What Is Competitive Advantage and How to Find Your Strategic Edge

Competitive advantage is why your product, service, or company is better than similar offerings in your market. It can come from various sources, such as product quality or innovation, proprietary technology, or excellent customer service. Established brands may have a competitive advantage based on customer loyalty alone or by their connections to markets of potential customers. For example, if a big company like PepsiCo wanted to release a new soda flavor, it would have a competitive advantage over a small indie brand releasing the same flavor because of its existing reach.

In this article, you’ll learn about developing different strategies for competitive advantage and how to determine the competitive advantage of your products or services. 

Read more: What Is Strategic Management? Benefits, Process, and Careers

What is competitive advantage?

Your competitive advantage makes your product or brand more attractive to customers than your direct competition. Think about why your product or brand is a natural choice for customers. Your competitive advantage is the deciding factor that closes sales.

For example, you might offer your product at a lower price than your competition. Customers who are conscious about saving money will be more inclined to purchase your product on that basis. Or, you may offer the fastest shipping available, drawing in customers who are in a rush to receive their order. 

Types of competitive advantage strategies

Your competitive strategy is how you'll use or develop an advantage. This type of insight can help you set goals and direction for the future, such as developing new products or services. The type of competitive strategy you need depends on the value you offer your customers. 

Three examples of competitive advantage strategy include cost, differentiation, and focused niche. Let’s take a closer look at these strategies.

1. Cost

One common competitive strategy focuses on the cost of your product or service. This may mean finding a way to offer your product for a lower cost compared to your competitors, such as streamlining processes or successfully negotiating lower prices with your vendors. When you can offer your product for the lowest price, you’ll attract customers who are looking for the best deal, developing cost leadership. 

On the other hand, having the lowest price isn’t the only way to employ a cost-based competitive strategy. Luxury and name-brand products use a higher price point to signal to customers that their offerings are more elite than other choices. Although the object's price is part of the competitive advantage, luxury brands use a different strategy called differentiation to highlight what makes their products superior.

2. Differentiation

Differentiation is a strategy brands use to demonstrate how their product or service is unique and unlike competitors' offerings. Offering a product that customers perceive as more valuable will help you build a loyal customer base willing to spend more money to purchase your product. When they compare your product to similiar ones, they understand the added value represented by a higher price.

You can position yourself as different from your competitors either in a broad way—building a company that operates fundamentally differently than others in their niche—or in a more focused way by developing superior products with new technology, specialized features, or higher-quality materials. For example, Apple consistently offers new cell phone models at higher and higher prices by touting its enhanced technological abilities with each new iteration.

Example. Despite the higher price of Apple phones, 48.7 percent of cell phone users in the US owned Apple phones in 2022 [1]. Although Apple positions itself as different and better than its competition, it still offers a product nearly half the market can access. If Apple were to continue differentiating itself into a smaller core group of users, it would employ a similar competitive advantage called a focused niche. 

3. Focused niche

A focused niche competitive advantage strategy means offering a product custom-tailored to a certain use or group of people. When you have a smaller, focused core of potential clients, you can further explore their pain points and deliver a product designed to address their needs. Designing a product or service with your end customer in mind can help you delight your customers and create customer loyalty. 

Example. While other automakers may sell millions of vehicles annually, Ferrari shipped a mere 11,155 vehicles in 2021 [2]. With a price tag that starts at nearly a quarter of a million dollars, Ferrari targets a core group of wealthy car enthusiasts shopping for a new car.

Other types of competitive advantage

You can develop a strategy around the advantage whenever you can find an edge over your competition. More examples of competitive strategy include:

• Geographic competitive advantage: You may have access to resources others don’t have due to your location. For example, you might have a more strategic location that draws in more customers, more accessible access to suppliers, or access to trade routes through rail lines, shipping ports, or airports. 

• Customer service competitive advantage: By providing the best customer service experience, you can stand out from others in your market and build a loyal base of customers who appreciate the help you’ve offered. 

• Skilled workforce competitive advantage: If you can attract the most talented employees to your company, you can build a competitive advantage based on their advanced set of skills. 

Why is competitive advantage important?

