Sustainable Competitive Advantage – Myth vs Reality

With a little luck you noticed the headline and thought… why not take a peak. Here is the deal… there has been a tremendous amount written about competitive advantage in business, but very little really hits the mark in terms of explaining what it is in a manner that helps the small business owner take concrete specific action to improve their own competitive position in the market.

First, lets put a definition to the term:

A sustainable competitive business advantage is any aspect of how you operate your business that is difficult or impossible for your competition to respond to over the mid-to-long term, AND, it is something that actually attracts customers to your business.

Ideally having a competitive advantage will result in your business growing more quickly and gaining market share at the expense of your competitors as customers in the realize that you offer a better value.

I want to pick the definition apart and explain what the above definition really means because from experience I know that most people miss the finer points… and many will mist the major points.

Doing Something Better or Different

A competitive advantage is NOT simply something that you do better or different than your competitors. 

Doing something better or differently from your competitors can be a part of the concept of a competitive advantage but it is only a small part and alone is not enough to qualify. Doing something better or different is not enough because as soon as your competitors see the marketing responding positively to your advantage they will start making changes to earn back the share of business that you are taking away from them. While it is good that you do something better than your competitors it can be a fleeting advantage at best.

To be a competitive advantage the thing that you do better needs to be something that is difficult or impossible for your competitors to match or respond to. Here is an example from personal experience of a fleeting competitive advantage. Back in 2001 I had just taken a company public and had a lot of cash. My brother in law had invested in the company and he also had some spare cash and he thought it would be a good idea to buy a franchise. We ended up going in together and buying several Quizno’s sandwich shop franchises. At the time Quizno’s was the only franchised sub sandwich operation that offered a toasted sandwich option. Toasted sub sandwiches were considered significantly better than non-toasted sandwiches by many people (myself included) and it was the main difference that Quizno’s advertised. Quizno’s growth was quite strong and the brand was quite popular.

During the process of investigating the franchise we determined that it would be very difficult for Subway, and others, to integrated a toasting capability into their production line and we thought that we would have a long term advantage in the sandwich space because of this difference. Now, from the perspective of about 15 years, it is easy to see that Subway and others only needed about 2-3 years to develop and deploy a toasting solution in all of their locations. In fact, many operations like Jimmy Johns, Potbelly, and WhichWhich developed with the toasting process fully integrated… and very successfully at that.

The problem with the Toasted Sandwich as a competitive advantage is that it was not sustainable over the long term. It was easy for competitors to develop a competitive response. Sure, it took a little time, but as soon as they noticed that Quizno’s was growing rapidly and that customers preferred toasting as an option they developed that capability. In short order lots of new competition arose which completely eroded the advantage. A competitive advantage that lasts only 2-3 years is a short term competitive advantage and is not enough of an advantage to build a long term business concept around.

To truly be a competitive advantage the thing that you are doing which is causing the market to shift in your direction should be sustainable over the long term, otherwise you may find that you spend a lot of time and money planning on an advantage that does not last long enough to recover your investment and provide a return that you will be excited about.

Difficult or Impossible to Duplicate, Emulate, Counter or Respond To.

How do you make your advantage one that is difficult or impossible to duplicate, emulate, counter or respond to? One of the best ways is to develop intellectual property that you can register with the US Patent Office. Copyrights, Trademarks, Servicemarks, and Patents are all great thing because once you have them you have the ability to protect your valuable unique ideas and products.

Do you ever watch the Shark Tank show? One of the questions that the judge panel asks of contestants is… “Do you have a Utility Patent?” That question is a huge indicator of interest because the first thing that a savvy investor wants to know is the level of uniqueness that relates to the product and the potential for protecting that uniqueness from interlopers infringing upon the good ideas of the contestant.

Another great thing to have is a business where the barrier to entry is extremely high. The barrier can be financial or something else. A great example is Facebook. Check Google for “facebook clone” and you will find hundreds of sources for scripts and software platforms that will make it easy for you to get started creating your own Facebook style system. Why aren’t there hundreds of knock-offs operating? Because is is not just the cost of building the software but the cost of building the network. The number of people on Facebook is the barrier to entry. Trying to build a user base of a few million people is a daunting task… Google tried with Google+ and they failed. Creating a barrier to entry is a great way to build a competitive advantage. But having a barrier to entry alone is not enough.

