Five Sources of Competitive Advantage
“If you build a better mousetrap, the world will beat a path to your door.” While the origin of this saying is in dispute — it’s generally attributed to Ralph Waldo Emerson in the late 19th century, but a quote from him saying exactly this is hard to find — its meaning is crystal clear: Companies that capitalize on their sources of competitive advantage — in this case, by offering a better product, or “mousetrap” — are more likely to win in a free and open marketplace.
If you and your managers haven’t spent time identifying your sources of competitive advantage, it’s long past time to do so. Honing and then maximizing your competitive advantages are perhaps the most effective ways to increase market share and maximize sales and profits.
What’s Your USP?
A business competitive advantage is also sometimes referred to as a unique selling proposition, or USP. It’s the thing or things that make your business different from – and better than – your competitors, as well as the reason customers buy from you instead of them. It’s important to identify your USP so you can build on your strengths and emphasize them in your sales and marketing efforts.
When asked to elaborate on what they believe their business’s competitive advantages are, most owners will talk about their great products or outstanding customer service. While these can certainly offer competitive advantages, there are other areas where your business can set itself apart from the competition. Here are some typical sources of competitive advantage:
High product quality – Most business owners will tell you that they produce high-quality products. But for some companies, it’s smarter to produce a lower quality product and offer it at a lower price to appeal to price-conscious customers.
Low price – Depending on the product or service and target customers, price can be a strong competitive advantage – or not. Businesses that have positioned themselves and their products as being of the highest quality generally won’t focus on low price as their USP.
High level of service – Similar to high product quality, some businesses stress exceptional customer service as their USP. But again, these businesses likely won’t be among the low-price leaders in the industry. In fact, low prices would likely give customers the impression that their service might leave something to be desired.
Industry knowledge and expertise – Some businesses possess in-depth industry knowledge that helps customers get the most out of the products and services they buy. They can often charge a premium for products and services because customers value this expertise and hands-on assistance.
Better technology and innovation – This is the classic “better mousetrap” that Emerson (or whoever) was referring to. Businesses that can use the latest new technologies and innovations to make things easier for customers often have a key strategic advantage over their competitors.
First-to-Market: A Lasting Competitive Advantage?
Another competitive advantage touted by some companies is being the first business to capture a market. For example, a company might invent a new product, come up with a new process or put technology to use in a new way to gain market share.
Amazon and eBay are good examples of the latter. Selling books, which is what Amazon originally focused on, or conducting auctions certainly weren’t new concepts in the late ‘90s when these companies were born. But they took advantage of the revolutionary new technology of the Internet to sell books (and eventually thousands of other items) and conduct auctions in ways that had never been done before. Now Amazon and eBay are two of the most successful examples of new-economy businesses.
But not every Internet business that was first to market enjoyed long-term success. For example, do you remember Pets.com and Webvan.com? These companies were first-to-market in online pet supplies and grocery shopping, which gave them a tremendous early competitive advantage and could have led to long-term success. But poor management and strategic planning led to their downfall – and now they’re mostly remembered as two of the biggest names among the hundreds of Internet businesses that flamed out when the dot-com bubble burst.
The lesson: While being first-to-market can provide an early competitive advantage, this advantage will only be short term. It takes hard work, solid management and sound strategic planning to translate an early first-to-market edge into a sustainable, long-term competitive advantage.
Companies that capitalize on their sources of competitive advantage — or that build better mousetraps — are more likely to win in a free and open marketplace. If you and your managers haven’t spent time discussing ways you can create competitive advantages for your business, it’s long past time to do so. Honing and then maximizing your competitive advantages is perhaps the most effective way to increase market share and maximize sales and profits. Engaged as a part-time CFO or project CFO, a CFO services partner can help you identify and maximize your competitive advantages.
Arthur F. Rothberg, Managing Director, CFO Edge, LLC