Basic rules for cultivating a competitive advantage.
- Sell a product or a service that is a basic necessity
- Be the first capture a lot of market share
- Operate in a large industry with little competition
- Sell a unique product that doesn’t change much
- Provides a unique service that’s difficult to replicate
- Be the low cost producer and/or seller of basic necessities
What that looks like financially…
- High Margins
- Low R&D Costs
- Consistent Profits
- Accumulation of cash
- Inventory rising with revenue
- Low to No Debt
- Retained Earnings
Having a competitive advantage requires building a sustainable product or service that restricts entry into the company’s niche market. This is virtually impossible for the majority of companies to do over any sizable geographic area, especially established small businesses; however, that doesn’t mean the competitive advantage cannot be localized. At KBC, we’ve held the belief that most local businesses should do a better job creating strongholds on their local markets.
Competitive advantages can spring from intellectual property, whether protected by law or secret sauce (i.e. Coca-cola), this can help brand the business as it puts a stamp of exclusivity on it. Of course, legal protection doesn’t mean what you do is relevant or necessary to the market. Many companies have trademarks, copyrights, and patents even at the small business level, which never amount to competitive advantage.
The product, service, or manufacturing process a company has can also competitive advantages over any other currently competing product or existing technology. Cost savings from efficiencies at scale add a lot to the competitive advantage, but this is a dangerous game if the company outsources any of the process to other companies. Many US organizations moved to China and had their tech/process/product stolen and repacked under a different name.
Building a brand is another way to make selling easier and rise above the competition. Essentially, if you can build a brand, it helps set your name out from other possible choices when the customer is ready to buy. Many times this is just spending the time and money to get attention. And, if you can do it in a catchy way like your favorite commercials, all the better.
Branding of the iPhone, iPad, Mac, Macbook, and so on has helped Apple solidify its dominance in the market for years to come. However, back in the mid to late-90’s the company, despite having a great product, was losing its competitive advantage in brand – curse corrected and is all good now, with $50 billion in annual profit and over $200 billion in cash at the time of this post. Remember how they started – iPod led to the iPhone, which was only available on AT&T.
In closing, for the majority of companies, even local retail, restaurants, and grocery stores, it’s not impossible to build a competitive advantage, it just requires work and the pigheaded determination to do it.