Learn the sustainable competitive advantage definition and see its importance. Explore sustainable competitive advantage examples and the factors that impact it.
Updated: 04/25/2022
Sustainable Competitive Advantage
What is Sustainable Competitive Advantage?
Competitive advantages are characteristics that enable a business to outdo its competitors in terms of quality and cost (CA). Because of these traits, the productive unit can generate more sales or more significant profit margins than its competitors. Thus, there are goods or services that a company's customers value more than equivalent offers from a competitor in this situation. The competitive edge of a corporation is what distinguishes it from its competitors. There is a direct correlation between higher prices, more customers, and brand loyalty. A company's most crucial goal is to build a competitive edge. However, in the same industry, a company's competitive edge might move from one competitor to the next due to differences in corporate culture.
A company's ability to meet the requirements of its customers better than its competitors is what is meant by a company's sustainable competitive advantages. There must be a long-term strategy in order for an organization to sustain an advantage in the marketplace. A steady competitive edge is essential for a company's long-term success. An organization can better serve its customers, earn more money, and have a higher profit margin if it has a strong focus on the customer experience. Additionally, it can aid in acquiring new clients and keeping current ones satisfied.
Sustainable Competitive Advantage Definition
In the business world, companies with a long-term competitive advantage are considered to have a sustainable competitive advantage. For a company to have a long-term competitive edge, it must consistently earn more profits than its competitors. To make money, a business must have satisfied customers willing to pay for its products and a cheap cost of production for those products and services, allowing it to earn a higher profit margin. For the most part, it refers to a company's skill or aptitude to give higher value to customers and to maintain a long-term competitive advantage over competitors in the same industry. For the most part, a long-term competitive advantage can be maintained for an extended period. The term competitive advantage conjures up images of an advantage a corporation can gain over its rivals.
Definition of Sustainable Competitive Advantage
Competitive advantage exists when a particular company consistently outperforms other companies in the same industry. A company is considered to be outperforming others if profits are higher than the competition's profits. The competitive advantage is thought to be stronger when it lasts for a longer period of time. Those companies who are able to maintain a competitive advantage for many years are thought to have a sustainable competitive advantage.
If sustainable competitive advantage is dependent on maintaining a higher profit margin than other companies in the same industry, how does a company set out to develop a strategy to both achieve and maintain competitive advantage? The two main components of profit are that customers both value the goods and services and will pay for them and that a company can keep production costs related to goods and services low, so that there is a higher profit margin.
For example, if Sally's Cupcake Shop can make a chocolate cupcake for 25 cents and sell it for $1.00, the profit on each cupcake is 75 cents. Sally's customers will pay $1.00 per cupcake because the cupcakes are delicious and made with high quality ingredients. A few blocks away, Bobby's Cupcakes & More spends 40 cents making a chocolate cupcake, but can only sell the cupcake for 50 cents. Bobby's profit is only ten cents per cupcake. Customers will not pay as much money per cupcake, because Bobby's cupcakes are not as tasty and are not made with ingredients that match the quality of Sally's cupcakes.
Sally will be able to maintain a competitive advantage as long as she keeps costs lower than the amount customers will pay, allowing her to build a higher profit than Bobby. If this continues year after year, even as costs and prices change, Sally would be said to have the sustainable competitive advantage. However, Sally cannot become too comfortable with her advantage and instead must continue to find ways to maintain a competitive advantage. Bobby may become motivated to outperform Sally. If Bobby is able to increase his own profit substantially, he could potentially take away the sustainable competitive advantage.
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Factors of Sustainable Competitive Advantage
Several factors influence a company's sustainable competitive advantage. They include:
- Profit - Companies that lack competitive advantages have no means of protecting their profits from competitors; without these advantages, a company is effectively insolvent. Advantages in the marketplace need to be long-lasting as well. Losses can be likened to those a community suffers when its wall fails.
- Distribution - Sustainable competitive advantage is enhanced via distribution channels. Differentiation and competitive advantage can often be achieved through a distinctive distribution channel, even when the product or service itself does not stand out from the crowd.
