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The Importance of Competitive Advantage

As an otherwise idle MBA (Master of Business Administration) there are a lot of times where I hear business plans and see business ventures that make me wonder whether the people involved actually understand the idea of going into business. Most businesses fail. But most businesses fail because they don’t have a business plan or a marketing plan. And I’d add that they need to keep these as Live Documents (continually amended in real time to reflect the changing business environment).

Boring stuff, I know. Who really wants to spend all that time and effort running a business with paperwork. Live documents, phooey. I hear you. My answer… well, a business that wants to compete, survive and prosper. Otherwise, you’re correct… what a waste of energy.

One step in that direction for a business is to sit down and seriously ask yourself what your product/service offers customers. I mean, what does it really offer them above your competitors? What is your Competitive Advantage? Why you and your product/service, instead of your competitor?

As an ad-hoc example, you’re opening a coffee shop in a small town. You should have an idea of the pie of money you’ll be trying to compete for a share of from your competitors; you seriously don’t think opening a new coffee shop in a crowded market is going to invent new customers out of thin air. No. You intend to steal your customers from the existing market. By being better.

So first you have to figure out with brutal honesty what advantage to customers you offer; who exactly you are chasing as a target market; and who your competition would be in real terms. By competition it means anyone your target market could go to instead of you. Not just for coffee, either; I mean anyone who could serve their needs at the time. You need to be able to concisely say those three things in a single statement – your business advantage to customers, your target market and your real market competitors.

Of course, at this point you’re wondering how your business might gain this competitive advantage? Because, after all, nailing this question of competitive advantage also means you can charge a premium price and increase profit margins.

  1. Cost leadership – provide better value by driving down consumer costs
  2. Differentiation – better service, higher quality, faster delivery, more features, innovation, personalisation, building relationships
  3. Focus – know your target market and how to meet their specific needs better than competitors

As a word of caution… cost leadership is about keeping consumer costs down; but don’t actively compete on cost unless it’s a last resort. It can lead to a race to the bottom (price war). Wherever possible try to compete on differentation which offers potentially higher rewards.

It feeds back into this idea of keeping Live Documents (business and marketing plans) that evolve with changes in the business environment. Where you watch your competitors come and go and adjust your strategies over time to maintain a competitive advantage. Find a niche, serve it well. Make it very difficult for somebody to come and out-serve your target market.

Yes, I know it’s all boring business stuff but a hell of a lot of people out there are actually in business. And so it should matter to you that your competitors may be pursuing this strategy against your business. In fact, if you have trouble articulating that sentence – what you offer to exactly what target market and against what competition, then maybe you should reconsider your new business venture.

Sometimes a business plan or a simple exercise like this can also show you what businesses are not so wise to embark on if you want to succeed over the long term. And it surely beats the crap shoot of flying blind in the hope that your idea flies on it’s own.

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About the Author

Steven Clark Steven Clark - the stand up guy on this site

My name is Steven Clark (aka nortypig) and I live in Southern Tasmania. I have an MBA (Specialisation) and a Bachelor of Computing from the University of Tasmania. I'm a photographer making pictures with film. A web developer for money. A business consultant for fun. A journalist on paper. Dreams of owning the World. Idea champion. Paradox. Life partner to Megan.

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