Another great thing to have in business is a relationship with a unique supplier that makes it tough for your competitors to have access to the same source you have for supplies. A perfect example is De Beers Diamonds. The De Beers diamond company owns the majority of the diamond mining rights in South Africa which is the richest source of raw diamonds on Earth. This, coupled with their cutting and retailing operations allow them to maintain their position as the undisputed master of the diamond industry. On a smaller scale, there is the network marketing company named Morinda which offers a product based on the Tahitian Noni Berry. They have the majority of the plantations in Tahiti that grown Noni Fruit Trees under contract so that they get about 90% of the entire crop of Noni berries. They make a juice based on the Noni beery and they market it as a curative juice through their network marketing organization. If you want the benefits of the Tahitian Noni berry you pretty much have to buy from one of their representatives.

With both the Tahitian Noni berry and diamonds you have two kinds of alternatives… other suppliers and alternative products. You can get diamonds from other places such as Russia or Arkansas (a notoriously poor supply source) and you can get other precious gem stones such as Emeralds and Ruby’s from other places. The Noni berry is primarily beneficial because of its antioxidant properties… and there are plenty of other fruits and vegetables that offer similar antioxidant properties. Regardless, most people want diamonds and people in the know know that the Noni berry is very beneficial. Having unique supply sources and supply chains can provide a competitive advantage.

Note… that in the above paragraph I mentioned that people want diamonds and Noni berry juice.

It MUST Attract Customers

Having something unique or different does not guarantee that you will sell lots of your stuff. People also must WANT it. Here is a good example… Taco Sauce. Here in Texas lots of people have parents or grand parents who came from Mexico and some of them really know how to make a great taco. You would be surprised how many ways you can make Tacos. And Taco Sauce is also something that can be very different from family to family. Now I know that many of those family recipes are great, but, I suspect that a few of them are not so great… but to the people who grew up in that particular family the taco sauce is probably something that they have a cultured palate for… sort of like Scotch… it is an acquired taste.  I hate Scotch… but know plenty of people who love it.

Now if you opened a restaurant with one of these secret family recipes and put the taco sauce on everything you made… it may be difficult or impossible for your competitors to copy or duplicate your recipe… but then… if the customers don’t like it why would your competitors bother? Get the point? Just having something unique is not enough. It MUST attract customers. It must provide some sort of benefit that makes your customer perceive your product or service as having a unique value that they cherish and desire.

Now I hate to say this but the truth is that low price is also something that attracts customers. It is very easy to improve the value equation by lowering the price. Low price competition is a very slippery slope and it is a competitive position that you should only consider taking if you absolutely know, without a doubt, that customers will respond and that you can garner significant internal efficiencies that allow you to maintain margins even at lower prices. One of the reasons that Walmart is able to sustain their position in the market as the low cost leader is because of the extensive distribution chain that they have developed and the volume discounts that they can demand from their suppliers. Trying to compete with Walmart as the low cost leader is a recipe for disaster for most companies. Be very careful that you fully understand the nature of your industry before you choose price as your competitive advantage. Many businesses have gone bankrupt using this strategy.

Here are some things that you can compete on that can provide a degree of competitive advantage to your business. the degree to which the advantage is sustainable depends on the particulars of your industry but the more of these that you are able to leverage and employ the greater the advantage will be and the more sustainable the advantage will become.

Customer Service – This is one of the simplest areas where you can create a competitive advantage. While there is very little that restricts your competitor from responding by increasing their level of customer service it is surprising how many companies fail miserably in this area. I consider this a Short Term Advantage factor.

Quality – Whether we are talking about products or services quality is another area where you can compete successfully. Customers are very sensitive to the differences in quality in most cases and they will respond positively if they perceive your quality to be superior to your competitors. I consider this to be a Mid Term Advantage factor.

Location – If your business is dependent upon a location for traffic investing in a superior location can give you an advantage. I consider this to be a Long Term Advantage factor. Once you make a location decision it is, of course, relatively difficult to change in the short term.

Marketing – Creative marketing can give you a competitive advantage by lowering your marketing costs and/or increasing your response rate and conversion rate. Every business has to learn these lessons but some businesses seem to consistently learn faster than their competitors. Generally Marketing is a short term competitive advantage because the audience tires of the same messages in a pretty short time and requires that you constantly renew your advantage.

 

 

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