HOW TO BUILD A COMPETITIVE ADVANTAGE

To build a competitive advantage, a company can use one of three main methods:
Cost: Provide offerings at the lowest price
A company has a cost advantage when it can produce a product or provide a service at a lower
cost than its competitors. Companies with this advantage produce in higher quantities and benefit
from one or more of the following elements:
Access to low-cost raw materials
Efficient processes and technologies
Low distribution and sales costs
Efficiently managed operations
Companies can capitalize on a cost advantage in one of two ways:
They can price their products the same as their competitors but make more profit because their
costs are lower.
They can lower their prices below those charged by competitors to attract more customers and
gain market shares.
In this case, the loss on margin—the difference between the price charged and the cost to make
the product—is offset by higher sales volumes.
This can include offering lower prices for the same goods or earning more profits by having
lower production costs. Larger companies typically have the cost advantage over smaller
companies, as they may produce more and benefit from purchasing their materials in bulk. Some
businesses or companies may even own the production companies that create their materials,
further increasing their cost advantage.These are some of the areas in which companies may
adjust spending to improve their cost advantage:
Material cost: Organizations experience a cost advantage when their products cost less to make
because they can obtain the necessary materials at a lower price than their competitors.
Processes: When companies use processes that increase efficiency, reduce errors and decrease
the overall time for production, they can produce more and spend less while doing so.
Distribution: A business can increase its cost advantage by reducing its distribution costs. They
can do this by using new technology or implementing more efficient systems.
Management: A dedicated and skilled management system that focuses on improving a
company's cost advantage can oversee other aspects like material cost, processes, distribution,
automation and patents.
Automation: Using technology to automate parts of the production, distribution, sales or
marketing processes can decrease costs and increase a company's overall cost advantage.
Patents: Owning the patent to technology, materials or processes can increase a company's cost
advantage by giving them specific advantages that their competitors can't have.

ADVANATGE
Understand competitive advantage: Cost advantage is one component within a larger profile of
competitive advantage, and by increasing it, you may reveal other areas that require
improvement.
Gain more long-term customers: When reducing prices to increase cost advantage, businesses
may gain more long-term, loyal customers. This can increase profits over the lifetime of the
company.
Ability to evolve and expand: When a company has a healthy cost advantage, leaders within the
organization may not need to spend as much time focusing on improving it. This means there
may be more space within operations to focus on innovation and original ideas.

Competing on price can be effective, but if you slash prices too much you risk decreasing profit
margins to an untenable level.

Differentiation: Provide offerings that are superior in quality, service, or features

In many industries, the barrier to entry has dropped significantly in recent years. As a side effect,
these industries have seen substantial increases in competitive products. In increasingly crowded
competitive landscapes, differentiation is a critical prerequisite for a product’s survival.
What are Types of Product Differentiation?
Several different factors can differentiate a product. However, there are three main categories of
product differentiation. These include horizontal differentiation, vertical differentiation, and
mixed differentiation.
Horizontal Differentiation
Horizontal differentiation refers to any differentiation that is not associated with the product’s
quality or price point. Instead, these products offer the same thing at the same price point. When
making decisions regarding horizontally differentiated products, it often boils down to the
customer’s personal preference.
Examples of Horizontal Differentiation: Pepsi vs. Coca-Cola, bottled water brands, types of dish
soap.
Vertical Differentiation
In contrast to horizontal differentiation, vertically differentiated products are extremely
dependent on price. With vertically differentiated products, the price points and marks of quality
are different. And, there is a general understanding that if all the options were the same price,
there would be a clear winner for “the best.”
Examples of Vertical Differentiation: Branded products vs. generics, A basic black shirt from
Hanes vs. a basic black shirt from a top designer, the vehicle makes.
Mixed Differentiation
Also called “simple differentiation,” mixed differentiation refers to differentiation based on a
combination of factors. Often, this type of differentiation gets lumped in with horizontal
differentiation.
Examples of Mixed Differentiation: Vehicles of the same class and similar price points from two
different manufacturers.
Many firms opt instead to differentiate themselves in other ways, which helps preserve or expand
their profit margin.

Specialization: Provide offerings narrowly tailored to a focused market

These marketing efforts often focus on the benefits and quality of the product that may attract
potential customers. Companies use this technique to target a specific market instead of the
general public. Some companies that use product specialization build their reputation as experts
in the specific market which they're targeting, meaning their products become the standard for
that specific market.
Yankee Candles. Macintosh computers. Orville Redenbacher popcorn. All three companies have
something in common: They are all known for a specific product. Sure, they offer variations on
that product. Yankee Candles offers variety of scents and candle sizes. Apple offers desktop and
laptop computers. Orville Redenbacher offers buttered popcorn, salted popcorn, and he also
offers fabulous sweet-and-salty kettle corn. But all three are so well-known for one product line
that you can instantly call to mind what they sell just by saying the name. That's the beauty of
selective specialization - a marketing technique that focuses on the benefits and quality of a
product.

What are the benefits of product specialization?

Here's a list of benefits of product specialization and a brief description of what they mean:
Market concentration: Product specialization allows companies to focus on one or two markets
for their products, reducing marketing efforts to target specific customers instead of the mass
public. This may reduce advertising costs.
Competition reduction: Specific markets usually have a set amount of companies that operate
within them, which often means fewer competitors. Fewer competitors sometimes allows
companies to focus their efforts towards research, product development and quality assurance
instead of advertising.
After-sale product sales: Consumers who buy these specialized products may be more likely to
buy more products that enhance their purchases from the company. For example, a person who
purchases a candle from a well-known candle company may be more likely to buy a candle
holder or stand to supplement their initial purchase.
Increased focus on product-specific ads: A combination of market concentration and reduced
competition means some companies can dedicate marketing efforts to developing specific ad
campaigns. This may increase brand familiarity via ads with unique and reoccurring characters
or messages.