Competitive advantage is the Holy Grail for a business owner.
What is competitive advantage for an entrepreneur? It’s an organized business that earns superior profits relative to its competition.
Imagine that, organized and profitable. Step into it. Own it. How does it feel?
If you’re working harder, earning less and don’t enjoy being an entrepreneur, your business doesn’t have a competitive advantage. Yet. Maybe you’re making a few small mistakes that lead to extra hours and mind-numbing frustration.
It doesn’t need to be that way, you simply need to start working on the things that gives you leverage. Picture the long hours finally bearing fruit. Imagine today’s stress is tomorrow’s energy.
Entrepreneurs with a competitive advantage understand how to create value and how to capture business in the form of profits. Creating unique value, is the DNA of business strategy and the source of competitive advantage.
I said it twice. Did you catch it? “Creating” is the key.
Developing a competitive advantage is in your control. Most hard working business owners can offer value. To earn sustainable profits you must offer unique value compared to your competition. And offer it in a way that your customers are willing to pay for it.
Lets start out by revealing the root cause of why you are working like a dog and getting paid like one. Ask yourself a soul bearing question; “What are you doing different from your competition to justify earning superior profits?”If nothing significant is unique, I will bet you are fighting on price.
How a Business Creates Sustainable Profits
It’s simple; your business has a competitive advantage if it’s earning superior profits compared to your competition. Opportunities to earn money vary by industry, but the goal of business strategy is always the same; to organize your resources and activities to earn superior profits.
The difference in your ability to charge a premium or reduce your costs are based on the differences in the activities you perform compared to your competition. Your company has a competitive advantage when specific activities allow higher prices, creates lower costs or both.
The spread between the two is the value you earn. The willingness to pay is the value is based on what the customer receives. At it’s core, competitive advantage is about creating superior value for your customers, which earns your business sustainable profits.
An interesting note about competitive advantage; you are striving to create unique value for your customers, not necessarily trying to beat your competition.
Read that again.
Competitive advantage is more focused on how you choose to run your business as opposed to focusing on what other companies are doing. Competition is important, it sets a baseline for the best practices in your industry. However once you identify the value offered by your competition, you can set out to provide something unique.
How Competitive Advantage is Achieved
If having a competitive advantage is our goal, we need to understand the elements that lead to superior profits. This is known as the value chain. These are the activities you, as the entrepreneur, have direct control over.
All cost savings as well as the ability to charge higher prices result from the activities that you perform on a day in and day out basis. These activities are mapped out when we analyze your current business model.
The right combination of activities in your value chain is how you create those higher prices or lower costs:
- Developing new ideas (Research and Development)
- Acquiring materials. (you have a unique supplier)
- Producing the actual product or service
The key point was the subtle words “the right combination of activities”. These activities must fit and support each other, otherwise you will be overwhelmed and constantly feel like you are putting out fires all day.
This is where many business owners get lost in tactics that have no strategy. Their business is all over the place with no direction. Picture the parts of a bicycle; separately they have little value, together they can take you on a breathtaking journey. Your business can be the same exciting journey.
Your Competitive Advantage Lies in The Activities
The differences in the activities listed above are what result in your competitive advantage. Just as the similarities in your activities result in you fighting on price as the only differentiation between you and the competition.
The value chain is a method of looking at your company from a birds-eye view to get a feel for how relevant the activities you perform daily, create the sources of your competitive advantage. This will result in the opportunity to charge higher price or the need to charge lower costs.
Something interesting to note here is that most entrepreneurs who are struggling, are simply performing the same activities as the competition. They often wonder why they are fighting on price. Their marketing strategy is “change the price.”
Remember this type of industry analysis is the work you should do before you open the business. However if you are already in business, Google your competition. Which of the activities listed above in the value chain you can do differently? Can you eliminate something and charge less (and still earn money) or can you add something and raise prices?
To begin brainstorming, start thinking about the activities that you perform each day. Which ones can have a potential impact to improve value so that you can raise prices ? Keeping within the context of strategy, you want to perform the same activities differently or perform different activities to create that value.
Ideas for Developing Your Competitive Advantage
- Can you find a better way of coming up with ideas?
- Is there proprietary way to perform or manufacture your product or service?
- Perhaps your company can deliberately choose different marketing activities.
Michael Masterson termed this your optimal selling strategy. For example, my trading education business specialized in marketing live events, as opposed to focusing solely on email and online marketing. We got out of the building. We spoke to crowds in person. It was more expensive, but we closed business on much higher transactions. It was different and it made money. So we added cost but created much higher value.
How can you do that in your industry?
Let’s talk customer service.
Let’s use Starbucks as an example. They know your name when you walk in the door and how you like your coffee, this is significant. It creates unique value and you pay for it. Tell me the last time you saw a Starbucks commercial on TV? They invest in their market differently, they invest in training.
Think about the standard of service in your industry. Can you do something different?
Competitive Advantage of a Cost Leader
Next take a look at the activities that represent a large or increasing percentage of your monthly costs. Is there a way of performing those activities at a lower cost without sacrificing value?Can you reduce a cost and maintain your offer, resulting in greater value for your company? Discount brokers did this in the stock market. A large mass of people didn’t want to pay for advice they no longer needed. The offer was reduced but still valuable.
Get a hold of the costs, understand each activity and how it relates to value.
Think about what you’re learning today and you’ll start to see each activity as a step in the process of creating value. The final product is a business with activities that produces your competitive advantage and higher profitability than your rivals. This result can be huge. No longer will your day be filled with busy work that leads to nowhere. Now you will start thinking about your business as a collection of value creating activities that fit together.
You now have the knowledge to look at your current offers and determine:
- If your customers are under-served resulting in you undercharging them. OR
- Are you offering them unnecessary services and over-pricing for things they don’t need.
Competitive Advantage in the Real World: One Cost leader, One Premium. Both are Profitable Models.
A good example can be found in the health club industry; CrossFit training versus a general gym membership.
CrossFit is a highly specialized and expensive type of workout at an average of $125 to $150 per month. On the other end of the spectrum you can get a $10 – $30 per month gym membership that doesn’t come with any frills, just get access to the equipment.
CrossFit is personalized, structured and team oriented and they charge for those activities, whereas the basic gym membership you’re on your own.
The activities match the offer. Do your activities match your offer? Or better yet, do they match what you would like to charge?Focus on creating value through your activities. Producing your product or service should only be one of the many ways to create that value.
Look at your business as a set of activities as opposed to mess of separate departments or jobs. This work takes place after you decide on the correct strategy to map out the activities.
Strategy choice comes first. If business strategy is a new term to you simply think of it as choosing how you plan to compete.
The Definition of Competitive Advantage Everyone Gets Wrong
The last point to touch on is about the term operational effectiveness. This is also known as performing the same activities as your competition but better.
This can, and should be one of your first goals, to understand the best practices in your industry and get to the point where your business is running efficiently. However this should not be your end goal, it’s too easy for a competitor to replicate best practices.
Your goal is to create different activities that result in unique value. Best case scenario, you develop a collection of unique activities that fit and work in harmony toward competitive advantage. A giant error by many, is to mistake a core competency (something you do well) as your advantage. One activity is too easy to copy.
To quote Michael Porter, the Harvard professor known for his ground breaking work on competitive strategy: “A strategy built around a unique configuration of activities works to achieve a sustainable competitive advantage.”
The key here is strategy, which is the antidote to competitive rivalry and the solution to not fighting on price.
Doesn’t that sound like a business you would like to own? Take the first step and the next will be revealed.
To learn more about developing a competitive advantage for your business, click here to contact us today.