How to Create a Competitive Advantage (2024)

What’s your brand’s competitive advantage?

Every business owner or marketer should be able answer this question—quickly and succinctly. If you can’t, you may have a problem.

That’s because you can be sure at least one of your top competitors has clearly articulated their competitive advantage—and is probably capturing market share because of it.

Your competitive advantage is what sets you apart—both from the competition and in the minds of your target audiences. Defining and communicating this competitive edge is one the most powerful ways to convince customers to choose your brand over the other guy.

What else goes into a competitive advantage? What’s the best way to define one for your own business? Below, we’ll answer these questions and more, including an exploration of the ultimate competitive advantage: your brand.

CONTENTS

• What is Competitive Advantage?
• Competitive Advantage vs Comparative Advantage
• Porter’s Generic Strategies
• What Makes a Competitive Advantage Sustainable?
• How to Create a Sustainable Competitive Advantage
• Why Brand is the Ultimate Competitive Advantage
• Competitive Advantage Examples
• The Takeaway

What is Competitive Advantage?

Competitive advantage is the capacity or attribute that enables a brand to outperform its competitors. It’s the reason a customer chooses one brand over another.

When tasked with the question “what is competitive advantage?” Philip Kotler, who some call the father of modern marketing, defines it as “a company’s ability to perform in one or more ways that competitors cannot or will not match.”

There are many types of competitive advantage, but the most important factor to the success of a competitive advantage is sustainability—that is, an advantage that’s durable over time and able to withstand fluctuations in the market and competitive landscape. Competitive advantage is an essential component of any comprehensive brand strategy.

Competitive Advantage vs Comparative Advantage

Key to any competitive advantage definition is the difference between competitive advantage and comparative advantage. While the two terms are often confused or used interchangeably, comparative advantage is technically a subset of competitive advantage.

A brand with comparative advantage is able to produce the products or services it offers more efficiently than other brands in the space.

If Brand A can produce equal or greater output as Brand B, working with a smaller input (labor, equipment, fuel), Brand A has a comparative advantage over Brand B. Comparative advantage, then, is a metric of what economists call “relative opportunity cost.”

By comparison, competitive advantage is any advantage that enables Brand A to capture more market share than Brand B.

With that important distinction out of the way, let’s get back to unpacking the meaning and business value of competitive advantage.

Porter’s Generic Strategies

The preeminent thinker on competitive advantage is Harvard Business School Professor Michael Porter. His definitive textbook, “Competitive Advantage,” looks at what he calls the “generic strategies” of competition, breaking the idea into two factors: competitive scope and competitive advantage.

Porter posits that a brand’s competitive scope is either narrowly targeted or broadly targeted, while its competitive advantage is either cost-based or differentiation-based. If we take these two intersecting factors and plot them on a grid like that above, where a brand falls on the quadrant determines its competitive strategy. We’ll unpack the implications of this below.

After researching hundreds of businesses and sorting their competitive differentiation according to the above criteria, Porter found three ways that brands can define their competitive edge: cost leadership (aka, the no-frills approach), differentiation (a brand with uniquely desirable offerings), and focus (specialized offerings for niche markets). This last category, focus, Porter segments into cost focus and differentiation focus, giving us the four quadrants of our diagram.

One of Porter’s most salient findings is that brands without a clearly articulated competitive strategy (i.e., those that don’t fall cleanly into one of the four quadrants), wind up forever “stuck in the middle.” Brands in this no-man’s land are unable to persuasively make a case for why customers should choose them over another brand.

Let’s take a closer look at each of Porter’s three “generic strategies”:

1. Cost Leadership

Brands whose competitive strategy centers on cost leadership provide reasonable value at a lower price. Think budget brands like Walmart, McDonald’s, and IKEA.

While the appeal of cost leadership brands to consumers is obvious, the businesses behind them are usually forced to find creative ways to relentlessly improve operational efficiency.

