“The competitive advantage is any business is certainly people.” Kamil Toume
Introduction
Competitive advantage is the ability of a firm to produce Goods or Services of better value or better prices than its competitors.
Customers are therefore attracted to such a firm, which then enjoys higher sales, profits and longevity.
In this article we look at how to build and sustain competitive advantage. We look at the primary strategies driving competitive advantage - differentiation and (low cost) pricing:
1/ How a firm develops its internal Resources and Capabilities to enable:
Examples of competition on differentiation include luxury cars or large legal and accounting firms (expertise).
Examples of competing on price include budget airlines and boutique services firms.
Some firms use both strategies including Aldi - smaller stores (low cost structure) and quality products at lower prices.
2/ Strategies to drive Differentiation and Price using Marketing, Technology and other tactics.
3/ Innovation as a driver of ongoing sustainable competitive advantage.
By the end of this article, the reader will see that building and sustaining competitive advantage enables firms to:
Competitive advantage is key to success for both small and large firms, and we will look at examples of both.
Differentiation and the Customer Value Chain
The strategy of Differentiation has evolved in the past twenty years. This has been largely due to advances in the incorporation of web based technology in business processes including cloud software and databases and mobile devices.
By combining technology with process design, firms are creating new customer experiences. Customer touchpoints now stretches from search to fulfilment and any subsequent interactions.
The ready availability of low cost technology has enabled many firms to offer online driven sales and fulfilment. Digitising customer interactions is not really a competitive advantage because technology is readily available to all firms. Technology simply enables a firm to get into the competitive arena.
Real Differentiation
Examples of sustainable differentiation factors include:
Differentiation can be seen as technical and intellectual excellence. Often this is combined with the personality of business owners and staff; the human interface which is part of the firm's unique value proposition.
Firms who successfully compete on differentiation are able to extract better profit margins.
Transience
The factors driving sustainable competitive advantage do not last forever due to:
Firms and individuals therefore must continually innovate, learn and upgrade their products and services. In a fast changing world, agility and flexibility are important capabilities.
Assets, People, Knowhow & Systems - Resources & Capabilities
The inside of every business requires a combination of cash, equipment, people, technology, systems and processes.
In small businesses, the owners are a mix of creatives and hands on do it types; creating products and services which customers want to buy.
As firms grow in size, more resources and new capabilities are required. What worked previously does not work for larger and more diverse volumes of products, services and customers. Scaling up new capabilities include:
The Secret Sauce of a firm is the combined skills, drive and personalities of its people.
Good managers develop well functioning teams who work in unison - efficiently and effectively to create and deliver customer value. In doing so, costs are kept under control, quality is maintained and improved, and customers are happy with the firm's quality, prices and service.
Case Study
Competitive advantage can be found in traditional industries.
MDE Group was founded in 2006 and is an electrical contractor for commercial premises. The owners have focused on the data and communications niche over the past 10 years.
By building a combination of skilled site managers, rigorous project management, resource allocation and financial management, the owners now have a strong industry reputation for large scale project delivery.
Projects include the Western Sydney Airport terminal, CBA Redfern Technology Park and CBA Head Office refit.
MDE is a good example of the feasibility of developing ongoing competitive advantage in a highly competitive industry.
Low Cost Strategy
Industries with higher competition typically face downward pressure on sales pricing. The strategy here is to be highly efficient producers. Input costs are tightly controlled, workflows are seamlessly smooth, and productivity is maximised as much as possible.
Many firms use additional strategies to drive down costs including:
Cost control and reduction initiatives can be taken in any industry - manufacturing, services, trading and hospitality. Firms which compete on price can still achieve above average profit margins due to their cost leadership.
Case Study
As a young company in the early 2000's, Jewel of India Sydney built its capabilities in producing Indian curry sauces and bulk meals for Food Services.
In 2009, in collaboration with Coles Supermarkets, Jewel launched its range of affordable chilled, ready to eat meals. Jewel had first mover advantage and was able to achieve 80% market share for its category. As the only producer at scale, it dictated trading terms and also attracted other supermarkets as customers.
The key to Jewel's success was its technical and recipe innovation capabilities and the achievement of economies from scale, technical knowhow, mechanisation and production innovation; all overseen by good management.
Risk Management
A firm's operating environment is ever changing internally and externally:
To mitigate risk, firms must take actions to protect competitive advantage which include:
Inside and Outside
Building competitive advantage is about building capabilities the inside of the business. A firm's people work with other internal resources (equipment, systems, capital) to be able to create and deliver excellence in products and services at best prices.
A key part of business strategy is Marketing where the firm broadcasts its Unique Value Propositions to its target customers. Similarly, in sales, a firm's staff must walk the talk in synch with the firms value propositions.
Technology has enabled platform strategies with more parties to buy sell transactions, e.g. Uber ride share, Airbnb, etc. These still need differentiation and cost strategies has foundation elements.
Summary
Firms which build and maintain sustainable competitive advantage will perform better than their competitors. Your sustainable competitive advantage is based on your unique value propositions and price strategies in the eyes of your customers.
Competitive advantage factors can disappear over time. Firms must have a culture of learning and innovation in order to stay ahead of its competitors and thrive in a changing world.
Even small firms can build and develop competitive advantage in very competitive industries.
The best firms treat strong HR Management as the driver of secret sauce for competitive advantage - a firm's unified people and culture.
All the best in your business!
Frank Choy, CFO
7 October 2022
