Understanding sustainable competitive advantage and why it matters

Markets evolve more quickly today than they did in the past. If your company’s competitive advantage isn’t sustainable, you could find yourself in a much weaker market position than you’d like.

But what exactly is a sustainable competitive advantage? How do you establish one? How does that differ from other business strategies?

This article will delve into the concept of sustainable competitive advantage. We’ll explore the various types and benefits, giving insights into how you can identify and cultivate your own.

Before we can tell you how to cultivate a sustainable competitive advantage, we must first outline how it differs from a regular competitive advantage.

Generally, a competitive advantage is any factor that lets your company outperform its competitors. Most of these are more temporary than we’d like. That great new feature you developed should give you a big advantage until competitors replicate it. A winning marketing campaign will win over new customers but will eventually become stale.

While a competitive advantage can provide immediate benefits, they are often short-lived.

A sustainable advantage takes the concept of a competitive advantage and makes it more long-term. To do this, your company must develop a competitive advantage that’s difficult for competitors to replicate or counter. It should be built on your company’s unique capabilities, resources, or positioning.

The terms “competitive advantage” and “comparative advantage” are often confused—but they have some important distinctions.

A competitive advantage, sustainable or otherwise, is an aspect of your product or service that sets it apart from competitors’ products or services. It may be higher build quality, features that competitors don’t have, or some other advantage that’s unique to your offering.

A comparative advantage has less to do with your product or service and more to do with outside factors. For example, you might live in a country where the cost of labor is cheaper, allowing your goods and services to be more affordable than those of your competitors. Here, it’s the relative efficiency providing the advantage rather than anything unique to your offering.

While both concepts are essential for building a successful business, this article will primarily focus on creating a competitive advantage that can remain sustainable over the long term.

When looking to build a sustainable competitive advantage, some companies fail to realize exactly what this means. As a result, they end up creating something that isn’t sustainable at all.

None of the items below are examples of a sustainable competitive advantage:

• Temporary market conditions: sometimes, market conditions may be favorable to a particular company. The trouble is that they can change quickly, so you can’t count on them in the long term.

• Easily replicable features or processes: as soon as a competitive advantage arises, every other business in the space will try to replicate it. The advantage isn’t sustainable if this is easy.

• One-time events or luck: a successful product launch or a fortunate market timing might provide a temporary boost but doesn’t guarantee long-term superiority.

• Price-based strategies: a drop in price to undercut the competition can boost sales. However, your competitors can easily replicate these prices.

• Reliance on a single product or service: there’s an old adage about putting all your eggs in one basket. Market demands and technologies change very fast, so this isn’t a sustainable strategy.

Developing and maintaining a sustainable competitive advantage offers your company numerous benefits.

Long-term profitability

Perhaps the biggest benefit of having a sustainable competitive advantage is that your business will be able to turn a profit for the duration of the advantage. As long as what makes your product or service stand out remains unique, it will be easier to find customers.

Higher barriers to entry for competitors

When your products have a competitive advantage that’s easy to replicate, there’s little barrier to entry for competitors who want to copy that feature and enter the market.

When you create something that’s harder to replicate, on the other hand, it keeps new competitors from forming and keeps current competitors at bay.

Ability to weather economic downturns

When economic downturns occur, they impact every business. However, they impact some businesses more than others. Those impacted most will be the ones that are most expendable.

Your sustainable competitive advantage gives you a leg up on your more cookie-cutter competitors.

Attracting top talent

When you have something that keeps your company ahead of the competition in the long term, customers and competitors inevitably start seeing you as a market leader. As a market leader in any industry, you can attract the top talent as they will be more likely to want to work for you.

Michael Porter, a well-respected business strategist, identified the following three main types of sustainable competitive advantage:

Differentiation

A differentiation strategy refers to the creation of products or services that customers view as superior or distinct from what your competitors are offering. Many factors could create this distinction; features, quality, brand image, and customer service are just a few examples.

However, it’s important to remember that if these features are to be sustainable, they must be difficult to replicate.

Cost leadership

A cost leader is a business that’s the lowest-cost producer in an industry. This doesn’t mean you have to have the lowest prices. It just means you must be able to produce goods more efficiently than competitors.

Cost leadership allows you to choose between offering lower prices to gain market share or profiting from more average prices.

The thing that gives you cost leadership must be something unique to your process that other companies can’t easily copy. Otherwise, it won’t be a sustainable competitive advantage.

Focus

A focus strategy involves finding a particular customer niche that other companies aren’t targeting. This means you can tailor your business’s messages and offerings to match that segment’s needs and desires, which leads to gaining a large market share within it.

Since the strategy here is finding a unique audience, companies who replicate it will find their own unique audience, making them less likely to encroach on yours.

