Develop Competitive Advantages

Every successful business has a few things that makes them stand out, which allows them to earn money despite fierce competition and the fact that many other businesses falter and fall behind. These are competitive advantages. Although there are potentially dozens of sources of competitive advantages, there are two primary categories which provide advantages; customers and products. These primary categories of competitive advantages provide your customers with a reason to purchase your products. Everyone is trying to develop primary competitive advantages so to do this you often have to develop supporting advantages which allow you to gain an edge over competitors in developing primary advantages. There are three supporting categories of advantages which allow you to better improve upon the primary advantages; personnel, structure, and resources.
So while you need to have some primary competitive advantages to attract customers, one must not underestimate the importance of supporting advantages. Wal-Mart, 7-Eleven, and McDonald’s can only provide quality service at low prices thanks to their structural advantages. Toyota built high-quality cars thanks to its employees and its structure. Starbucks has great customer service thanks to its employees. What we see then is that while customers might only see and buy from a business based on its products or its customer service, what allows some businesses to succeed while others fail is often advantages which allow that business to spend the money or get the personnel necessary to build better quality, lower prices, better customer service, etc.

While it’s theoretically not impossible for any one company to be good at everything, it has proven nearly so even for companies with billions of dollars in resources. Further, because you are using limited resources, it is important for you to focus your efforts on those things that will give you a distinct edge which you can afford to do with the limited time and money you have. Focusing does not mean giving up on other aspects of the business. Even if you choose not to make customer service the center of your business, you can’t suddenly not care about your customers. In other words, while success is about focusing in order to become extremely good, it’s also about being skilled at a number of different things.





Customer-based Advantages

Brand, Target, Service, Marketing, Ease of Purchase, and Reduction of Concern

Customer service is about more than simply being friendly and helpful although these can be a big part of it. The primary purpose of a customer-focused strategy is to find ways to reduce the barriers that might prevent a customer from making a purchase. For example, many customers don’t buy because they’re worried they’ll find a better price the next day which is why a number of stores have a guarantee to match a competitors’ price. Other stores have grown more lenient in their return policies as a means of convincing people to try their products they are unsure about. Remember that sometimes even customers who want to buy your products and have the money to do so won’t ultimately buy. They’ll put everything in the shopping cart then leave it and walk out of the door because the line is too long because they feel uncomfortable because the store is too crowded, or they will be uncertain which of the dozens of products are better and so will get none. Finding better ways to deal with any of these issues can give you an advantage.

It’s important to understand that any company is faced with two issues when it comes to making a sale; first is the emotional risk which a customer feels when they think about committing to a purchase. Everyone worries about making any form of commitment in both time and money. The commitment to any one purchase comes with emotional risks. Thus reducing these risks can include making customers feel comfortable in a store; building a brand so they feel more comfortable with your product; reassuring them about their purchase, etc. The second challenge you face is buyer’s remorse. The negative feelings a customer has after they make a purchase which can reduce the likelihood that they’ll make a future purchase from you. There are a number of factors which can cause buyers to feel remorse including; social factors (especially related to fashion or items which might have political connotations), price factors, quality factors, concern that perhaps they should have purchased another product, or saved their money, and more. Such concerns can be reduced through branding (in the case of fashion or concerns about whether they should have purchased a different product) and quality-based tactics.


Quality Service

The quality and friendliness of service in and after your purchasing process, the moment a person walks into your store or calls, sales to their follow-up desire to return a purchased product, to calls to customer support are extremely important. This can also include efforts to improve the beauty of the store and prevent it from feeling overcrowded. Zappos, one of the few online retailers to become a billion-dollar company, was also one of the few retailers to put their phone number at the top of every page encouraging people to call with questions which, in turn, encouraged people to buy from them. Like everything else, customer service costs time and money so you must determine its value versus the value of other tactics you could engage in.


Ease of Purchase

The longer someone has to wait to purchase from you, or the more complicated it is to do so, the less likely they are to buy. This is one reason why location is so important because the further your customers have to travel to reach your business, the less likely they are to do it. Once a customer enters your store, the easier it is for your customer to find what they want and the faster the checkout process, the more likely they are to purchase a product. On the web Amazon.com has created a system to allow customers to buy products with a single click saving them from any checkout process.

Reduction of Concern

Reducing the concern customers have when they purchase something by allowing them to return it, by matching later prices, providing samples, quoting reviews and more is an important part of getting customers to actually choose to buy your products.

Branding

What people think of and especially how they feel about your company alters the way they shop. Trust and style are both worth a premium. People can be willing to pay more for something that fits their self-image, will make themselves look better to the world, or which they trust. Target is building on this advantage by making itself the stylish choice for the upper, middle class. This is happening even though most of the products they sell are no different from what any other department store sells. Remember, brand is about image and emotion.

You can learn more about branding in our section on this topic on pages (6-17).

Target Customers

Almost every industry has certain groups of people they tend to target more than others leaving many potential customers by the wayside. You can gain an advantage by targeting these ignored customers by going into underserved neighborhoods and reaching out to various cultures and demographics.

Axe found success by building a line of body washes, body sprays, and similar items for teens and twenties men, a demographic that other companies ignored. Whole Foods served health-conscious customers who were looking for high-end products and were otherwise underserved by the grocers who were focused on lowering prices. When targeting a new set of customers, you have to think differently about what you’re selling, and you need to be much more conscious of your target than others in your field are.


Marketing and Sales Methods

There are three aspects of marketing that will give you an advantage; they are message, reach, and cost. Most of your large competitors promote well their products, but it’s unlikely that small businesses with which you compete will do so in a way that makes them relevant. This can make marketing an easy advantage for you to gain. However, this simplicity exists because marketing is difficult to understand which is why it’s been given its own section within this book.

You can learn more about marketing on Page 21.




Product Advantages

The products you sell can provide you with a unique advantage; however, this advantage only exists if your product tactics are customer centric. There is, after all, almost nothing that people have to buy and nothing that large groups of people have to buy from you. Even if you run the only grocery store in a small town, they can likely drive to another town or order some food online. There are many people who drive for miles to shop at grocery stores when they don’t feel their needs are being met locally. We are a very mobile society, after all. Thus, it’s important to remember that while extremely important products themselves don’t offer the strategic advantages, its people’s perceptions of your products that ultimately offer the advantages.

As a retailer you can choose to sell unique products that no one else is selling. However, if people don’t feel an emotional draw to those products, then you won’t gain an advantage from this uniqueness. Think of all the amazing new technologies which took years to get off the ground such as the Tablet PC which went on sale almost ten years before Apple brought it out. The first companies which sold this “revolutionary” new product made very little or lost money in their attempt to sell it, and then Apple came along and made billions off them in a few months’ time. The stuffed toys known as Beanie Babies were not different from other small toys, yet they became hugely successful (for a short period of time anyways). Beanie Babies wasn’t successful because it was truly unique; it was successful because people perceived it as more emotionally appealing than other miniature plush toys that existed. At the center of a good product tactic are your customers’ emotional desires.


Quality

The quality of the product can be the most important part of a business’s success. It’s true, of course, that people sometimes accept lower quality for other advantages, but it’s much more difficult for small businesses to achieve these other advantages. Quality is easier to achieve for many small businesses because of the amount of attention that the entrepreneur can give to the products they create and because of new innovations within the product or service that spurred them into business. Equally important is the fact that niche groups are willing to pay more for something that is high quality allows small businesses targeting these niches to spend the money per product to develop quality. Skull Candy, a maker of high-end headphones is a good example of this. They started out making headphones which they sold for much higher prices than most of the existing headphone models. American Girl charges over $100 for their doll boxed sets again because they focus on quality. Both these companies grew into multimillion dollar businesses by selling to small groups of people who were willing to pay a lot more for quality.

Quality isn’t only for manufacturers of products. Quality is also the key to the success of restaurants, salons, and any other business which is creating something for a customer.
Retailers can also gain an edge in quality by choosing only to carry certain types of merchandise as Whole Foods and Bloomingdale's do. The biggest challenges small businesses face in achieving quality, especially when dealing with food, is that it’s difficult for them to choose to throw out food the moment it might start to lose quality, or to throw out products which might not meet rigorous quality standards but are still fairly good and accept the financial loss. If you can’t accept the loss of tossing products that don’t meet your quality standards, then you need to figure out some advantage other then quality. The other challenge businesses will face in seeking a quality advantage is in having the skills necessary to craft quality products. Such skills don’t just have to be in your chosen field. They can also be in managing your employees or vendors to ensure that they maintain your quality standards.


Pricing

Unlike what many people think, advantages in prices don’t just come from low prices. Price advantages can also mean charging more to become more exclusive, to gain better cash flow and more flexibility in other strategies. If Tiffany’s sold its rings for the lowest price, for example, they wouldn’t be exclusive and so would likely be less successful than they are. In general, low pricing is a dangerous strategy for a small business to try to achieve because it requires other advantages that are difficult for small companies to develop and takes away the small businesses opportunity to create other advantages.

There are small businesses that manage to pull off low prices and earn money because of natural advantages, but you need to make certain some of these exist before you choose this strategy. Remember, in the low prices arena, you’re competing against large companies such as Wal-Mart, McDonald’s, major service providers and the category killers. Strategy is about finding an edge, and you have to realize that these companies all save a lot of money per product in order to be able to charge what they do.










Supporting Advantages

Management and Personnel

The people who work for you can be your most important resource because those on salary are likely working for less per hour then a freelance worker who’s brought into the company. Further, they are the ones your customers interact with daily and who have the opportunity to notice every flaw or business opportunity your company might have. This is why Starbucks chooses to offer health plans even to its part-time workers so that they can attract the best people in the industry; people who might not otherwise be willing to work at a coffee shop.

Disney has also gained a lot of its edge over competitors through being able to hire the best people. Unlike Starbucks, however, this advantage comes primarily from Disney’s unique brand. People want to work for Disney because of what it stands for, and then those people go out and continue to help Disney continue to build the brand that attracted them to the company in the first place. Google and each new, hip technology company gain a similar advantage in being able to attract the best workers in a large part because of the brand they have. Google further gains an advantage in the way they manage their personnel so that these employees help them create new, innovative products and solutions. What we see then is that a company can gain a unique advantage in customer service, branding, products, price, and more through the people they employ.

In order to gain an advantage in personnel, a company should think of its recruitment and retainment strategies in much the same way that they would think of marketing to customers. They need a good marketing and targeting program to find high-quality employees and good employee services to retain these employees. In addition, however, they need a way to determine both who these good employees are and a management system which allows them to take advantage of their employees’ skills.



Innovation Leader

"Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It's not about money. It's about the people you have, how you're led, and how much you get it."
Steve Jobs – “Fortune,” Nov. 9, 1998

Being an innovation leader involves constantly finding new ways to gain advantages, ways that have not been used before within your immediate industry. In many cases such innovations come either from the employees or the founder of a company, and so the personnel that a company has and the way they manage them are key to this tactic.
What makes innovation so difficult to pull off is that it’s standard to ask questions such as: Who else has done something? Where else has this worked? If something is truly innovative, the answer to these is going to be “no one” and “nowhere.” When you come up with something innovative, you may lay in bed anxious and excited wondering if it’ll actually work, and odds are you won’t follow through out of the fear that it won’t work.
Just as challenging as actually following through on innovations is developing new innovations frequently. To learn more about this, see “Innovation” on page ()))



Adaptability

No matter the industry you are in, it will eventually shrink or change drastically. This is the only thing you can count on. The biggest changes are what often help catapult small companies into the lead. It’s during recessions, for example, that little companies tend to expand their market share. New technologies, new consumer tastes all have the same affect.

And while it’s common for us to notice the big changes that occur, we often miss the more subtle but important, small changes. Every industry has new opportunities to change itself because new things are happening every day. The biggest challenges to using adaptability as a competitive advantage come from fear. People are afraid of the unknown. So even though we are entering the unknown at an ever-increasing rate, most companies try to avoid it rather than embrace it because it’s human nature to do so. Further, building an adaptable company requires you to be patient. New strategies based on what’s happening in the world can take a long time to bear fruit. Because of this they are often dropped before they can realize value or are ignored altogether. Finally, one must be aware of what’s happening in the world around them. Adaptability comes from constant learning.

More than any other advantage, adaptability comes from knowing what is happening and what could happen because sometimes adapting to a change better than the competition involves knowing that things are changing before they do. When researching changes, it’s important to do more than look at what’s directly impacting your business now. You must also think about what might impact your business in the future. Think about what the worst and the best things that could happen are. If, for example, you own a supply company and a large percentage of your customers are on the other side of a river, imagine what would happen if the bridges had a toll placed on them. Adaptability is a personal advantage because it is about learning and being aware, which are things that only you and the people working for you can do properly.
Thus, you must allow your employees to engage in some experimentation as adapting to changes you must be willing to experiment with new ideas. You have to set up your business where you can afford to be wrong occasionally because you will be wrong. Further, you must foster in your employees not only the ability to challenge you but a willingness and even a desire to do so. Adaptation, after all, requires you to challenge your assumptions about things because assumptions tend to be biased towards the existing status quo. Such challenges can allow you to think of things you otherwise might not have.



Structural Advantages

Structural advantages provide you with the ability to produce, manufacture, ship, and manage your products, business, or services at a lower cost or faster than most or all of your competitors. Because structural advantages help you improve or save money on every product you make, they provide you more leeway in any decision you want to make or tactic you wish to utilize. Wal-Mart’s success is based on developing more efficient logistics and management processes which allow it to lower its prices on key products. Toyota and Sony used the money they saved from their efficient manufacturing process to allow them to make higher-quality products which in turn allowed them to leapfrog over a lot of larger and better financed competitors. McDonald’s became more efficient so that it could make its meals faster, an important advantage in the fast food industry.
While it’s rare for small businesses to have an edge over larger businesses in efficiency, a small business might easily be able to find advantages in efficiency over many of its equal-sized competitors. After all, a maker of handcrafts isn’t just competing with Wal-Mart, they’re competing with other makers of handcrafts. So if they can find a way to get their shipping done faster and at a lower cost than other people who make handcrafts, they have an edge.

One of the challenges many businesses face in achieving structural advantages is that these aren’t the upfront parts of business seen by the public. Structural advantages involve bookkeeping, warehouses, truck routes, factory layouts, etc. However, many of the great innovations which have propelled one business ahead of another have been structural, unseen advantages. Further, just as structural advantages provide leeway, having structural disadvantages can prevent you from doing the things you need to do to compete. To gain as much of a structural advantage as possible then, you must track and review the primary processes you use to manage your business. How you train your employees, how you get the supplies you need, how you make, store, or shelve the products you sell, and how you go about selling these products is critical.

You will find that education and learning are an important part of discovering and keeping up with new processes. Industry and business journals and news often discuss new structures and means by which businesses have gained advantages is efficiency. Further, there are always new companies seeking to provide new services to assist companies in improving their structure. Amazon.com, for example, offers its logistics services (at a price of course) in which they’ll store your products, box them up with your name, and ship them for you, which can free you up to focus on the things you’re better at.

You must also realize that your structure is based not only one your company’s ability to do its job but on your vendors’ ability to do theirs. Wal-Mart, Disney, and more all allocate money to track and work with their vendors; helping to improve their systems so that they can provide better service. While it is difficult for a small business to do this, in most cases they can at times negotiate with the companies they depend on to be better involved in the process. Odwalla Juices set up a system with its distributors and the retailers who carried their products to help them determine which products sold best in which stores and on what days allowing them to become more efficient in delivering just the right products. Further, nearly any business can carefully review the vendors they use to make certain that they have the best vendors for their needs.
Structure is a long-term investment so it may take awhile to see returns on purchasing technology, building a new warehouse, or doing other things that make you more efficient. However, once these returns come in, you’ll have a huge advantage over the competitors who didn’t make this investment because they will have to wait to see returns on their own investments in structure while you’re enjoying them.


Consistency

People claim to want originality; they claim to want something unique, and indeed a few people actually do. The majority of people, however, buy from McDonald’s because they know what they’ll get, or they go to movie sequels more often than original movies. Most people want to know what they’re getting, and so you often need to structure your business in order to create the same thing, provide the same service, and have the same set of hours every single time. As with any aspect of gaining a structural advantage, this requires you to review your processes to see where and how errors are made so that you can find ways to reduce them.

Channels and Placement

Your sales channel is the place where your product is sold whether it’s online or in a store or via some other means. There have been many companies which have been able to develop their customer advantages based almost entirely on how they choose to sell to customers. Two of the most famous examples of this have been Avon and Tupperware which chose to make their target market the sellers who made sales door-to-door and to friends. Cutco, a highly profitable knife manufacturer, chooses to avoid selling their products in retail outlets and instead opts to have them sold by independent contractors in people’s homes one-on-one based on referrals made by previous customers. American Girl sold their products by distributing beautifully designed catalogs, allowing them to keep all the money from their sales so they could spend more on promotions and the products themselves. Whether you’re choosing to sell online, in a catalog, to high-end cafes or somewhere else, where you choose to sell will have a huge impact on your other tactics.

Many sales channels, such as stores or direct salespeople, require you to share a huge percentage of your earnings with someone else, which means that your channel can become the most expensive part of your marketing plan. This requires you to be certain that your customers prefer that channel and that that channel will provide you with as much market exposure as possible. Additionally, such sales channels often mean that you have two sets of customers; the stores or salespeople who sell your products as well as the people who buy your product from this sales channel. It is not uncommon for a company to have salespeople to sell to retail stores and a recruiter to attract their salespeople; thus requiring them to choose three sales channels for each stage of their product.

While it might seem easier to just sell directly to customers the way American Girl does, you must remember that retailers are often better at connecting with customers than manufacturers are. So you must be ready to sell directly to your target market. As you can see, selecting the right places and methods for selling your products can be a complex task, one which requires a good awareness of your own abilities as well as the abilities of those who you might sell through and your target market’s desires.

Technology

There is a lot made of how technology is rapidly changing the world and altering the way we do business. Indeed, technology is perhaps responsible for more changes and advantages than anything else. Having the latest technology, however, is not an advantage in and of itself. Rather, technology is a way for you to obtain other advantages. Ecommerce was a new sales channel, robots help businesses improve their structure reducing their manufacturing or shipping costs, computers provide employees with additional information allowing them to be more innovative and efficient.

When examining new technology, it’s important to look at it based on what it can do for you and how your customers will respond to it. It might, for example, be cheaper to have an automated system answer customers’ questions, but this might also cause you to lose customers. Ecommerce might mean that you don’t have to pay rent on a space, but it can also make it more difficult for customers to discover that you exist or remember you. The Internet, after all, is based on the top ten results and the few websites that people can remember.

When you actually take the time to analyze your structure and how technology might impact it, you can build incredible advantages that will put you well ahead of the competition. Diapers.com, for example, owes its success to the use of robots which greatly enhanced its logistics. Such robots reduced the costs of storing and handling its products so that it was able to sell at lower costs and provide greater customer convenience than most of its competitors. So while some have argued that Diapers.com’s advantage came from customer service and price, these advantages existed because of new technology.


Focus

Focusing on one set of processes, products, or customers will make you better at working with them. As with technology, focus itself isn’t an edge so much as it is a way to enhance another edge. That being said, it’s important to understand that focusing on a specific set of competencies is the best way to insure that you not only retain the advantages gained from those competencies but that you are able to improve on those advantages. When determining your focus, you need to think about what your company is uniquely good at or what you can be good at. As with everything else, look for openings that no one else sees. Keep in mind when you’re doing this that dozens of people likely see openings in the trendy industry so you shouldn’t be afraid to focus on an industry which is shrinking because every industry in the world has companies that do well despite what the industry is doing over all.

Indeed, in some cases, a shrinking industry can create new advantages because of new niche markets and because few people within that industry are developing truly new ideas. Candlelight, for example, was probably not romantic when everyone was using candles so the opportunity to claim that it was and develop that niche market probably didn’t exist until light bulbs became common. American Girl expanded by hundreds of millions of dollars while the doll industry was shrinking overall. What makes or breaks your business’s success oftentimes is not what’s happening in an industry but your response to what’s happening.



Resource Advantages

Nearly every business has certain resources which are vital do doing its business, and in many cases the quality, price, or simply the ability to get these resources can give you a decisive advantage or a disadvantage. In the modern world, when many resources are just as easy for one company to obtain as for another, location and placement has become one of the most important resources. For example, any company trying to make something for retailers has to struggle for a limited resource, “shelf space.” In the case of freezer or fridge space, this access to resources is truly at a premium because not only does the store have to find room for your product, but they must pay electricity for it to be there. Häagen-Dazs and other ice cream sellers which manage to get shelf space have used this to their advantage to hinder new competition from entering the market. Indeed, the best places on the store shelves are often paid for.
Companies have located themselves near suppliers in order to be in a better position to negotiate deals or buy a limited amount of products before they are bought by competitors. Similarly, tech companies locate near other tech companies in order to be in a position to attract better employees (an important resource in technology).
There are a number of possible advantages a location can provide; the first and most obvious is the ability to gain the customers necessary to stay open. A location can also allow your company to obtain better workers which is why so many businesses of the same type choose to locate in the same areas. By the same token, some locations provide real financial benefits; they cost less in property taxes, zoning, or they provide better access to capital then others do. Much of the venture capital in this country goes to businesses in Silicon Valley, and businesses in Salt Lake City received more SBA-based loans in 2009 they did businesses in any other city.

Still, location isn’t everything. There are still many things that are in short supply. There are record companies that only release a few thousand records giving any retailer which can get some of these records an advantage. By the same token, many wineries and other manufacturers of high-end products provide only a limited number of their products. Also, there are still some minerals, such as rare earths, which can be in short supply. Finally, since it’s possible to buy some things in advance, doing this before the price goes up can give you the advantage of getting the resources you need at a lower price than most of your competitors. Doing this requires you to be able to predict what’s going to happen in the future so that you can determine when prices are about to go up.


Barriers to Entry

Many businesses stay in business simply because it’s difficult for new competitors to enter the market; this can be both an advantage and a disadvantage. On the one hand, having less risk of a new competitor entering the market means that you can dominate it. However, this can cause a business to grow lax so that the demand for their products decreases or so that the cost of making these products skyrockets. The lack of competitors in an industry can also mean that the companies in it are ill-prepared to deal with new competitors who do manage to enter it.

Hollywood film companies have enjoyed incredibly high barriers to entry with the same few film studios having dominated the industry for decades. This barrier to entry comes from more than just the costs to break into Hollywood though these are substantial. The barriers also come from the difficulty smaller distribution companies have in convincing stores and movie theaters to show their products. At the same time, however, we do see that the cost to make movies has been skyrocketing and that growth may be hindered by competition in the form of computer games, various forms of online entertainment, and more.

Outside of Hollywood, this industry-based barrier to entry is rare on a global level, however, as there are many countries that can push into the market. The big three automakers in the U.S. enjoyed this competitive advantage for years. This led to inefficient processes that caused their expenses to go up and quality to go down. Then Japanese automakers entered the market. Now it’s likely Chinese, Indian, and other automakers are going to come into the market.

Barriers to entry can also come from the government. Pennsylvania has created serious barriers to entry into the restaurant and grocery business by creating stringent liquor laws that make it more difficult for new businesses to enter the market, a situation Philadelphia has compounded through problematic zoning laws and regulations which cost new businesses tens of thousands of additional dollars. Indeed, I would argue that most barriers to entry exist because of government regulation that prevents small businesses from entering the market, allowing a few large businesses to overcharge for their services. This means that perhaps the easiest way to gain this advantage is to work with other businesses in your industry to lobby the government in order to get them to create zoning laws, licenses, and other forms of red tape to stop competitors from entering the market. As history has shown repeatedly, even when these laws are worse for the economy, governments tend to listen to large blocks of voters and so often do pass them.