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Today’s business environment is very competitive. It’s now a lot easier and cheaper to start a business, particularly with technology enabling business to be conducted online and internationally to win customers in foreign markets. The explosion of online retailing is an example of this, and all this competition and activity makes it difficult to stand out from the crowd. The challenge is to resist being another ‘me too’ business. The way to avoid this is by developing a sustainable competitive advantage that differentiates you from your competitors. Sustainable competitive advantage is the key to business success. It is the force that enables a business to have greater focus, more sales, better profit margins, and higher customer and staff retention than competitors.
It is the major driver of long-term business value and is what purchasers will place the most value on when looking to acquire a business. Without a sustainable competitive advantage, you risk being another ‘me too’ business that muddles along achieving less than satisfactory results. At its most basic level, there are three key types of sustainable competitive advantage.
Most small businesses don’t have the market share and buying power to effectively compete on price and are not big enough to be all things to all customers in a market. Therefore, to successfully compete, small businesses need to develop a sustainable competitive advantage that is based on providing superior value to a specific niche. There is another advantage that is often referred to and that is first mover advantage. First mover advantage is where the first entrant in a new market obtains an advantage over other competitors that enter the market later. However, while being a first mover may provide an initial advantage, in my opinion, it is not sustainable unless it’s supported by one of the three types of advantages listed above. Google and Facebook are good examples of this. Neither of these companies were the first movers, yet both now dominate their respective markets. Five steps to developing a sustainable competitive advantage
At the end of this process, you will have a very clearly defined statement of:
Once you’ve found your sustainable competitive advantage, you should use it in many ways, to the business’ benefit. Using your sustainable competitive advantage in your sales and marketing makes it easier for your customers to understand why they should part with their dollars and give them to you rather than your competitors. This, in turn, makes it easier for your staff to sell your products or services and know their promises will be delivered. They know the whole business is focused on making sure the sustainable competitive advantage is protected and capitalised upon. Your sustainable competitive advantage can guide your decision-making and provide you with direction and a sharp focus. If a new opportunity for the business doesn’t support your sustainable competitive advantage, then you should question whether to pursue that opportunity. Is short-term growth that might erode your sustainable competitive advantage, more important than building a long-term position of strength and stability? This longer-term view and effective use of a sustainable competitive advantage can support a higher return on capital invested in the business, even in the face of stiff competition. This position builds value in a business and can add a premium to the sale price. That’s an advantage every business owner wants. This article was originally published on September 21, 2011. NOW READ: Setting your business apart: The Commons co-founder Cliff Ho on how to stand out in a crowded market NOW READ: “Execution is everything”: Here’s the number one reason Australian SMEs are going broke
Strategy is all about "how":
1) How to outcompete rivals2) How to respond to changing economic and market conditions and capitalise on growth opportunities3) How to manage each functional piece of the business (eg. sales and marketing, finance, HR)4) How to improve the company's financial and market performance
Why crafting and executing strategy are important tasks?
Strategy provides:1) A game plan for pleasing customers2) A road map to competitive advantage3) A prescription for doing business4) A formula for attaining long-term standout marketplace performance
9 broad types of actions and approaches that often characterise a company's strategy in a particular business or industry.
1) Actions to gain sales and market share via more performance features, more appealing design, better quality or customer service, wider product selection, or other such actions (differentiation)2) Actions to gain sales and market share with lower prices based on lower costs (low-cost)3) Actions to enter new product or geographic markets or to exit existing ones4) Actions to capture emerging market opportunities and defend against external threats to the company's business prospects5) Actions to strengthen market standing and competitiveness by acquiring or merging with other companies6) Actions to strengthen competitiveness via strategic alliance and partnerships7) Actions and approaches used in managing R&D, production, sales and marketing, finance, and other key activities8) Actions to upgrade , build, or acquire competitively important resources and capabilities9) Actions to strengthen the firm's bargaining positions with suppliers, distributors, and others
McDonald's Strategy in the Quick-Service Restaurant Industry. Its key initiatives of the Plan-to-Win strategy are:
1) Improved restaurant operations2) Affordable pricing 3) Wide menu variety and beverage choices 4) Convenience and expansion of dining opportunities 5) Ongoing restaurant reinvestment and international expansion
What is competitive advantage?
It comes from an ability to meet customer needs more effectively, with products or services that customers value more highly, or more efficiently, at lower cost. Eg. Walmart
What makes a competitive advantage sustainable (durable), as opposed to temporary?
The presence of elements of the strategy that give buyers lasting reasons to prefer a company's products or services over those of competitors
How to create a sustainable competitive advantage?
1) Develop valuable expertise and competitive capabilities over the long-term that rivals cannot readily copy, match or best2) Put the constant quest for sustainable competitive advantage at center stage in crafting your strategy
What is the company's business model?
It is management's blueprint for delivering a valuable product or service to customers in a manner that will generate ample revenues to cover costs and yield an attractive profit.
What is the relevancy of a company's business model?
It is to clarify how the business will:1) Provide customers with value (the firm's customer value proposition)2) Generate revenues (repeat sales) sufficient to cover costs and produce attractive profits
What are three tests that can be applied to determine whether a strategy is a winning strategy?
1) The fit test - how well does the strategy fit the company's external and internal situation?2) The competitive advantage test - can the strategy help the company achieve a sustainable competitive advantage? 3) The performance test - is the strategy producing good company performance? Based on profitability and financial strength, and competitive strength and market standing. |