- Consumer demand - It is possible to determine a company's long-term competitive advantage by observing how well it responds to customer needs and complaints about product quality. As a result, the strength of a company's competitive edge is reflected in consumer demand.
- Brand reputation - Companies that are market leaders and have excellent corporate reputations can build and maintain strong brands. When a brand's strengths and good images influence a product's success, it can provide a long-term competitive advantage.
- Low-cost advantage- The hypothesis that price is a strategy and cost is the truth is usually universally accepted. Firms that produce goods at minimal costs get long-term advantages in the marketplace by maximizing earnings while avoiding losing out on consumers.
- Pricing power - High barriers to entry or a strong position in a market are common ways for companies to gain pricing power. This gives them to dominate the industry and attain a sustainable competitive advantage.
- Unique products - One of the best ways to achieve a long-term edge in a highly competitive industry is to offer something that no other product can. If a product can be distinctive in any aspect, it has an advantage over its competitors.
Benefits of Sustainable Competitive Advantage
There are different recognized benefits of a company having a sustainable competitive advantage globally. These benefits include
- The ability to attract new customers - Anything that persuades buyers to acquire a business's items is a long-term competitive advantage. As a result of recruiting additional personnel, a company can develop a new procedure to produce something more cheaply and quickly; increase customer service by increasing the number of staff; or make production processes more efficient.
- Take a bigger market share - Companies with a larger portion of the market have an edge in the marketplace. Because of their bigger order quantities, companies with a large part of the market generally acquire better prices from suppliers.
- Increased customer lifetime value - When considering client lifetime value, segmentation will inevitably occur. Every section benefits from this since it identifies the individual demands of each segment. As a result, the value proposition for each group can be improved so that each segment can expand at a faster rate.
Sustainable Competitive Advantages Examples
An obvious example of an organization with a sustainable competitive advantage is Coca-Cola. A brand takes a lot of effort and money to develop. It's easy to take it out. Having a strong brand means people will choose your product or service over competitors'. Companies that are market leaders and have excellent corporate reputations can build and maintain strong brands.
Another example is Walmart. Pricing techniques that rival Walmart fail to match it. Successful distribution strategies contribute to Walmart's increased earnings. The Everyday Low Price (EDLP) pricing strategy is part of Walmart's business strategy. Prices like this are aimed to attract a large number of clients, which results in a profitable company. Walmart uses an intensive distribution strategy, also referred to as an extensive distribution channel design, for this element of the marketing mix. In this method, all of the company's retail locations and e-commerce sites are nearly identical.
Lesson Summary
The ability to outperform the competition in terms of quality and price is referred to as a competitive advantage. Having a company's sustainable competitive advantages means being able to meet the needs of customers better than competitors. Competitive advantage and sustainable competitive advantage can be distinguished by the length of time they have existed. While a company's competitive advantage may shift from one industry participant to the next, it never shifts within the companies themselves. The term sustainable competitive advantage refers to a company's ability to maintain a better profit margin than its competitors over an extended period. Walmart is an excellent case study of a corporation that has sustained a long-term competitive edge through efficient distribution systems in its shops and pricing strategies that its competitors find difficult to match. Many aspects contribute to long-term competitive advantage, including distribution, consumer demand, and profit.
Examples in the Marketplace
A well-known example of a company with a sustainable competitive advantage is Walmart. Walmart maintains a sustainable competitive advantage in part because its strategies are specific to its organization and these strategies are known for creating a gap between Walmart's performance and that of its competitors. For example, Walmart has created a complicated and detailed distribution center network, which allows it to move goods to stores more quickly and efficiently than its competitors, while maintaining prices lower than its competitors.
Another example of a company with a sustainable competitive advantage is Apple, the maker of Apple computers, as well as iPods, iPhones and iPads. For many years, Apple has been the leader in the cell phone industry, outperforming other popular phones such as Blackberry. If Apple can maintain consumer interest, as well as continue to maintain a higher profit margin, it may maintain the competitive advantage. However, if a company, such as Samsung, begins to create a higher profit margin, the advantage may shift.
