What Is Competitive Advantage? + How to Find Your Strategic Edge

Competitive advantage is the upper hand a company has (or seeks) over its competitors. A company can gain that edge through various means, including brand size or longevity, product quality, market share, and more.

In this article, you’ll learn about the different factors that drive competitive advantage. Afterward, if you're interested in strengthening your business analysis skills, consider enrolling in the IBM Business Intelligence (BI) Analyst Professional Certificate, where you'll learn how to generate valuable insights through data warehousing, profiling, and evaluation, leading to informed decision-making and process improvement.

What is competitive advantage?

Competitive advantage is, simply put, the advantage a company has over its competitors. Having a competitive advantage can mean that your company's brand, products, or services are more attractive to customers than your direct competitors, which in turn leads to higher profitability.

For example, offering a product at a lower price than your competition can lead to a competitive advantage. Customers who are conscious about saving money will be more inclined to purchase your product on that basis. Or you may offer the fastest shipping available, drawing in customers who are in a rush to receive their order. 

Established brands may also have a competitive advantage thanks to customer loyalty or market share. For example, if a big soda company wants to release a new soda flavor, it would have a competitive advantage over a small indie brand releasing the same flavor because of its existing reach.

Why is competitive advantage important?

A competitive advantage is important because it helps you define your positioning in the market and explain to customers why your product or service should be their natural first choice. After identifying your competitive advantage, you can drive a higher profit margin by prioritizing activities that help you earn a bigger or more precise market share. When you demonstrate the value of your product to customers—for example, by using price, marketing, or quality cues—you can attract a group of loyal customers who will want to buy your product repeatedly. 

3 approaches to competitive advantage

Your competitive strategy is how you'll develop an advantage, but it's important to pick the right one. The type of competitive strategy you need depends on the value you offer your customers. Let’s take a closer look at these strategies.

1. Cost

One common competitive strategy focuses on the cost of your product or service. This may mean finding a way to offer your product for a lower cost compared to your competitors, such as streamlining processes or successfully negotiating lower prices with your vendors. When you can offer your product for the lowest price, you’ll attract customers who are looking for the best deal, developing cost leadership. 

On the other hand, having the lowest price isn’t the only way to employ a cost-based competitive strategy. Luxury and name-brand products use a higher price point to signal to customers that their offerings are more elite than other choices. Although the object's price is part of the competitive advantage, luxury brands use a different strategy called differentiation to highlight what makes their products superior.

2. Differentiation

Differentiation is a strategy brands use to demonstrate how their product or service is unique and unlike competitors' offerings. You can build a loyal customer base willing to spend more money on your products by offering a product that customers perceive as more valuable. When they compare your product to similiar ones, they understand the added value represented by a higher price.

You can position yourself as different from your competitors either in a broad way—building a company that operates fundamentally differently than others in their niche—or in a more focused way by developing superior products with new technology, specialized features, or higher-quality materials. For example, Apple consistently offers new cell phone models at higher and higher prices by touting its enhanced technological abilities with each new iteration.

Example. Despite the higher price of Apple phones, 48.7 percent of cell phone users in the US owned Apple phones in 2022 [1]. Although Apple positions itself as different and better than its competition, it still offers a product nearly half the market can access. If Apple were to continue differentiating itself into a smaller core group of users, it would employ a similar competitive advantage called a focused niche. 

3. Focused niche

A focused niche competitive advantage strategy means offering a product custom-tailored to a certain use or group of people. When you have a smaller, focused core of potential clients, you can further explore their pain points and deliver a product designed to address their needs. Designing a product or service with your end customer in mind can help you delight your customers and create customer loyalty. 

Example. While other automakers may sell millions of vehicles annually, Ferrari shipped a mere 11,155 vehicles in 2021 [2]. With a price tag that starts at nearly a quarter of a million dollars, Ferrari targets a core group of wealthy car enthusiasts shopping for a new car.

Other types of competitive advantage

You can develop a strategy around the advantage whenever you can find an edge over your competition. More examples of competitive strategy include:

• Geographic competitive advantage: Your location may give you access to resources others don’t have. For example, you might have a more strategic location that draws in more customers, more accessible suppliers, or access to trade routes through rail lines, shipping ports, or airports. 

• Customer service competitive advantage: By providing the best customer service experience, you can stand out from others in your market and build a loyal base of customers who appreciate the help you’ve offered. 

• Skilled workforce competitive advantage: If you can attract the most talented employees to your company, you can build a competitive advantage based on their advanced set of skills. 

2 frameworks for determining a competitive advantage

Although each company will develop its own process of setting competitive advantage strategies, you should be aware of two frameworks for considering competitive strategy. The five forces and VRIN are two ways of determining what makes you different from your competition. 

1. Five forces 

The five forces that impact your company’s competitive advantage include:

1. Suppliers

2. Competitors

3. Similar products customers might choose

4. Customers

5. Threat of new competition

According to Michael Porter, an economist and Harvard Business School professor, these five forces restrict how much profit a company can make. 

Your product or company can gain value by maintaining supplier relationships, drawing in new customers, and differentiating from similar products. Your company can be constrained by market competition, emerging threats, the total market size, and difficulties in obtaining needed supplies. Understanding how these factors interplay can help you see the strengths and weaknesses of your positioning. 

2. VRIN

Jay Barney, a professor of strategic management at the University of Utah, developed the acronym VRIN—value, rarity, imitability, and nonsubstitutability—to describe four qualities company resources can have that add to the company's competitive advantage. If a company's resources, such as products, technologies, or brand, have a high level of these four qualities, they have the potential to form the basis of competitive advantage.

• Value: If your product or service offers value to your customers, they may be willing to pay more for your brand than others. Conversely, you may offer value to customers in the form of a lower price point. 

• Rarity: Rarity helps differentiate your product from others. If the factor that provides your customers with value is something that your competition isn’t doing or isn’t doing well, you may have a rare resource you can use to your advantage. 

• Imitability: Imitability speaks to how easily it would be for your competitors to imitate the rare value you’ve identified. For example, your competition might release a similar product to yours, but they might have a harder time imitating your brand name and reputation.

• Nonsubstitutability: Lastly, nonsubstitutability refers to how easily customers can swap in another product to meet the demand your product fills. The best competitive advantage will be one where no true substitute exists. 

Learn more about competitive advantage on Coursera

Companies can determine competitive advantage from a business standpoint as well as a marketing one. Develop or strengthen important data skills in these key areas:

• Learn how to apply data analytical techniques to important business problems with the IBM Business Intelligence (BI) Analyst Professional Certificate.

• Learn how to use essential tools like spreadsheets, SQL, and Python to collect, connect, and analyze relevant marketing data with the Meta Marketing Analytics Professional Certificate.