Five steps to get a sustainable competitive advantage
Wednesday, September 21, 2011/
Today’s business environment is very competitive. It’s now a lot easier and cheaper to start-up a business, particularly with technology enabling business to be conducted online and internationally to win customers in foreign markets.
The explosion of online retailing is an example of this, and all this competition and activity makes it difficult to stand out from the crowd.
The challenge is to resist being another “me too” business. The way to avoid this is by developing a sustainable competitive advantage that differentiates you from your competitors.
A sustainable competitive advantage is the key to business success. It is the force that enables a business to have greater focus, more sales, better profit margins, and higher customer and staff retention than its competitors.
It is the major driver of long-term business value and is what purchasers will place the most value on when looking to buy a business. Without a sustainable competitive advantage you risk being another “me too” business that muddles along achieving less than satisfactory results.
At its most basic level there are three key types of sustainable competitive advantage:
- Cost advantage: the business competes on price.
- Value advantage: the business provides a differentiated offering that is perceived to be of superior value.
- Focus advantage – the business focuses on a specific market niche, with a tailored offering designed specifically for that segment of the market.
Most small businesses don’t have the market share and buying power to effectively compete on price and are not big enough to be all things to all customers in a market.
Therefore, to successfully compete, small businesses need to develop a sustainable competitive advantage that is based on providing superior value to a specific niche.
There is another advantage that is often referred to and that is first mover advantage. First mover advantage is where the first entrant in a new market obtains an advantage over other competitors that enter the market later.
However, while being a first mover may provide an initial advantage, in my opinion, it is not sustainable unless it’s supported by one of the three types of advantages listed above.
Google and Facebook are good examples of this. Neither of these companies were the first movers, yet both now dominate their respective markets.
Here are my five steps to developing a sustainable competitive advantage:
- Understand the market and its segments. Look for those niches that aren’t well serviced by competitors and can be profitably targeted and sold to.
- Develop an understanding of what customers really want and establish a value proposition that grabs their attention.
- Work out the key things that you need to do really well to support and deliver the value proposition, eg. service levels, quality, branding, pricing, etc.
- Understand what your strengths and core competencies are and how you can use these in innovative ways to provide value to your chosen market.
- Design your business model to support and deliver the value proposition.
At the end of this process you will have a very clearly defined statement of:
- Who you will be selling to, ie. customers and market segments.
- Why they will buy from you and not your competitors (the value proposition).
- What are the key things that you need to excel at to be able to consistently deliver your value proposition.
Once you’ve found your sustainable competitive advantage, you should use it in many ways, to the business’ benefit.
Using your sustainable competitive advantage in your sales and marketing, makes it easier for your customers to understand why they should part with their dollars and give them to you rather than your competitors.
This in turn makes it easier for your staff to sell your products or services and know that their promises will be delivered.
They know the whole business is focused on making sure the sustainable competitive advantage is protected and capitalised upon.
Your sustainable competitive advantage can guide your decision-making and provide you with direction and a sharp focus.
If a new opportunity for the business doesn’t support your sustainable competitive advantage, then you should question whether to pursue that opportunity.
Is short-term growth that might erode your sustainable competitive advantage, more important that building a long-term position of strength and stability?
This longer-term view and effective use of a sustainable competitive advantage can support a higher return on capital invested in the business, even in the face of stiff competition.
This position builds value in a business and can add a premium to the sale price. That’s an advantage every business owner wants.
Marc Peskett is a director of MPR Group a Melbourne based firm that provides business advisory services as well as tax, outsourced accounting, grants support and financial services to fast growing small to medium enterprises. MPR Group is a member of the Proactive Accountants Network. You can follow Marc on Twitter @mpeskett