SUSTAINABLE COMPETITIVE ADVANTAGE
If you don’t have a competitive advantage, don’t compete.
– Jack Welch, Former CEO of General Electric
To generate long-term revenue and value growth, it is paramount to create sustainable competitive advantage. Growth companies and markets attract competition, and if a growth company doesn’t have any advantages that competition can’t easily replicate, then chances are a price war to the bottom will occur or the company will be gobbled up and surpassed by the competition.
Seemingly very successful companies often shrivel up and die because they never figure out their sustainable competitive advantage. While there is always so much to do in the short-term, strategic leaders have an eye on what short-term actions could potentially create long-term sustainable competitive advantages. So, let’s go over the sources of sustainable competitive advantage and some pragmatic ways on how to create them.
What is Sustainable Competitive Advantage?
The true magic of an organization is its people doing hundreds and thousands of things a day to bring to life products and services that somehow improve customers’ lives. And, in doing those hundreds and thousands of things a day, the hope, is that over time, an organization develops some sort of sustainable competitive advantage, which encompasses those elements that give an organization an advantage over competitors, and are sustained over time. Sustainable competitive advantages are typically difficult to create and not easy to replicate.
There are eight main sources of sustainable competitive advantage, including Brand Loyalty, Location, Scale, Intellectual Property, Innovation, Proprietary Information, Network Effects, and Lock-up Supply. Let’s go over them in a bit more detail. And, as we do, think through what sustainable competitive advantage your company has or can create.
The Sources of sustainable competitive advantages include:
• Brand Loyalty driven by the strength of the brand (Disney), design (Apple), products (Gillette), and loyalty programs (Target REDcard).
• Location in the form of prime physical locations for the given customer segments (Starbucks) or the sheer number of locations (7 Eleven).
• Scale over competitors that helps drive down costs and pricing, given leverage with purchasing (Walmart), volume production (Samsung), marketing (Coca-Cola), fixed costs (Costco), and partners (AT&T).
• Intellectual Property in the form of proprietary formulas (drug companies), processes (Toyota), and patents (Priceline).
• Innovation based on constant uniqueness and novel use of technology (Google) and design (Dyson).
• Proprietary Information, which can be in the form of knowledge (Glaxo Smith drug research), process (Tesla battery manufacturing) customer (Amazon purchase history), and many other types.
• Network Effects where the value of the product or service increases with the number of users or products. Typical of social (Facebook), technology (Salesforce.com) and market-based (Ebay) business models.
• Locked-up Supply happens when there are few to no other alternatives in the supply of product or service (DeBeers Diamonds).
Sustainable competitive advantage is hard to create, but once you have a beachhead, you need to press your advantage, continuing to build on it and protect it.
How do you develop sustainable competitive advantage?
Here are the top tips for developing the eight sources of sustainable competitive advantage:
Often the go-to advantage of most organizations. The key is to make raving fans out of your customers. Do everything within your power to give them the best experience, to make them love your product and brand. If you crack this code, you’ll grow like crazy by creating brand advocates who will be loyal for life and drive unbridled free marketing, telling everyone they can about your brand.
There has never been such a time when Innovation is so prevalent in the world. There are so many innovative ideas, research, technology and design to infuse into products and services. Organizations that want to capitalize on Innovation need to ensure they are continuously encouraging, enabling, scanning for and incorporating Innovative ideas into their products and services.
It always amazes me that the “Name your Own Price” auction concept was patented and used to create Priceline, a $50+ billion company. Organizations with potential intellectual property should put the right management systems in place to constantly scan, evaluate and secure intellectual property. Even, NIKE, a company not typically associated with patents, has over 4000 issued patents.
Scale advantages can be created at the neighborhood, local, regional, national or global level. You see this a lot with regional furniture or mattress retailers, who get enough locations, so that they can maximize their advertising spend, inventory, and customer convenience while minimizing their logistics costs of the bulky and heavy furniture. Yet, sometimes regional scale is beaten out by national or global scale, which Walmart has been doing with general merchandisers and IKEA with regional furniture stores.
There is the old adage of location, location, location. And, oh is this so true. In retail, stores with the right location, where competitors can’t open up too close, are always off the chart performers.
If you are a location-based business spend a ton of time and energy figuring out the ideal location. Conduct traffic surveys, evaluate other tenants in the area and if they fit your core customer, map out where competitors are, or where they could be. And, once you pick a spot, make sure you put in the lease agreement a point that no other competitors or similar businesses will be located on the landlord’s property.
Organizations often collect massive amounts of data on their customers, processes, development or R&D learnings, markets, and sales, yet; frankly, many organizations don’t turn this information into a sustainable competitive advantage, even though they could. With customer information, you have to turn that into ways to better engage and drive loyalty in customers. With R&D learnings you have to protect those learnings with a high level of secrecy while continuing to build on them and leverage them in the business. Whatever type of proprietary information you have, figure out ways to build on it and leverage it to create more value for the organization.
One of the most powerful advantages is creating a network effect. Facebook, eBay, and Pinterest all have strong network effects. The more users that use the platform, the more value created by the platform. The internet has spurred the growth of network effect advantages. Many organizations can leverage the power of the internet to create network effects, whether it is building an online community of users or the marketplace for an industry.
While it is often difficult to lock up the majority of supply of something, organizations can lock up key supplier relationships, distribution agreements, and exclusive partnerships to service a particular market. If you are a distribution-based business, lock up the main distributors or retail partners ASAP. There is only so much room in a retail store, and some of the most successful consumer goods product companies have simply been the first to lock up the key retailers or distributors in a market.