Competitive Advantage

Competitive Advantage or your competitive edge is a key concept when working on your strategy.

  • The ability to outperform competitors by:
    • Attracting more customers
    • Attracting customers willing to pay a higher price
    • Supplying products and services at a lower cost
  • So that the business generates higher profit and return on investment.

In the Profit Tipping Point, I revealed that five key things affect your ability to earn a great profit from your business:

  • The attractiveness of your industry – some are much better than others.
  • The rivalry amongst competitors – the more destructive the competition, the more value is transferred to customers and the less captured by the firms in the industry.
  • The relative competitive advantage of the firms – if the industry factors determines the size of the cake, then competitive advantage goes a long way to determining the share of the cake.
  • The relative management and marketing abilities – your current competitive advantages reflect past management, your current management affects future competitive advantage.
  • The mindset of the business owner to do what’s necessary to make the most of the opportunities and protect the business from the threats.

The less well your market/industry scored as attractive, the more you need to make sure that the final three – your competitive advantage, your management and marketing skills and your mindset are right. The focus in Your Profit Club is on these last three items as you have control.

Generic Forms of Competitive Advantage

Michael Porter (remember his Five Forces model for Industry Analysis) has also been a leading thinker in competitive advantage.

He identified two main advantages:

  • Being differentiated in ways that matter to the customer or
  • Having a cost advantage.

These two advantages can be applied in a broad or narrow (niche) market.

We’ll be looking in much more detail how to build your competitive advantages in other sections of P3M4 Customers & Competitors and the follow up modules.

If your business products and services are differentiated in a meaningful way, they offers some special value which will appeal to all potential customers or a special niche of customers.

For example you may have an outstanding guarantee policy which takes away all risk of buying from the customer.

If your business has a cost advantage then it can earn you superior profits in two ways:

  • You can sell at a price lower than your competitors and still make a profit as you attract more price conscious buyers.
  • You can sell at the same price as your competitors, get a fair share of the market and pocket the extra cash. Remember you don’t want to be the one that creates fierce competition.

Michael Porter also warned of the dangers of being “Stuck in the Middle” if you don’t create a consistent strategy.

This is the failure to choose between having a low cost strategy and a differentiation strategy.

These businesses haven’t been ruthless on costs so you can compete with the lowest cost operators and haven’t successfully developed differentiation factors which are appreciated by customers.

Michael Porter has been criticised for such an abrupt assertion that you can’t do both – you can’t be the lowest cost operator and create differentiated value.

People remember the Japanese manufacturing miracles of the eighties and early nineties led by Toyota where quality was much better and costs lower because of the efficiency of the Toyota Production System based on Just in Time manufacturing, Total Quality and Lean Manufacturing.

The criticism is unfair since his books make clear that there are special conditions where firms can be differentiated and low cost:

  • Where competitors are stuck in the middle and don’t force the business where trying to be both is inconsistent.
  • Where costs are strongly influenced by market share so the cost advantage is big enough to allow the firm to spend some extra money on creating differentiating factors and still be the lowest cost.
  • Where the firm innovates and creates a new operating method which is far superior to that used by competitors (this is what Toyota did.)
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