable
- There is a more actionable approach with 4 differentiation strategies, explained in my ebook (link here ✋).
- Maintaining a competitive advantage is about committing long-term to your differentiation strategy