Businesses often struggle to obtain an advantage over their competitors. According to Michael E. Porter, cofounder of the Harvard University Institute for Strategy and Competitiveness, there are two basic methods for achieving a competitive advantage. These include the development of a cost advantage and the development of a differentiation advantage. Simply put, a business achieves cost advantage when the company offers a product or service at a lower cost than its competitors do. Product or service differentiation is somewhat more complex, but can also provide a competitive advantage to a business when properly implemented.
According to the QuickMBA website, a company achieves a competitive advantage when it "sustains profits that exceed the average for its industry." A company that is able to sell large quantities of a particular product at a lower cost than its competitors may easily exceed competitors' profits. To achieve high profits through differentiation, the firm may create the perception that its products or services are of better quality or offer more features or more advanced features than competitors offer. The company might also differentiate itself from competitors by providing better customer service than the competition.
Consumers often perceive that a particular product or service provides value if they are able to obtain a particular product or service that is comparable to the competition but at a lower price. To obtain a competitive advantage using product or service differentiation, the company must add value to its products and services that is not available from any competitor. For example, if consumers believe that a particular brand of appliance lasts longer and breaks down less often than a less-expensive brand, they may choose to purchase the expensive brand to save money on repair costs over the long term.
Firms that create the perception that their products and services are better than their competitors' may often charge more for their products because they have influenced consumers to believe they are getting a better value for their dollar in spite of the increased cost. In some cases, this may be achieved simply through creative advertising and brand building designed to create the perception that the company's products or services are in some way better than competitors'.
There are some risks associated with relying solely on product or service differentiation to achieve and maintain a competitive advantage. For example, your brand may lose value if you do not work to maintain the perception of value over time. Competitors may also imitate your strategies and cheapen your brand in the minds of consumers. The overall goal of your competitive strategy should be to build and maintain a sustainable competitive advantage.
- Hemera Technologies/AbleStock.com/Getty Images