For some businesses, this means lower wages compensated by more intangible benefits like stock options, PTO, or growth opportunities. Other companies use unskilled labor surpluses, benefiting from economies of scale and bulk purchasing as they grow.

The takeaway here is that a brand whose advantage is communicated in terms of cost leadership must always be on the lookout for ways to maintain their edge in the market when it comes to pricing.

2. Differentiation

A brand whose competitive advantage strategy is centered on differentiation delivers a superior product or service than other brands in its competitive landscape.

“Superior” here might mean a higher quality product, a faster service, or more advanced technology. Apple, Nike, and Harley Davidson are all good examples of brands whose competitive advantages center on differentiation.

Regardless of how they are differentiated, brands like these are able to charge a premium for their offerings. That’s because customers who gravitate toward effectively differentiated brands are less concerned about price and more concerned about the functional, emotional, or self-expressive brand benefits.

3. Focus

Finally, brands with focus-based competitive strategies target highly specific audiences with offerings that are uniquely specialized to meet their needs. These focused benefits can be geared around either cost or differentiation, the point is that they are highly specific to a unique customer base.

Brands like Amazon, The Home Depot, and Costco have pursued strategies focused on cost effectiveness, while brands like Bentley, Rolex, and Gucci are heavily focused on differentiation.

Whether it is focused on cost or differentiation, a brand with a focus-based competitive advantage strategy must understand its target audience better than its competitors. These are niche offerings that appeal to niche demographics. For these brands, tools like customer research and regular brand audits are essential to maintaining their advantage.

Whichever quadrant it lives in, the keys to any successful competitive strategy include clearly defined objectives, tactical planning, and, most importantly, the operational wherewithal to support them. Insofar as it undergirds your brand promise, it’s essential that you’re able to execute on whichever competitive strategy you decide is best.

As we’ll see in the next section, the mark of a true competitive advantage boils down to one thing: sustainability.

What Makes a Competitive Advantage Sustainable?

If you drill down into Porter’s classifications above, you’ll find that competitive advantage boils down to not just the value proposition of a given brand, but the way in which that value proposition is delivered.

With this in mind, we see a range of ideas that businesses often cite as their competitive edge:

• Price
• Speed of delivery
• Speed to market
• Technology
• Design
• Scale
• Customer service
• Personalization
• Experience

The problem is that any one of these capabilities is rarely defensible as a competitive advantage on its own. And even if you can realistically lay claim to a single capability as your competitive advantage, it’s even rarer for that advantage to be sustainable over time.

Warren Buffett once said, “The key to investing is determining a company’s competitive advantage—and, above all, the durability of that advantage.”

A competitive advantage must be sustainable, or in Buffett’s words “durable,” if it is to be of any advantage at all. That is, it must stand the test of time, including market fluctuations and the entry of novel competitors.

Let’s take a closer look at a couple of the capabilities above to see if they are actually sustainable, in and of themselves, starting at the top: price.

If a brand claims to offer the lowest cost products or services within its vertical, this claim can only withstand the entry of new competitors for so long. When a new competitor comes along and offers a lower price point for the same offerings, the inevitable strategy is to lower prices even further. But what happens when the competitor lowers their prices even further, or when a new brand enters the space offering lower margins?

You can see how differentiating on price quickly becomes a race to the bottom for all brands involved. As such, it does not constitute a sustainable competitive advantage.

A similar situation is true for a capability like speed or technology. Amazon and other behemoth retailers have invested billions of dollars in the ongoing effort to shrink the time of delivery to just hours—or even minutes. It’s no longer realistic for brands to compete with the logistical capabilities of such enterprises.

It isn’t just price and delivery. The problem with choosing any individual capability as your competitive advantage is that there will always be the possibility of another brand with a superior claim. These types of advantages rarely stand up to the pressures of the market over time. None can be said to be inherently sustainable.

So, how do you create a sustainable competitive advantage that will make investors like Warren Buffett salivate? By developing a multifaceted framework of differentiation.