A competitive advantage is important because it helps you define your positioning in the market and explain to customers why your product or service should be their natural first choice. After identifying your competitive advantage, you can drive a higher profit margin by prioritizing activities that help you earn a bigger or more precise market share. When you demonstrate the value of your product to customers—for example, by using price, marketing, or quality cues—you can attract a group of loyal customers who will want to buy your product repeatedly. 

Who decides on a competitive advantage strategy? 

Senior-level executives, such as the chief executive officer or director of strategy, sometimes decide strategies involving competitive advantage. While managers and other supporting staff may not directly set strategy, they facilitate activities supporting those goals. Let’s take a closer look at these careers. 

1. Chief executive officer (CEO)

Average annual base salary (US): $204,424 [3]

Job outlook (projected growth from 2022 to 2032): 3 percent [4]

Requirements: You'll likely need a bachelor’s degree, typically in business or public administration. Sometimes, you must earn a Master of Business Administration (MBA). Typically, you'll also need to acquire experience in management positions in your industry. 

As CEO, you can help guide your company's overall direction and strategy. You might also direct other senior leaders, manage overall company operations, and answer to a board of directors. In this role, you'll establish company goals, oversee financial activities, negotiate contracts, and provide overall leadership. 

Read more: What Are Leadership Skills, and Why Are They Important?

2. Director of strategy 

Average annual base salary (US): $169,969 [5]

Job outlook (projected growth from 2022 to 2032): 3 percent [4]

Requirements: At least a bachelor’s degree, although a master’s degree is also common. Typical areas of study include business, marketing, finance, or communication.

As the director of strategy, you'll be responsible for developing initiatives to help the company reach its goals. You might assess industry and market trends, perform competitive analysis, evaluate partnerships, and look for new business opportunities. In this role, you'll report to senior leadership and may have a staff of professionals on your team. 

3. Product managers

Average annual base salary (US): $121,160 [6]

Job outlook (projected growth from 2022 to 2032): 6 percent [7]

Requirements: A bachelor’s degree in business management or supply chain operation management. In some cases, you may need to earn your MBA.

As a product manager, you may oversee a product from development to final sales. In this role, you can conduct market research and develop products based on feedback. You can also develop strategies for positioning your product in the market and manage staff to oversee the product’s creation and packaging.

Read more: What Does a Product Manager Do? And How to Become One

How to determine your competitive advantage

Although each company will develop its own process of setting competitive advantage strategies, you should be aware of two frameworks for considering competitive strategy. The five forces and VRIN are two ways of determining what makes you different from your competition. 

Five forces 

The five forces that impact your company’s competitive advantage include:

1. Suppliers

2. Competitors

3. Similar products customers might choose

4. Customers

5. Threat of new competition

According to Michael Porter, an economist and Harvard Business School professor, these five forces restrict how much profit a company can make. 

Your product or company can gain value by maintaining supplier relationships, drawing in new customers, and differentiating from similar products. Your company can be constrained by market competition, emerging threats, the total market size, and difficulties in obtaining needed supplies. Understanding how these factors interplay can help you see the strengths and weaknesses of your positioning. 

VRIN

Jay Barney, a professor of strategic management at the University of Utah, developed the acronym VRIN—value, rarity, imitability, and nonsubstitutability—to describe four qualities company resources can have that add to the company's competitive advantage. If a company's resources, such as products, technologies, or brand, have a high level of these four qualities, they have the potential to form the basis of competitive advantage.

• Value: If your product or service offers value to your customers, they may be willing to pay more for your brand than others. Conversely, you may offer value to customers in the form of a lower price point. 

• Rarity: Rarity helps differentiate your product from others. If the factor that provides your customers with value is something that your competition isn’t doing or isn’t doing well, you may have a rare resource you can use to your advantage. 

• Imitability: Imitability speaks to how easily it would be for your competitors to imitate the rare value you’ve identified. For example, your competition might release a similar product to yours, but they might have a harder time imitating your brand name and reputation.

• Nonsubstitutability: Lastly, nonsubstitutability refers to how easily customers can swap in another product to meet the demand your product fills. The best competitive advantage will be one where no true substitute exists. 

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If you’re ready to take the next step, consider earning your Strategic Leadership and Management Specialization from the University of Illinois at Urbana-Champaign. You can complete this series in two months with only 10 weekly study hours. This program covers leading teams, managing an organization, corporate strategy, and more. Upon completion, gain a shareable Professional Certificate to include in your resume, CV, or LinkedIn profile.