Let’s take a look at some specific examples of how companies build a sustainable competitive advantage:

Offering unique products

Although some products are easy to replicate, an innovative company can still secure a sustained advantage through two mechanisms:

1. Creating products unique enough to get a patent

2. Being innovative enough to continuously stay ahead of copycat businesses

Gaining a reputation for providing excellent customer experiences

Certain companies have built a reputation for providing a stellar customer experience. This creates loyal customers who build word of mouth, increasing the chances of growth and underpinning your business’s long-term sustainability.

Having a low-cost advantage

The so-called big box stores are an example of how an efficient supply chain creates a sustainable competitive advantage. They allow a business to operate at economies of scale that make it equally hard for existing competitors to keep up and for new competitors to enter the market.

Developing a category-defining brand

Some brands are so synonymous with their product that their name becomes a generic word for that product. Band-aid brand bandages are a great example of this.

When you build a strong brand reputation over a long period of time, it can cement your place in the market.

Pricing power

If you have pricing power, you can maintain higher prices than your competitors and still find an audience. A strong brand or a particularly unique product, for example, can get away with premium prices more easily.

Corporate strategic assets

Exclusive access to resources, proprietary technology, or strategic locations can provide an advantage that sustains itself.

For example, established players in the targeted advertising space are hard to compete with because they have a large collection of user data that can’t be replicated quickly.

Products and services that evolve

There are some companies out there who seemingly make everything. At one time, Mitsubishi could have made your car and your TV. A company’s ability to shift to new markets when one falters gives it longevity that less flexible companies can’t enjoy.

A strong cash flow

It may seem the most obvious sustainable advantage, but a company that already has a strong cash flow can innovate quicker, weather economic downturns, and capitalize on new opportunities much more easily than a cash-strapped competitor can.

Here are some of the companies across various industries that have managed to build a sustainable competitive advantage:

• Amazon: having started as an online bookstore, Amazon has built a vast logistics network, capitalized on customer data, and expanded into emerging markets like cloud computing.

• Google: initially gaining market share with a more effective search engine, Google has leveraged the data collected to establish dominance, moving into new fields that allow it to further build its user data.

• LVMH: although you may not have heard of the parent company, you’ve likely heard of the brands they own. LVMH’s portfolio of brands, such as Louis Vuitton, Christian Dior, and Tiffany & Co., gives them a brand reputation that’s hard to beat.

• Tesla: when Tesla first entered the electric vehicle market, not many companies were making them. That gave them a reputation as a dominant EV manufacturer, which they have expanded by entering battery production.

Before you can make one of your competitive advantages sustainable, you need to know what they are. The section will explore how to identify them.

• Conduct a SWOT analysis: a strengths, weaknesses, opportunities, and threats (SWOT) analysis tells you where you excel and fall short relative to your competition.

• Analyze customer feedback: using tools like Dovetail, you can gain valuable insights from customers about what they think your advantages over competitors are.

• Look to the past: examine how your company has been successful in the past and the challenges that prevented success to identify strengths to replicate and weaknesses to avoid.

• Compare yourself to competitors: compare your offerings, process, and performance metrics to those of your largest competitors to find areas where you stand out.

• Access your unique resources: look at your company’s tangible and intangible assets that you can further leverage. These might be proprietary technology, brand strength, or exclusive partnerships.

• Talk to employees: your staff, especially those in customer-facing positions, have valuable insights about what sets your company apart from others.

• Analyze financial performance: look for areas where your company consistently outperforms industry averages and find ways to take advantage of them.

To gain a sustainable competitive advantage, you’ll need to develop a strong strategy and sustain it. Here are some key areas that may help your business develop its advantage:

Understanding your market and competitors

Thorough market research is the key to understanding the market well enough to build a strategy for sustained competitive advantage. Analyze market trends, customer needs, and competitor strategies to determine how you can set yourself apart.

Pay attention to disruptions in the market. Technological advancements or business model innovations can quickly disrupt an industry. You’ll want to be the one capitalizing on these trends or find a way to counter them so you aren’t at their mercy.

Leveraging core competencies

For your company to be successful, it has to have a core competency—something it does exceptionally well. Figure out what those competencies are and focus on taking them further, building yourself well above the competition.

As you develop business strategies, ensure they are always aligned with your core competencies. Every strategy should either leverage what you do well or work to build upon it. In particular, try to build strategies that allow you to develop capabilities competitors won’t be able to replicate. This could be proprietary processes or exclusive partnerships.

Investing in research and development

If applicable to your business, research and development (R&D) is a major part of developing a sustainable competitive advantage. By committing a significant portion of your budget to R&D, you can drive the type of innovation that keeps your business ahead of copycats.

The drive for innovation must be in all aspects of your business. Develop a culture of innovation that encourages creativity and experimentation from your entire organization. Great ideas can come from anywhere, and employees should feel empowered to provide them.

Don’t forget to look outside your company, too. By partnering with universities, research institutions, or other companies, you can gain access to new ideas and technologies and forge mutually beneficial relationships.