Companies can create a competitive advantage and capture more value either by increasing the customers’ willingness to pay or decreasing the cost paid to suppliers and employees. Competitive advantage occurs when you differentiate your products from your competitors and gain better value for your products by getting the customers to pay more or by reducing your input costs.
The customers’ willingness to pay is more than the price. A company may keep its prices lower than what the customers are willing to pay to earn customer loyalty or it may pay its employees and suppliers for added assurance of an assured supply.
Differentiation is the key.
Companies gain a competitive advantage by differentiating their products from their competitors.
- You may differentiate by delivering products or services of higher quality than those offered by your competitors. While you may succeed in increasing the customer’s willingness to pay, you may also pay more to source the materials that make your product better qualitywise thereby driving down your margins and offsetting your competitive advantage.
- Another strategy that companies adopt is to have limited quantities of the product which drives up the willingness of the customers to pay due to limited supply. This may increase the company’s competitive advantage but it does not necessarily increase your ROI. You also limit the accessibility to your product creating a natural barrier if you want to sustain your position. Then it becomes essential for companies to seek out new markets or product extensions so that they can sell more to the same customers.
- The direct-to-customer model reduces the distribution cost. Eschewing product customisation and celebrity endorsements help reduce marketing costs. They do not charge a premium for their products but their lower costs help them maintain a competitive advantage.
Innovation can be a worthwhile strategy.
While innovation is not necessarily a surefire way to create competitive advantage especially when competition can replicate the product quickly.
At the same time breakthrough innovations, especially where the technological barrier is high, can help companies carve out new markets and refine, manage and monitor the unique technological advantage. These capabilities allow the companies to innovate continuously producing new products and simultaneously gaining efficiencies in manufacturing and attracting new talent making innovation sustainable in the long run.
Advantage of network effects.
Some products become more competitive as their network of customers becomes wider. in addition to the widening of the user database, it could add more revenue to the bottom line by fine-tuning the pricing and introducing periodic promotional efforts. However, network effects can result in diminishing returns.
All these aspects show that there isn’t one strategy that works to create a competitive advantage. the specific strategy a company uses depends on the industry, the product and the resources available. Each approach has tradeoffs and these are critical to creating a competitive advantage. Companies must think through all the possibilities to maintain their competitive advantage in the long run.
3 Ways to Gain a Competitive Advantage Now
by Michael Blanding
HBSWK 2023/06
R2G 