Lesson Summary
Competitive advantage exists when a particular company consistently outperforms other companies in the same industry. A company is considered to be outperforming others if profits are higher than the competition's profits. Those companies who are able to maintain a competitive advantage for many years are thought to have a sustainable competitive advantage.
Companies who maintain the competitive advantage have determined how to balance the costs of goods with the consumer desire to purchase the good for a certain price. Companies who create a larger gap between expense of product creation and payment by the consumer are more likely to maintain a sustainable competitive advantage.
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Video Transcript
Definition of Sustainable Competitive Advantage
Competitive advantage exists when a particular company consistently outperforms other companies in the same industry. A company is considered to be outperforming others if profits are higher than the competition's profits. The competitive advantage is thought to be stronger when it lasts for a longer period of time. Those companies who are able to maintain a competitive advantage for many years are thought to have a sustainable competitive advantage.
If sustainable competitive advantage is dependent on maintaining a higher profit margin than other companies in the same industry, how does a company set out to develop a strategy to both achieve and maintain competitive advantage? The two main components of profit are that customers both value the goods and services and will pay for them and that a company can keep production costs related to goods and services low, so that there is a higher profit margin.
For example, if Sally's Cupcake Shop can make a chocolate cupcake for 25 cents and sell it for $1.00, the profit on each cupcake is 75 cents. Sally's customers will pay $1.00 per cupcake because the cupcakes are delicious and made with high quality ingredients. A few blocks away, Bobby's Cupcakes & More spends 40 cents making a chocolate cupcake, but can only sell the cupcake for 50 cents. Bobby's profit is only ten cents per cupcake. Customers will not pay as much money per cupcake, because Bobby's cupcakes are not as tasty and are not made with ingredients that match the quality of Sally's cupcakes.
Sally will be able to maintain a competitive advantage as long as she keeps costs lower than the amount customers will pay, allowing her to build a higher profit than Bobby. If this continues year after year, even as costs and prices change, Sally would be said to have the sustainable competitive advantage. However, Sally cannot become too comfortable with her advantage and instead must continue to find ways to maintain a competitive advantage. Bobby may become motivated to outperform Sally. If Bobby is able to increase his own profit substantially, he could potentially take away the sustainable competitive advantage.
Examples in the Marketplace
A well-known example of a company with a sustainable competitive advantage is Walmart. Walmart maintains a sustainable competitive advantage in part because its strategies are specific to its organization and these strategies are known for creating a gap between Walmart's performance and that of its competitors. For example, Walmart has created a complicated and detailed distribution center network, which allows it to move goods to stores more quickly and efficiently than its competitors, while maintaining prices lower than its competitors.
Another example of a company with a sustainable competitive advantage is Apple, the maker of Apple computers, as well as iPods, iPhones and iPads. For many years, Apple has been the leader in the cell phone industry, outperforming other popular phones such as Blackberry. If Apple can maintain consumer interest, as well as continue to maintain a higher profit margin, it may maintain the competitive advantage. However, if a company, such as Samsung, begins to create a higher profit margin, the advantage may shift.
Lesson Summary
Competitive advantage exists when a particular company consistently outperforms other companies in the same industry. A company is considered to be outperforming others if profits are higher than the competition's profits. Those companies who are able to maintain a competitive advantage for many years are thought to have a sustainable competitive advantage.
Companies who maintain the competitive advantage have determined how to balance the costs of goods with the consumer desire to purchase the good for a certain price. Companies who create a larger gap between expense of product creation and payment by the consumer are more likely to maintain a sustainable competitive advantage.
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Frequently Asked Questions
What is meant by sustainable competitive advantage?
Sustainable competitive advantage is defined as a set of features and capabilities that allows a business to meet the needs of its consumers better than its competitors. This creates more focus for a business enabling it to attain greater sales and better profit margins.
What is a sustainable competitive advantage example?
Coca Cola's branding is an example of sustainable advantage example. Over the years, it has successfully positioned its goods in the market in a way that its competitors can not match.
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