Creating a competitive advantage

A little competition can be a healthy thing. It can also be both costly and disastrous if you aren’t up to mark with others in your particular business or industry. How you handle competition can be a direct link to the success or the failure of your company.

Why are competitive advantages so important? Well, mostly because they can ensure that a company earns excess returns for a longer period of time. By increasing the life of a company, the value of the stock is enhanced. Competitive advantages don’t just come in one form. Companies can also have multiple competitive advantages; in fact, the more the merrier.

The key to attracting and retaining customers is to understand their needs and buying processes better than competitors do and to deliver more value. To the extent that a company can position itself as providing superior value to their customers, it gains competitive advantage. But a solid position cannot be built on empty promises.

Identify your competition

Having a competitive edge means possessing an advantage over your competition. This does not take luck, but rather some solid strategic planning. Before you can accurately identify your competition, it’s crucial to first define and analyse your target market. What are you selling and to whom? Next, make a list of those companies trying to do the same. What are their strengths and weaknesses? Their strategies and goals? How do they attract customers?

If you don’t have this vital information, it is best to get it quickly. You shouldn’t live in fear of your competition, nor should you fear them, but you must find out who they are and what makes them attractive to current and potential customers. Assessing your competitors openly and honestly will play a key role in helping you develop a competitive edge.

Winning companies aren’t successful by accident, though often it may seem that way. Through important considerations like location, product, services and product features, they have somehow found a fresh spin, a new way to offer buying incentives that similar companies either can’t or don’t offer.

Ensuring long-term success

There are few areas that companies can stand out and ensure their long-term success: establishing market share, strong brand management, enjoying the network effect, having certain trademarks and patents, being cost effective, and creating high switching costs, etc.

•    Market share – Companies with significant market share create a problem for competitors because these competitors will have to rely on ‘stealing’ market share away from the competition; they can’t just create business out of thin air. After all, would you want to create a cola product if you knew you’d be going head-to-head with goliaths such as Pepsi and Coke? It’s also great for the company because it means its products are well-known and well-received in the marketplace.

•    Strong brand management – Having a strong brand can ensure a company’s long-term success and it also allows companies to earn healthy profits because their brand allows them to charge a price premium. Strong brands tend to create the longest-lasting competitive advantage.

•    Network effect – The network effect occurs when a product creates demand from users, which then enhance the product. The network effect is fairly uncommon but it can be extremely lucrative when it occurs. For example, eBay uses this.

•    Trademarks and patents – Trademarks and patents can be sources of competitive advantage for some companies, although it’s not too common. One example is Shuffle Master; the company creates auto-shufflers that are used in many casinos.

•    Cost-effective Structure – Being a low-cost producer has some advantages, although they’re often short-lived. By shaving all possible costs, a company can ‘undercut’ its competitors and offer compelling prices on its products, thus attracting many customers. The obvious example of this is Wal-Mart, which has taken its cost cutting to the furthest limits, which is responsible for the company’s status as the world’s largest retailer.

•    High switching costs – Another way to earn excess returns and lengthen a company’s life is to install switching costs into the business model. For example, wireless telephone companies require you to enter into contracts that restrict your ability to change service providers. Some software companies also have high switching costs because the learning curve to learn a new software programme is often steep. These advantages are important to keep in mind when seeking out your next investment opportunity. By investing in companies with significant competitive advantages, you’re safeguarding yourself against some threats.

•    Product differentiation – It is achieved by offering a valued variation of the physical product. The ability to differentiate a product varies greatly along a continuum depending on the specific product. There are some products that do not lend themselves for much differentiation. Some products, on the other hand, can be highly differentiated. Appliances, restaurants, automobiles, and even batteries can all be customised and highly differentiated to meet various consumer needs.

•    Service differentiation – Companies can also differentiate the services that accompany the physical product. Two companies can offer a similar physical product, but the company that offers additional services can charge a premium for the product.

•    People differentiation – Hiring and training better people than the competitor can become an immeasurable competitive advantage for a company. A company’s employees are often overlooked, but should be given careful consideration. This human resource-based advantage is difficult for a competitor to imitate because the source of the advantage may not be very apparent to an outsider. A well-trained production staff will generate a better quality product. Yet, a competitor may not be able to distinguish if the advantage is due to superior materials, equipment or employees.

•    Quality differentiation – Quality is the idea that something is reliable in the sense that it does the job it is designed to do. When considering competitive advantage, one cannot just view quality as it relates to the product. The quality of the material going into the product and the quality of production operations should also be scrutinised. Materials quality is very important.

Maintaining the competitive edge

Once you have developed a competitive edge, maintaining it will be a daily challenge. It will require you to forecast where the trends and changes in your industry will come from, and what your company can do to stay ahead of the game. It will demand that you continuously track your competitors and their future plans. You will also need to recognise that through the course of time your customers’ needs may change due to a variety of circumstances. Your company must be flexible and willing to change as well.

The achievement of competitive advantage is not always permanent or even long lasting.

Once a firm establishes itself in an area of advantage, other firms will follow suit in an effort to capitalise on their similarities.

A company is said to have a “sustainable” competitive advantage when its competitors are unable to duplicate the benefits of the company’s strategy.

In order for a firm to attain a “sustainable” competitive advantage, its generic strategy must be grounded in an attribute that meets four criteria. It must be:

•    Valuable: It is of value to consumers.

•    Rare: It is not commonplace or easily obtained.

•    Inimitable: It cannot be easily imitated or copied by competitors.

•    Non-substitutable: Consumers cannot or will not substitute another product or attribute for the one providing the firm with competitive advantage.

Businesses fail when you lack competitive advantages

They say, ‘Never bring a knife to a gunfight!’ Entrepreneurs frequently start these ‘me-too’ kinds for many reasons. However, the lack of competitive barriers renders them extremely vulnerable to new entrants, who will gladly cut prices to the bone to steal customers.

If you want your business to thrive, you need something that protects it from competition. It could be a great location, a cool brand, proprietary technology, latest technology, creativity, flat structures, communication strategy, human talent or a cost structure that cannot be easily replicated.

None of these advantages is likely to be permanent, but they only need to shield you long enough for your company to take root. This will give you time to make investments that create additional barriers.

(The writer is the Managing Director and CEO, McQuire Rens Group of Companies. He has held regional responsibilities of two multinational companies of which one was a Fortune 500 company. He carries out consultancy assignments and management training in Dubai, India, Maldives, Singapore, Malaysia and Indonesia. He is a much sought-after business consultant and corporate management trainer in Sri Lanka.)