Today, businesses are operating in an intensely competitive environment. New products and markets are continuously being created disrupting the traditional offerings. To succeed in this environment, your business needs to shake up the status quo and avoid competing in exactly the same way as your rivals.
When it comes to competitive advantage in business, it is critical to understand that advantage over rivals is rooted in differences. Of course, no one has advantage at everything, but what is important is for the business leaders to be able to identify key asymmetries that are capable of being converted into superior advantages.
Is competitive advantage sustainable?
Your business has a competitive advantage if you’re able to produce products at a lower cost than can competitors, or deliver more perceived value than can competitors, or a mix of the two.
However, you need to understand that your product costs differ with the product and application. Your customers are geographically dispersed, have different knowledge, varying tastes and other characteristics. As a result of these subtleties, you will realize that most advantages will extend only so far.
Thus, many at times, the advantage is only on certain products and/or services and among only a specific group of customers. The group’s earning potential and desire for a unique shopping experience determines the level of value placed on your company’s products and/or services.
With customer behaviors constantly shifting, competing on price alone is no longer sufficient. Today’s customers are looking far beyond lower prices, they want value for money and an unforgettable user experience. In many industries, technology has reduced or removed market entry costs and other barriers.
Your business might be able to achieve cost leadership but how is this reflecting on your margins? Take IKEA for example, one might argue that they are doing well with a cost leadership strategy. Fair enough. But if you look closer, the company has managed to combine all three of Michael Porter’s generic strategies to deliver its value proposition and unique customer shopping experiences.
These capabilities have been honed and improved on by IKEA over the years and are very difficult for a small start-up to copy as is. A small start-up lacks the investments needed to develop the market and capabilities to achieve efficient processing and economies of scale, thus preventing him from achieving equivalent costs.
Just as in IKEA’s example above, for your competitive advantage to be sustainable, your competitors must not be in a position to easily duplicate it, or they must not be able to duplicate the resources underlying it. This kind of unique offer demands your high level creativity and the ability to imagine differences that are possible and even those that are not currently possible.
These differences must not only be unique to your own eyes, but must also be valued by the customer enough to pay for that difference.
Some differences are not attractive enough to justify the additional cost of delivering them. Instead of being appreciated by the marketplace, they are viewed a negative attribute of the offering. In long run, the company ends up losing stupendous amounts of money because it is now trying to change the minds of customers, with no certainty of success.
Isolating Mechanisms
The concept of “Isolating Mechanisms” is borrowed from biology and describes the reproductive characteristics which prevents species from fusing. Applied to business strategy, this describes unique characteristics that prevent competitors from entering your marketplace and dethroning you.
Possessing these characteristics is key to sustaining your competitive advantage. Examples of isolating mechanisms include reputations, brand names, commercial and social relationships, tacit knowledge, network effects, skills gained through knowledge, significant economies of scale and complementary services.
Isolating mechanisms enable us to shift our focus from competing on price alone and find unique ways of increasing value. Today’s competition is very intense, and by providing more value to our customers we avoid being commodities.
How do we create value?
Having an edge over customers is not the same as achieving higher profitability. Think of Uber, the ride-sharing company. The company disrupted the taxi industry with its advanced technology and applications, making a name for itself. However, although the company has been taking in more revenues, it has also been losing money like crazy.
The relationship between wealth and competitive advantage is dynamic. In other words, wealth increases when competitive advantage increases or when the demand for the resources underlying it increases. That’s why it is critical to understand all the sources of your competitive advantage.
How many times have you come across statements that read, “We are the best in the world, We are the leaders, We are number one.” If you’re one of the organizations using these rhetoric, can you easily back your statements with facts? It is one thing to say you will be the best in the world in a certain industry, it’s quite another to explain how this is reflected in costs, differentiation and focus.
It is therefore important that your strategy clearly articulates how your overall intentions are translated into competitive advantage. Advantage over rivals only becomes more valuable if the number of customers grows and/or the quantity demanded by each customer also grows.
Increased demand will lead to an improvement in long-term profits only if the business is in possession of scarce resources that enable it to create a sustainable advantage.
1. Continuously Improve
What Got You Here Won’t Get You There. We are living in an ever-changing world where change is no longer a nice-to-have but a must. There is no guarantee that your current value proposition will continue to deliver stellar performance.
You therefore need to deepen your advantage and widen the gap between your customer’s value and cost. Many businesses are comfortable with the status quo and the way things are currently being done. The assumption is that everyone knows what they are doing. This is a very dangerous way of running the business.
Time and again, you must re-examine each aspect of your products, processes and details of how value is delivered, not just from cost controls or incentives (financial) point of view but also from the stakeholder (non-financial) point of view.
Are you carefully studying their attitudes, decisions and feelings?How strong are the isolating mechanisms surrounding key value delivery methods?
Having answers to the above questions will help you anticipate and prepare for problems before they occur.
2. Broaden the extent of advantage
There is always a part of the market that is currently not being served and needs exploiting. Sometimes, in order to create value you don’t have to compete in exactly the same market as your current competitors.
Extending an existing competitive advantage brings your company into new fields and new competitors. What are the special skills and resources that are underlying your current advantage? Can you build on these existing strengths?
The challenge for many leaders is that when looking at their company’s capabilities, they do so only at face value or generalizations. The real danger in this is that they end up diversifying into products, markets and processes they know nothing about, or have limited knowledge of. After venturing into these new avenues and performing dismally, they wonder why this is the case.
To successfully extend your advantage, you need adequate knowledge and know-how of your new territories. Failure to have this important information at your disposal is a recipe for disastrous consequences.
You should not expect to take existing products to non-traditional customers, or create new products for existing customers, or create new products for new customers and expect overnight success if you have not first done your homework and defined the value proposition all these customers are seeking.
3. Strengthen your isolating mechanisms
As mentioned earlier on, isolating mechanisms prevent rivals from replicating your products or service offerings, or the resources driving your advantage.
Now that you have identified and defined characteristics that are essential for your business to increase value and succeed, you need not rest on your laurels, but rather, create new ones and/or strengthen existing ones. The aim is to have as much little imitative competition as possible and have increased value flow to your business.
Depending on the nature of your business and industry, you need to locate that set of competitive advantages that allows you first to survive and then to thrive. For instance, in tech-related industries, having stronger patents, brand-name protections and copyrights works best. In other industries where the collective knowledge of groups drives performance, strengthening this isolating mechanism depends on turnover rates.
Another broad approach to strengthening isolating mechanisms is to have a moving target for imitators. This approach ensures you are always steps ahead of your competitors. By the time your rivals figure out how to replicate much of your proprietary know-how and other specialized resources it would be too late for them.
Continuously improving your products, services, processes, systems, proprietary knowledge etc. makes it very difficult for rivals to imitate and catch up with you.
Remember, no one has advantage at everything. Chances are that your rivals are already trying to differentiate and are doing it better. Don’t lose heart. As the old saying reads, “Do not put all your eggs in one basket.” That is, do not be over reliant on any one attempt to gain a single competitive advantage.
Press where you have advantages, side-step situations in which you do not have and exploit your competitors’ weaknesses and avoid leading with your own. Obstacles will always be there but you need to be adaptable so that you can react to setbacks without losing your business. It is all about where to play and how to win.