Creating And Sustaining A Competitive Advantage
An advantage is rooted in asymmetries among rivals. It is leadership’s job to identify which asymmetries could offer an advantage. You want to exploit real advantages and be careful to avoid your weaknesses. You also don’t want to get into a fight you can’t win.
A Sustainable Competitive Advantage
A sustainable competitive advantage like lower costs or higher quality is the goal of every business, but you also have to realize that your advantage may not be across the board. Your advantage may only be in certain products or services. Also, your customers are not monolithic. They differ in knowledge, biases, perceptions of quality, budgets, etc. Therefore, your advantages may be limited or temporary and not extend across the market.
To have a sustained advantage, your competitors can not be able to duplicate your advantage (eg, even lower prices or higher quality). To achieve that you need patents or processes, or unique skills and methods that you have obtained through experience or a strong brand name like Apple.
Some advantages are more interesting than others. Richard Rumelt in his book “Good Strategy/Bad Strategy” explains that a competitive advantage that is “interesting” only when the advantage helps you increase value.
Competitive advantage and profitability are not equal. You can’t make money or get wealth by simply having, owning, buying, or selling a competitive advantage. The connection between competitive advantage and wealth is dynamic. Wealth increases when competitive advantage increases or when the demand for the resources underlying it increases.
How to increase value
Increasing value requires a strategy to do at least one of the following:
Continue to strengthen your advantage (stay in beta mode forever)
Keep expanding your advantage in both products and markets
Create a higher demand for your advantaged products
Make it difficult for competitors to copy or imitate your advantage
Deeping your competitive advantage
Start by defining advantage in terms of surplus — the gap between buyer value and cost. In other words, widen the gap by increasing value to buyers, reducing costs or both. This is difficult for two reasons:
One, Management must believe that improvement is a “natural” process and that it can not be accomplished by pressure or incentives alone. Improvements come from reexamining the details of how work is done, not just cost controls.
The same improvement rules apply to products except observing buyers is more difficult than examining one’s own systems. Companies that excel at product development and improvement carefully study the attitudes, decisions, and feelings of buyers. Then have empathy for buyers and anticipate problems before they occur.
Two. The second reason deepening your advantage is difficult is when your methods and processes themselves are weak. The improvements must be embedded or protected from rivals.
Broadening Your Advantage
Extending your competitive advantage into new products or markets means encountering new competitors. This requires looking at and reexamining the underlying skills and resources of your proprietary knowledge.
Extension based on customer beliefs (brand, reputation, etc,) may be diluted or damaged by careless extensions. (look at how Disney has protected — no cursing, no sex, and no gratuitous violence- its brand while expanding) A brand’s value comes from guaranteeing certain characteristics of the product. But those characteristics are hard to define
Creating Higher Demand
Advantage increases when the number of buyers grows or when the quantity demanded by each buyer grows Technically it is the scarce resources that underlie the advantages that increase in value.
Note; increases in long-term profits only occur if you have already created a competitive advantage and you continue to use your proprietary processes and methods to expand demand. Engineering increased demand for the services of scarce resources is actually the most basic of business strategies. The increased value will come from less imitative competition.
If you continuously improve, more and stronger patents, strengthing your brand-name additional copyrights, etc your competition will have a hard time imitating your products. It’s like staying in “Beta” forever.