Your product features will be copied. Your pricing strategy will be copied. Your hard work will be copied. Your nimble startup team will be copied. Your marketing copy will be copied.
Anything that can be copied will be copied.
This is an attempt at a practical guide to competitive advantage and how it can be created when you are building your business. However, without first being clear in your understanding, you may never get there.
Before I go any further I need you to do one thing. Whenever you read competitive advantage you should be thinking “an avenue for sustaining growth inspite of external threats.” This is the prize!
Why is it called competitive advantage?
Because it is an actual advantage which your competition, current or future, cannot easily copy or buy.
If you ever do an MBA there are typically four different strategies which you are told produce competitive advantages. Seeing as most investors have an MBA it is still important to understand where their thinking in competitive advantage may have originated. A quick rundown of the four traditional strategies:
Cost Leadership: Commonly misunderstood as the lowest price in an industry. This is often the case but not always. The strategy is about having the lowest cost structure – products or services are created at the lowest cost in the industry. Example: Walmart or Vanguard Group.
Differentiation Strategy: A unique product or service that competitors cannot serve. The business typically has unique capabilities and resources which allows it to satisfy underserved or unserved customer segments. Examples: Apple, Nike or GoPro.
Innovation Strategy: Also known as the “leapfrog” strategy. This is the label which traditional MBAs apply to tech startups who jump over existing competitors and make them obsolete or irrelevant. Example: Tesla Motors.
Operational Effectiveness Strategy: A business performs internal business activities better than competitors. The benefits can be lower time to market with products or more efficient to do business with than competitors. Example: Amazon.
When I read through these strategies, my thought is:
“These are great strategies for diagnosing how a company won after the fact, but they don’t help me, the entrepreneur, articulate or formulate a strategy for my early stage business.”
Earlier this year Toby and I went on a trip to the Philippines for the purpose of seeing what opportunities there were in the Business Process Outsourcing and seat leasing industry. We had a packed schedule for 4 days and wanted to get the most out of it.
In order to frame our thinking for potential business ideas and opportunities, we explored the idea of different lenses we could put on in order to analyse how we could have a potential competitive advantage.
We came up with a list of competitive advantages which allowed us to think about how we might attack the industry and sustainably grow a business. It is a practical lens you can use when thinking about your own business.
1. Perceived Authority
If you are dedicated to giving back to the your niche over a period of years, it is almost natural that you will evolve into an authority.
The tools you use to do this could be numerous: blogging, a social media platform/s, speaking engagements, writing a book, lecturing at a university or college, teaching in any form or organising events.
There can be many people who have authoritative knowledge in an industry yet have not marketed or sold themselves. Without the marketing they won’t be considered as authoritative by an audience.
The “magic formula”:
Perceived Authority = Authoritative Knowledge + Marketing
For some tactics on how to start on the path to becoming an authority check out the article I wrote on Under30CEO.
2. Valuing something important more than the competition because it’s not obvious
Google was a late entrant into the search industry, and it saw something which others did not. It entered the search market when the experts and competition thought that search was over and there was nothing more to it.
It had an obsession on one thing and placed far more value in it then their competition did. It was challenging for others to see the value in it because their attention and resources were dedicated elsewhere. The competition would need to completely change their momentum in order to compete.
What customer need is being missed by the leaders in your industry?
3. Impossible to duplicate team
If I was starting a basketball startup which had Michael Jordan, Lebron James and Kobe Bryant on board, would you be willing to bet against us?
These guys are not going to endorse or advise multiple businesses in the same space. It restricts the competition from using the identical avenue for growth.
Having the right people endorsements is a big winner when pitching. Investors love to see others involved in your business who have been there and done it before. Especially if they have a high profile.
The right kind of celebrity endorsement or involvement from high profile experts is a must. It’s not worth just accepting anybody you can find.
4. Network effect
Network effect occurs when a product creates demand from users which in turn enhances the utility of the product. It is incredibly difficult to achieve but creates a tough moat to cross around your business.
Examples include ebay, Facebook, Funding Circle.
The higher the switching costs for the user, the more sustainable the competitive advantage will be in the long run.
Andrew Chen has a great post about the habit forming feedback loops of social products. Aspects of these loops can also be applied to establishing network effects.
5. Intimate knowledge of customer pain points
Having an intimate knowledge of what makes customers in your niche tick takes time, experience and often living the pain yourself.
Understanding the customer pain points in an industry can be a factor of success that is incredibly challenging for a competitor to replicate because they have not experienced the pain point first hand.
A great example of wholeheartedly understanding your customers pain points is the story of Nick Woodman who founded GoPro.
6. Understanding Your Competition
Having an understanding of your competition is essential in figuring out what your competitive advantage should be. It allows you to attack the inflexible parts of their business model and exploit them. Knowing your competition intimately means understanding which parts of their business model they cannot change without significant difficulty and pain.
Think Blockbuster trying to change their model of physical retail stores when Netflix came along. It would have involved a very difficult (read ‘unpopular’) decision from Blockbuster in order to change it’s cost structure in this way.
Another example worth reading about is the Chilean airline LAN. A great example of competitors who would have to change difficult parts of their business model in order to compete on the same playing field. (Note: It is free to sign up to HBR and you can access 3 articles like this one each month.)
When you find a weakness in an industry or large industry leading business and combine it with an understanding of the customer need, you have an opportunity. It can be a protected avenue for sustaining growth over a period of time. It does not mean your business is locked in to be a home run. The usefulness of an advantage can change over time and can also be copied when given enough time. But having a competitive advantage can give you the 3 – 6+ years you need to build your loyal audience, profit and capital.
Take note of the common threads among the competitive advantages. They either come under one of the below umbrellas or both:
require considerable time to be created
are difficult or complicated to copy
It is by no means a prerequisite to have a competitive advantage before launching a business. This is something which you can aim to develop over time after launching.
If you were trying to write a guide in order to understand competitive advantage, what else would you include? Put your ideas in the comments below.