A sustainable competitive advantage refers to a company's certain abilities, assets or attributes that are difficult to recreate or surpass in success. As such, they sustain their competitive advantage over other similar and likeminded companies in the market.
Specifically, "competitive advantages are conditions that allow a company or country to produce a good or service of equal value at a lower price or in a more desirable fashion," according to Investopedia. "These conditions allow the productive entity to generate more sales or superior margins compared to its market rivals. Competitive advantages are attributed to a variety of factors including cost structure, branding, the quality of product offerings, the distribution network, intellectual property and customer service... Competitive advantages generate greater value for a firm and its shareholders because of certain strengths or conditions. The more sustainable the competitive advantage, the more difficult it is for competitors to neutralize the advantage."
The term dates back some time. It was in 1985 that Harvard Business School professor Michael Porter first wrote the phrase "competitive advantage."
In 1985, Harvard Business School professor Michael Porter wrote the book Competitive Advantage: Creating and Sustaining Superior Performance. He put the book together in order to help companies figure out how to gain not only a competitive advantage against others in their industries, but also a competitive advantage that they could sustain. So he put together clear goals, strategies and operations for them to build their own sustainable competitive advantages.
Today, the term is still widely used in the business world, and companies still strive to gain sustainable competitive advantages over one another.
Here's what you should know about sustainable competitive advantages — the basic types and how to achieve one yourself.
What is the difference between a competitive advantage and sustainable competitive advantage?
Though similar, having a competitive advantage is neither the same nor as great as having a sustainable competitive advantage.
"Competitive advantage exists when a particular company consistently outperforms other companies in the same industry; a company is considered to be outperforming others if profits are higher than the competition's profits, and the competitive advantage is thought to be stronger when it lasts for a longer period of time," according to Study.com. "Those companies who are able to maintain a competitive advantage for many years are thought to have a sustainable competitive advantage."
Here are some examples of sustainable competitive advantages to give you a better idea:
- Powerful Brand
- Low-Cost Provider
- Product Differentiation
- Pricing Power
- Highly Skilled Labor
- Brand Image Recognition
- A Unique Geographic Location
- People Assets
- Strategic Assets
What are the three basic types of competitive advantage?
While there are many kinds of sustainable competitive advantages, there are three basic types of sustainable competitive advantages in which most companies look to excel.
1. Cost Leadership
Cost leadership refers to a company that can offer the best value-price combination. They offer reasonable value at a lower price than their competitors, which means that clients and customers wouldn't ever have a reason to look elsewhere. Because the objective is to become the lowest-cost producer (with the best value), companies often resort to large-scale production and exploit economies of scale.
Differentiation refers to a company that can offer different, better products and/or services than anyone else. They do this by providing unique or super high-quality products or services. They might also do this by delivering their products or services faster or more efficiently than other companies. In other words, they achieve differentiation thanks to innovation, quality or customer service — or a combination of the three.
Differentiation is important because, if a company can successfully differentiate themselves, then that company is able to set a premium price on its products or services.
Focus refers to a company that understands its target demographic and focuses in on that demographic more than their competitors in the industry. It might focus in on a very specific market, a small niche that other, perhaps larger companies, wouldn't typically serve. This kind of focus makes it a critical, necessary player for the clients and customers who turn to it.
What are some examples of companies with sustainable competitive advantages?
Some example businesses with sustainable competitive advantages include McDonald’s, which mainly relies on a cost leadership strategy, using economies of scale to produce fast food at a low cost (even lower than its competitors!). Walmart is another one that relies on a cost leadership strategies. Meanwhile, Louis Vuitton, relies on differentiation, since it offers luxury products and can, therefore, put a premium price on products.
How do you achieve a sustainable competitive advantage?
There are several steps you can take in order to achieve a sustainable competitive advantage in your industry.
Here are three moves to make so that you truly understand who you are selling to (both the market segment and your customers/clients), as well as why they'll choose you and how you can continue to innovate so that they continue to choose you.
1. Get to know the market (and your competitor landscape).
Truly do your best to get a full grasp on the market and its segments so that you understand the niches that are being well serviced by your competitors. Those holes are where you can come in and provide real value to clients and customers.
You need to know exactly what the market is, what benefits you can bring the market and who your competitors in the market are (as well as what benefits they're bringing the market already).
2. Get to know your target demographic.
Once you know the market, it's also important to get to know your target demographic. What do they really want or need? Conducting regularly surveys and studies to get a read on what's in demand is key to understanding how you can provide the best possible value.
3. Learn your strengths and core competencies.
Part of leveling up is understanding your own strengths and core competencies, and then playing on those. See how you can use these strengths to continue to innovate and provide value.
AnnaMarie Houlis is a feminist, a freelance journalist and an adventure aficionado with an affinity for impulsive solo travel. She spends her days writing about women’s empowerment from around the world. You can follow her work on her blog, HerReport.org, and follow her journeys on Instagram @her_report, Twitter @herreport and Facebook.