A competitive advantage is some aspect of the company and/or its product or service that gives it an edge over its competitors and allows it to generate greater values for the firm (in sales and/or profit margins) for the firm and its shareholders. Two primary examples of competitive advantages include: 1) comparative cost advantage – a firms ability to sell a good or service at a lower cost than its competitors as a result of lower production costs; and 2) differential advantage – a firm’s ability to product products or services that are seen as better than its competitors’.
Sustainable Competitive Advantages
Simply put, the more sustainable the competitive advantage, the more difficult it is for competitors to adopt the advantage. Sustainable competitive advantages are not easily copied and generally stem from one or more of the following: vendor relations, product sourcing advantages, prime location, unique products/services; customer loyalty, customer service reputation, or distribution channel advantages. When developing a business plan and business model, it is important to look beyond the product/service/competitive advantages and try to establish advantages that are truly sustainable. The following are some tips to help you with this process:
- Intellectual Property
While all I.P. has its shortcomings, patents are probably the best sustainable competitive advantage on offer as they provide 20 years of competitive protection. Beyond patents, it is important to consider trademarks, copyrights, domain names, long-term contracts and trade secrets.
- Dynamic Product Line
A one-of-a-kind, differentiated product line may have several competitive advantages. But for how long? Don’t be the one-hit-wonder of the entrepreneurial world by coming out with one great song but failing to back it up with a great album and future albums. Discover how your innovative technology can incorporate with add-on products that bolster your revenue sources as well as follow-on products that keep you ahead of the competition.
- Dramatic Cost Advantage
In order for a cost advantage to be a sustainable competitive advantage you will need some dramatic breakthrough in the technology, manufacturing or revenue model of the product. A breakthrough that is not easily copied by your competitors and that is ideally protected via patents or tightly held trade secrets.
- Seasoned Management Team with Key Relationships
One of the greatest competitive advantages is a great management team. A great management team with proven success in the past is most likely to continue their track record, lending to a real sustainable competitive advantage. One of the main reasons for their past and continued success will come from the key relationships they have developed over the years with vendors, manufacturers, suppliers, distribution channels, industry influencers, major contractors, etc.
- Brand Loyalty
By building strong relationships with your customers and keeping them happy, you will benefit from repeat businesses even if you do not offer the cheapest or most effective product.