How to Create a Sustainable Competitive Advantage

So far, we’ve looked at three strategic approaches to competitive advantage, unpacked some of the individual capabilities that these strategies entail, and found that any individual capability on its own will rarely stand the test of time as a sustainable competitive advantage.

So, how do you create a sustainable competitive advantage? By developing a multifaceted framework where the advantage you have over the competition exists in the intersection of three factors of differentiation.

To build and maintain a sustainable competitive advantage, start by identifying three key factors about your brand:

1. Value

What is the real value your business provides? Your products or services might offer your customer dozens of features or benefits, but what, ultimately, is the problem they solve?

If you offer an analytics platform, for example, the bells and whistles that make your product unique do not constitute the real value it provides. Its real value lies in the confidence it offers your customers to make informed business decisions.

2. Customers

What do your customers truly need? There are a lot of things your customers like. When the economy is going well and abundance is widespread, customers will pay for all sorts of cool features that are nice to have.

But what will your customers still need when the next recession inevitably rears its ugly head? What do you provide that is indispensable to your customer’s business?

A solution to customer needs that transcends market volatility is the second essential component of a sustainable competitive advantage.

3. Competition

What do you do better than any other business? Every business excels at something; the secret sauce behind their success. Whether it’s specialization, efficiency, or service, pinpointing the one thing you do better than any other business in your field is the final lens you need to identify your sustainable competitive advantage.

This is one area where singularity is key. In fact, it’s rare for a business to be truly exceptional at more than one thing. Look at athletes, musicians, artists—those who reach expert professional status generally have a singular discipline at which they are better than 99 percent of the population. What’s your business’s one thing?

What is the real value you provide, that your customers truly need, and that no one else does as good as you? Answering these questions is a surefire way to develop a sustainable competitive advantage.

You could offer the most valuable product in the world and produce it in a way that far outperforms your competitors, but if your customers don’t truly need it, you don’t have a sustainable competitive advantage.

Or you could offer an inherently valuable service that meets an ongoing need of your ideal customer, but if a competitor can fill the same need faster or more efficiently, it isn’t much of an advantage at all.

At the end of the day, there might be nine things your company does really well. Your customers might desperately need three of them. But only one of these you do better than anyone else. This is your competitive advantage.

This multifaceted framework meets what author Brian Tracy says are the ultimate criteria for any competitive advantage in business: a proposition that is “perceivable, promotable, and something the market will pay for.”

Why Brand is the Ultimate Competitive Advantage

Defining your competitive advantage is an essential step for any brand. But it’s only one step of many in developing a comprehensive brand positioning framework. That’s because the only way to get the most out of a well-defined competitive advantage is by building an equally strong brand around it.

In fact, all things being equal, a strong brand will always be the ultimate competitive advantage. To unpack this idea, we’ll first need to define what we mean by a strong brand.

Multinational market research firm Kantar Millward Brown, defines a strong brand as one that is:

1. Meaningful: It appeals more, generates greater love, and meets customers’ expectations and needs.
2. Different: It is unique in a positive way and stays ahead of the curve for the benefit of the consumer.
3. Salient: It comes to mind spontaneously as the brand of choice for key needs.

Taken together, these three brand attributes can be seen in all of the world’s most valuable brands—from Target to Starbucks to Salesforce. They drive the ROI of branding, explaining why customers will always be willing to drive a little farther, wait a little bit longer, and pay a little more for a brand they love.

In his report “Why Aren’t We Doing This?” legendary global marketing consultant Peter Field sums up the unparalleled advantage of a strong brand this way:

“Brand building delivers sustainable competitive advantage in a world where there are few other sources. By creating and reinforcing desirable associations for their brands, companies can create demand for their products even if they enjoy no tangible advantage over those of their competitors.”

Field makes a critically important point here, which is that in most industries these days, the tangible differences between competing businesses are slim.

What’s the tangible difference between co*ke and Pepsi, for example? A minor variation on the same flavor whose relative superiority is entirely subjective. The respective competitive advantage of either brand boils down to a brand experience that resonates with customers on a deep and lasting level.

