Competitive Advantage for Entrepreneurs

Published in

cogapp

19 min readJul 2, 2019

One of a series of articles on business strategy for entrepreneurs

Introduction: Why and How

Since any organisation, sooner or later, ends up in competition with others, establishing a lasting competitive advantage is one of the most important priorities for any entrepreneur.

The world is not short on material about competitive advantage. Michael E. Porter wrote the bible on the subject in 1985. The Financial Times described it as ‘the most influential management book of the past quarter century’. If you get a chance to read Porter’s book I highly recommend it. It’s brilliant, but at 592 pages it is probably overkill for most entrepreneurs. Furthermore, the focus is on larger, more established businesses and it was written before the Internet which has profoundly changed the competitive landscape.

By comparison with Porter’s book, this article is a brief guide to competitive advantage for entrepreneurs, i.e. people running smaller, more agile organisations in an internet-enabled, media-saturated environment.

It is organised in three sections: a catalogue of strategies for competitive advantage; a worked example showing how to apply the catalogue ideas in practice; and, finally, some thoughts on how to categorise the different strategies and which might be most valuable in the long run.

Two points to note before we get going:

My use of the word ‘organisation’ (as opposed to ‘business’) is deliberate. Competitive advantage is just as much of an issue for non-profits as it is for commercial ventures. And most of the possibilities listed here are just as applicable in either context.

and

The Internet has profoundly changed the rules by which organisations compete.
Distance, time and lack of transparency which previously restricted competition are much less effective barriers in a 24/7/365 global online marketplace. Internet-based businesses can quickly grow to address world markets, but as they grow they, in turn, will face global competition.
Fortunately, the Internet has also created numerous new ways to establish and maintain a competitive advantage. Some of these are discussed here.

A Catalogue of Competitive Advantage Strategies

Finding ways to establish and maintain competitive advantage is a creative practice. And like all creative practices it has rules and precedents. The entries in this catalogue provide some of those precedents and suggest some of the rules.

Human ingenuity and the demands of a changing environment mean that an exhaustive catalogue will always be impossible.

But even if it is not completely comprehensive, what is given here should provide enough material to suggest a way of thinking. If it does that then I hope it will inspire a life-long practice: analysing organisations and product ideas in terms of competitive advantage; understanding the patterns that work (and those that don’t) and generating and testing new ones.

Note that every one of these strategies has a potential inverse.
For example, Versatility. Making a very versatile product may be a good thing, making a very non-versatile product may also be a good thing if it allows you to reduce costs or increase valuable Specialisation.
Even qualities like Risk can be inverted for competitive advantage. Intuitively, lower risk is better, but not always. The Japanese delicacy, fugu fish is notoriously toxic if it is not prepared in exactly the right way. Part of the thrill of eating it comes from the corresponding frisson of danger.

For want of any better alternative, the catalogue entries are organised alphabetically from Acquisition to Virality.

Each of the catalogue entries can be read as a provocation: ‘Is X a strategy that I can use in my venture? If not, why not? If so, how?’

Acquisition, Cost of Product Acquisition and Adoption

Customers (believe that they will) experience lower costs of acquisition and adoption using our product (or service).

Advertisers wanting to use outdoor advertising used to have to book each site separately. In the late 1970s, a company I worked for, More O’Ferrall Adshel, started to design and offer packages of sites. This made it far easier for customers to book national and regional campaigns; an extremely successful initiative.

See also ‘Bundling and Unbundling’ and ‘Convenience’ below.

Ambition

The first thing they teach you in negotiation training is that higher expectations lead to better outcomes. The more ambitious you are for your project or your organisation, the more likely you are to succeed. Customers and staff are naturally drawn to ventures that are forward-looking and ambitious. Elon Musk is a master in this area, constantly setting a higher and higher bar for Tesla and his other ventures.

Entrepreneurs are, by their nature, ambitious. The question is are you being ambitious enough?

Note also that ambition doesn’t need to imply recklessness. The Wright Brothers set themselves a wildly ambitious goal and reached it on extremely limited resources. They achieved this by developing their enterprise in a series of carefully planned stages. You can read a good account of their project here.

See also Risk Taking below.

Brand

L’Oreal, Coca-Cola, Porsche, Persil, Andrex, Colgate, Fairy Liquid and thousands of other great brands demonstrate how branding can influence purchasers to prefer one product over its competitors.

A secondary benefit of a strong brand is internal. It tells staff how to behave and creates coherence and purpose.

Building and sustaining a strong brand is one instance of the ‘Castle and Moat’ strategy — see below.

Bundling and Unbundling

Record players were originally sold as single items, then, with the introduction of stereo, new manufacturers emerged making component systems with separate amplifier, record deck and speakers. Later still, there was a return to all-in-one units. Now the market has changed again and the pendulum has swung back the other way.

The question is about what units of value make most sense for your customers and your organisation.

Capital

There are two ways in which an organisation’s capital can confer competitive advantage.

Firstly, having generous amounts of working capital allows an organisation to pick and choose its opportunities where less well-endowed competitors may struggle.

A weak balance sheet leads organisations to make unwise sales in order to stave off short-term liquidity problems. You make the sale but you take on less profitable or more high-risk contracts. This may ease the short-term cash problem (or it may not) but it leaves your business weaker in the long run.

Beyond the requirements of day-to-day working capital, having surplus capital in the form of a war chest allows an organisation to strengthen its competitive position by investing in product development and infrastructure or by acquiring competitors and ancillary businesses. Think of Google’s acquisition of YouTube or Facebook’s acquisition of Instagram and WhatsApp.

