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It All Starts and Ends with Competitive Advantage

If you want to start a successful business or stay in business you’ve got to have some degree of advantage over your competitors.  Otherwise why would anyone ever buy from you?  Competitive advantage can come in one or combination of the following factors:  Price, service, quality, location, or imbedded customer base.  The better your business performs against one of these factors, the more likely you are to succeed.  Let’s take a moment and consider each.

Being the low cost provider of a good or service can be a quick path to gaining more business or market share than your competitors.  But this strategy has serious risks.  Certainly you will need a lower labor, materials or overhead cost.  Unless you have deep pockets and plan to drive your competition from the field. Even then you may find that your competitors are willing to cut prices in response.  After all you can not expect them to let you take their customers away without a fight.  So if you go down this path it would be better to be certain that you truly do have lower costs. 

Service can also be serious differentiator and competitive advantage.  If you can respond quicker, get it done quicker, or get there sooner, your customers may prefer you over your less nimble competitors even though you cost more…to a point.  If your costs are dramatically higher, as little as 20 percent in many industries, most customers will have a hard time justifying your speedy approach. 

Quality is important in almost every industry.  People do not like to pay good money for work that has to soon be redone or have to purchase a new unit that fails prematurely.  By that I mean faster than expected.  In certain instances quality is not all that important, for instance wooden 2 x 4 studs for construction that will not be seen when the project is completed, or lead fishing weights that will soon be battered or lost.  In other instances quality is the only important consideration as in smoke detection, fire alarms, safety and medical equipment.  Most products are somewhere in between and the astute business person will seek to produce the highest quality within his means.   Over the long term producing higher quality is almost always less expensive as you don’t have to deal with as many returns, or as much scrap, or rework. 

Location can also be a competitive differentiator.  If you’ve got the only game in town, then people will have buy from you unless they are willing to travel to another town to get it.  Concessions at the ball park or a national park are prime examples.  Prices are higher than normal but not so high that people refuse to buy.  If your distant service competitors charge for travel time, other things being equal, you can charge more money but not so much more that it pays the customer to use your competitor.

An embedded customer base can also be a competitive advantage.  So what if you are a little more costly, or even a little slower?  Most people hate change.  The prospect of needing to invest the time and energy to build the necessary trust with one of your competitors can be a real deterrent.  “They may be a devil to deal with, but at least they are a devil I know.”

Well if it were all just that simple.  Unfortunately we live in a changing world.  New competitors with better products or service arrive on the scene almost daily.   Today’s Internet extends the reach of many retailers, wholesalers, and even some service providers, like web site designers.  When demand for your product or service slacks or increases, it’s in your interest to try to find out why.  Find out why your old customers are not buying from you.  If they are switching or thinking of switching find out why and figure out which of the above factors you can do something about, and get moving.

 Most successful businesses exist in the marketplace with other successful competitors. They can do this because each has some mix of competitive advantage factors that appeal to a given segment of the potential customer base.  Successful businesses work hard to understand their customers.  They ask questions like:  What could we be doing that would make us even better?  Or, how do you see your customer base changing over the next 12 to 18 months.  Understanding your customers and your customer’s customers can help you see the changes you need to make in order to maintain or gain competitive advantage.

Additional Resources:

Sources of Competitive Advantage for Small Independent Retailers:  Lessons from the Neighborhood Drugstore. Jeffery McGee, Leonard G. Love, and Michael J. Rubach. 

A good summary of Michael Porter’s view on gaining competitive advantage

Untangling the Origins of Competitive Advantage.  A 48 page MIT / BU working paper on the subject

Copyright 2003, Donald J. Bodwell.  All rights reserved. Email: