Competitive Advantage Is Part of Your Business Model - dummies

Competitive Advantage Is Part of Your Business Model

By Jim Muehlhausen

Competitive advantage enables a firm to perform at a higher level than others in the same industry or market — or with anyone competing for the customer’s limited budget. Competitive advantage can serve as a powerful catalyst for your business.

Competitive advantage enables you to outsell, outprofit, and outperform others in the same industry or market. When you’re analyzing the strength of a business, if you look only at competitive advantage, your analysis will be incomplete.

People often mistakenly use the term competitive advantage as a synonym for the term business model. The reality is that competitive advantage is a portion of your business model, but not all of it. A business model is more encompassing than your competitive advantage.

For instance, you can have excellent competitive advantage but still have a weak business model. If Starbucks decided to maximize coffee poundage sales by lowering the price of a cup of coffee to $0.50, its competitive advantage may rise slightly. However, the lower price would result in a significantly different, and worse, business model for Starbucks.

According to Michael Porter, the Harvard professor responsible for the concept, competitive advantage is obtained through cost leadership, differentiation, and/or focus.

Cost leadership means your firm has the ability to deliver similar goods or services as your competitors for a lower cost. This doesn’t mean a lower sales price, but a lower cost of goods sold. If your firm has the ability to deliver a widget at a cost of $8 and it costs another firm $10 to deliver a similar widget, you have a cost advantage.

If your cost advantage is the best in your industry, you have cost leadership. You can gain cost leadership in countless ways; here are just a few:

  • Access to natural resources: China’s stranglehold on rare earth minerals or cheap labor

  • Scale: Walmart can buy Pampers cheaper than anyone else

  • Vertical integration: Intel designs, fabricates, and markets chips

  • Technological leverage: Many analysts attribute Walmart’s rise in the 1980s to technological superiority in logistics

  • Proprietary processes: Rolls-Royce uses a secret metallurgy process to make super-durable jet engine blades

Differentiation means that the customer believes that your product has superior and different attributes than the competition. Customers pay much more for a cup of Starbucks coffee than for a cup of joe at the diner because they view Starbucks coffee as a differentiated product.

Many times, you can charge extra for the differentiated attributes of your offering, creating additional margin. Businesses can create differentiation by using any of the following tactics:

  • Superior branding (Coach, Tiffany’s, Rolex)

  • Unique supplier relationships (Eddie Bauer Edition Ford Explorer)

  • First mover advantage (iPad, Walkman, Crest toothpaste)

  • Location (remember the retail mantra “location, location, location”?)

  • Scale (not many companies can build an airplane or a skyscraper)

  • Intellectual property (iPod circular controls, Hemi engines, Intel Inside)

You can also gain competitive advantage through your focus. A business can’t serve too many masters. You can translate intense focus on a market, niche, or attribute into a significant advantage. Examples include the following:

  • Tesla’s focus on only electric automobiles

  • Taiwan Semiconductor’s exclusive focus on fabrication

  • Amgen’s focus on biopharmaceuticals (rather than all types of drugs)

  • Starbucks’ focus on coffee rather than becoming just another restaurant

  • Amazon’s initial focus on books

  • Rally’s focus on drive-through hamburgers

  • A doctor’s focus on heart surgery