Competitive Advantage: Definition, Types & Examples

Types of Competitive Advantage

There are three generic types of competitive advantage that Michael Porter set out in his book, “Competitive Advantage: Creating and Sustaining Superior Performance.” They are Cost Leadership, Differentiation Leadership, and Focus, which is divided into cost and differentiation focus.

Cost Leadership

When a company has a competitive advantage through cost leadership it focuses purely on price in order to become the lowest-cost producer in the market. By extension, this allows it to charge the lowest prices to attract consumers – thereby providing it with a competitive advantage.

This type of competitive advantage is also known as a ‘no-frills’ approach. As cost is the key factor in this strategy, firms often ignore factors such as quality and reliability. As a result, this may affect brand image and customer retention if it leads to unhappy customers.

Under a cost leadership strategy, the company focuses on improving operational efficiency, which in turn reduces the cost per unit. For instance, it may look to minimize the number of workers, introduce new processes, and improve supply chain efficiency. The key focus here is not necessarily on the product, but rather how much it costs to produce. In turn, this can lead to lower costs for consumers, but may also lead to poor quality goods.

Most companies that operate under this strategy only do so if they can fully utilize economies of scale. For small niche markets such as diamond-encrusted phone cases, it isn’t so feasible. Instead, mass markets such as retail tend to operate this strategy. Examples include Walmart, Aldi, and Carrefour.

Differentiation Leadership

Differentiation leadership is where businesses use a unique selling point to distinguish themselves from the competition. Firms offer a different value proposition from their competitors in order to attract customers. For example, if the price is higher, then the unique selling point will help justify the price tag.

Companies operating under a differentiation strategy are often the first to exploit new trends in the market. For example, Apple led the way with the revolutionary iPhone which has changed the way we consume media and entertainment. Through its differentiation approach, it has established itself as a world leader in the smartphone market – whilst also enhancing its brand image.

Differentiation can come in many forms, some of which include high quality, superior customer service, better features, or reliability. It can simply refer to anything that makes a good different from the competition. In turn, this can help the firm attract customers who are looking for quality and are willing to pay for it.

Whilst a differentiation strategy can help set the firm out from the competition – it is not necessarily enough. For instance, a new restaurant may make the best pork ribs in the country, yet it may very well go out of business within the year. The reason being is that nobody knows they are the best ribs. So without a successful marketing campaign that highlights the unique selling point to customers, this strategy may not fare so well.

Focus Strategy

A focus strategic approach covers both a cost and differentiation focus. It differs from the other two types of competitive advantage in the fact that it targets niche markets. Whilst cost and differentiation leadership target the whole market, a focus strategy targets a small segment. Examples include stores for left-handed people, vegan shoes, or pubs for animals.

This type of strategy specifically targets a certain demographic in the market which has specific needs. Generally speaking, these are small markets that new companies can come and take advantage of due to the lack of competition. In turn, it allows small firms the opportunity to operate without fierce competition from large firms that can compete on price.

Firms that operate a focus strategy tend to gain a competitive advantage by targeting a specific need of the consumer rather than their sensitivity to price. Due to the small size of the market, it means that it is often under-served which results in consumers willing to pay higher prices. At the same time, there is also limited competition and, in some cases, can classify as a natural monopoly.

Examples of firms using a focus strategy include Bakon Vodka, a firm that sells bacon flavoured vodka. There are also a number of firms that sell jewellery especially for cats. Coming back to a more sensible example, we have the use of local short-haul flights. For instance, Southwest Airlines in the US provides bespoke transport between airports. Therefore, by focusing on a specific part of the market, such firms are able to distinguish themselves from big players that are more broad in focus – thereby obtaining a competitive advantage.