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Competitive advantage is how businesses get ahead of their rivals and gain a larger portion of the market share to drive up their own profit margins. The most common definition of competitive advantage is the ability to not only move ahead of your competitors, but also to stay ahead.
There are different types of competitive advantage, as we will see, and within these types there are multiple ways a company can achieve success.
Types of competitive advantage
The first type is comparative advantage, which refers to a company’s capacity to provide a product or service either more efficiently or more cost-effectively than its direct competitors offering the same or similar products or services. It sometimes referred to as competitive pricing advantage.
The second type of competitive advantage is differential advantage, which means one company’s products or services are markedly superior to their competitors. This is arguably the best competitive advantage to have as it has the potential to generate greater profit margins through a larger market share, though it is also often the most difficult to achieve.
How to gain comparative advantage
Comparative competitive advantage often results in a significant number of consumers opting for the less expensive of two comparable products or services, generating greater profit margins for that company thanks to the lower cost of production or service provision, which is passed onto the customer via lower prices.
Another form of comparative advantage is the geographical location, where the site of one business simply makes it more convenient for a majority of consumers.
Efficient internal systems are another significant element of competitive advantage theory, where the daily operations of one company are more streamlined and less costly in terms of labour as well as financial expenditure.
How to gain differential advantage
Differential advantage can be achieved in a variety of ways, with a strong brand identity being one of the most obvious.
A menu item from an independent single-site restaurant might be superior to a worldwide chain’s version, which in theory should give it the differential advantage in that locale. However, the worldwide chain has a strong brand identity, which gives it a different kind of differential advantage and one that is likely to bag a larger market share in the long run. The single-site restaurant can still compete in its local area by offering superior ingredients and craftsmanship in its food, but they are unlikely to siphon off enough of the market share to worry the worldwide chain.
Other differential advantages include using more advanced technology than competitors, or having a crucial element of the product patented. You can also gain a differential advantage by hiring superior talent that do a better job than competitors are able to achieve.
Gaining competitive advantage through innovation
Innovation has always been one of the most important aspects of gaining a sustainable competitive advantage. A company can steal a huge march on its competitors by providing their product or service in a new and different way.
Of course, it is not always as simple as just doing things differently or coming up with something new, as the business world is littered with failed attempts at innovation. The innovation has to provide previously unachievable or unforeseen benefits that suit consumers. Such innovations that catch on with consumers often end up changing the industry landscape as competitors scramble to copy and catch up.
If you can get it right then it is a great opportunity to not only move ahead of your competitors but to start building a strong brand identity which will reap its own rewards in the long run.
The competitive advantage of operational efficiency
One of the simplest and yet most effective ways of gaining a competitive advantage is to make your internal systems more efficient and effective. One way you can achieve this is by simplifying your invoicing and payments processes, which then reduces the time you spend chasing payments leaving you free to focus on the external advantages for your business.
We can help
If you’d like to find out more about gaining competitive advantage, contact our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments to make your internal systems more efficient and give your company a valuable competitive advantage.