As we’ll see below, customers don’t choose Apple products over Samsung because they are technologically superior. They choose Apple products because they want to be associated with the Apple brand. They see in Apple the best versions of themselves: an intelligent, creative professional with a soupçon of rebellion.

It’s difficult to quantify just how powerful an advantage Apple has over the competition, purely because of the brand equity it has cultivated through its visceral, imaginative, and thoroughly consistent brand.

Competitive Advantage Examples

The best way to understand their power is to look at competitive advantage examples in the brands we all know and love. The Fortune 500 list is replete with stellar examples of sustainable competitive advantages that have put the brands behind them leagues ahead of their nearest competitors.

Each of the following three brands has leveraged a different competitive edge to a create a defensible moat around its market dominance for years.

Amazon

The first of our competitive advantage examples, Amazon has built its commanding market lead on many factors. Its true advantage, however, comes from scale and aggregation. This goes for sellers as well as customers.

Amazon learned early on that the more sellers and customers it had in its marketplace network, the lower the prices it could offer.

Lower prices attracted more customers; more customers attracted more sellers; more sellers meant a better selection and better prices; better selection and prices attracted more customers; and so on.

Over the years, Amazon has expanded into new verticals, added new features, and even built new marketplaces that compete with its own marketplace—all with the aim of driving user engagement and fueling the self-perpetuating cycle of growth.

When Amazon enters a new market, it does so with the full heft of its scale and aggregation advantage, as well as a willingness to go toe-to-toe in industries with razor-thin margins. This is the strategy that has enabled it to expand from a small bookseller to the world’s “everything store.”

Google

Google’s competitive advantage started with a relatively simple innovation, better web search, the formula for which became a recipe for disrupting a range of other services.

Google’s early PageRank algorithm was based on site relevance—the number of times a website had been linked to by other sites—unlike existing site-ranking algorithms that simply prioritized keywords.

With this somewhat simple difference, Google quickly became the internet search engine of choice. Some five billion searches are made on Google every day, making it the most popular website in the world.

Over time, Google’s dominance in search allowed it to gather sizable data and build a durable advantage in advertising as well. Add to this the fact that so many searches are made with intent to buy and it makes Google advertising that much more valuable.

Google’s ongoing accumulation of data from an increasingly wide array of sources, means the company can offer smart, personalized results in everything from shopping to transportation. The more personalized its services become, the less likely its users are to give up those conveniences and use a competitive service.

Apple

Apple’s competitive edge isn’t its technology. The separation between Apple and its closest competitor, Samsung, is increasingly very little. That’s because the difference between the quality and functionality of each brand’s technology is all but negligible these days.

The one thing Apple has always had over its competitors is its brand.

Apple has spent decades masterfully crafting a brand design and brand experience that are second to none. The sleek, minimalist Apple visual identity is one that a generation of customers now identify with.

The forward-thinking, seamless experience of the Apple brand feels like home to a legion of devoted followers. You literally couldn’t pay them to use anything else.

Its brand has given Apple increased pricing power, enabling it to dictate prices without the risk of losing brand loyal customers. The decades of methodical brand management into which Apple has invested have paid off exponentially.

Apple is proof positive that brand-building drives long-term profitability far more effectively than short-term, data-driven marketing initiatives. That’s why the ultimate competitive advantage is your brand.

The Takeaway

Insight into the many types of competitive advantage is the first step for any business looking to differentiate itself from its competitors. But more important than simply understanding a competitive advantage definition is clearly articulating your unique advantage to the customers you serve.

Developing a framework that takes into consideration your business’s unique value, the customers you serve, and the competition you’re up against is the best approach to defining your competitive edge.

At the end of the day, however, no advantage is as powerful or sustainable as a strong brand. Just look at the many competitive advantage examples in the world’s top-performing brands. A strong brand enables you to compete whether you have a tangible edge over your competitors or not.

Editor’s Note: This post was originally published in September 2019 and has been updated with additional insights.