It would not be hard to make the case that UK businesses, particularly UK tech businesses, have been badly undercapitalised in a way that has left them sadly vulnerable to takeover by their better endowed foreign peers.

Castle and Moat

A man who knows a thing or two about competitive advantage, Warren Buffet said, “In business, I look for economic castles protected by unbreachable ‘moats’.”

Google is a prime example. Google’s primary revenue source is search advertising. Around that castle it has erected a series of ‘moat’ operations including Google Maps, Translate, Dictate, News, Shopping and Analytics. None of these are necessarily great revenue sources but they all serve to keep competitors away from the search advertising ‘castle’.

Another form of moat is a strong brand. Think of Coca-Cola, famously a Warren Buffett investment. The investment Coca-Cola makes in its brand widens the moat for its competitors. Conversely, a crisis affecting the brand might create a breach that lets competitors enter. The mineral water brand, Perrier, was devastated in the 1990s by a scandal about benzene pollution.

Convenience

Using our product is our customers’ most convenient option.

Convenience is at a great premium in many markets. Apple’s reputation for outstanding ease-of-use is a prominent example.

Convenience is not the same as low cost. People will pay a premium for convenience.

Amazon’s online retail business is based on optimisation for speed and convenience. Buying something from Amazon may or may not be the cheapest option but it will always be super-convenient. Most consumers want to get on with their lives and don’t want to incur the cost of adopting new systems, so for Amazon this a compelling competitive advantage.

Location and extended availability have traditionally been easy routes to establishing convenience. They are not called ‘convenience stores’ for nothing. As the internet has developed, location has become a less powerful factor but it still matters.

Cost and Value

Customers (believe that they will) experience lower total cost of ownership and/or greater lifetime value using our product.

Note that you can be highly competitive in this area even if you are not the cheapest option; so long as customers believe that they will enjoy disproportionate benefits.

Low price is, perhaps, the most obvious competitive strategy but the associated race to the bottom has severe and equally obvious limitations. Nevertheless it is hard to avoid when selling undifferentiated commodities hence the number of strategies listed here that aim to avoid commoditisation by adding points of difference.

Cost Base

A business that has a lower cost base than its competitors is in a delightful position. Whatever price it charges, it will be more profitable than for its competitors. Having a lower cost base derives either from lower overhead costs or lower variable costs. A business that pays less rent or lower wages is in a great place to compete.

So far, so obvious, but there is another way in which cost base can confer competitive advantage. This occurs when a business has a more dynamic cost base than its competitors, i.e. one that scales up and down more responsively in relation to demand.

Many of the tech unicorns use online systems and apps to create a flexible pool of resources that can be scaled up or down seamlessly, to meet demand, with little or no associated overhead. A conventional taxi service that employs taxi drivers and pays them regularly is at a hideous disadvantage with respect to Uber. AirBnB is another good example.

Conversely, having an inflexible cost base confers a competitive disadvantage. Inflexible commercial leases make UK businesses less competitive than their US rivals who enjoy much easier and flexible access to space. UK businesses on the other hand can make redundancies more readily than their French equivalents who generally face great difficulties if ever they need to scale back.

Judging the trade-offs in tuning an organisation’s cost base is one of the more important skills that an entrepreneur needs to master.

Delight

Delight goes beyond Product Features and Design. Delightful products make you smile or gasp with pleasure in unexpected ways. Think of Virgin Atlantic’s customer experience or the animated emojis (animojis) in the Apple’s iOS 12.

The role of delight in product design has been systematically studied by Professor Noriaki Kano. If this idea is relevant in your world then studying his model of product development and customer satisfaction will be time very well spent. More information, via Wikipedia, here: (https://en.wikipedia.org/wiki/Kano_model).

Design

Better design can certainly establish a competitive advantage.

Notable examples include companies like Braun, Apple, Porsche and Vitra and, of course, the whole of the high-end fashion industry.

The value of design traditionally depends heavily on the industry sector but this may be changing. For example, the finance industry has traditionally been, more or less, a design desert but the advent of mobile and online banking with their intimate consumer touch-points is making design a much more important issue. New entrants like Monzo are deploying design as a competitive advantage in banking.

Endorsement

Daniel Craig wears a Rolex. George Clooney drinks Nespresso.

If Daniel Craig wears a Rolex, by implication he doesn’t endorse TAG Heuer or Omega. So Rolex has an advantage over those others, at least until Daniel Craig defects or his reputation is tarnished.

Ergonomics

British Airways and EasyJet will both fly you to Amsterdam. At least by reputation, BA has better, more reliable planes. EasyJet would find it very hard to compete in this area. Instead they have developed a better, more ergonomic app for passengers to manage their travel.

At least when I last used it, the EasyJet app was streets ahead of its BA equivalent in terms of ease-of-use. And interestingly, it turns out that a lot of the air traveller’s customer experience, especially on short-haul flights, occurs prior to boarding the plane. EasyJet may not have better planes, but thanks to better user experience on their app they offer a competitive product (and incur little or no additional cost in the process).

Future Proofing

Customers believe that our product will last longer/evolve better than our competitors’.

Innovation

Your organisation and its products are (and are recognised by customers) as more innovative than your competitors.

The capacity to innovate and bring those innovations to market is a huge advantage in many markets.

Apart from the obvious examples of tech giants like Google and Apple, think of companies like GoPro, Citroen, Tesla and Audi.

Anyone interested in the subject of commercial innovation should head immediately to the website of Steve Blank (www.steveblank.com) and go from there. Steve is the founder of the lean start-up movement. His book ‘The Four Steps to the Epiphany’ despite its peculiar title, remains the best thing written on this subject and provides a handbook anyone can use.

Kickstarter

Kickstarter allows a business to combine initial fundraising with initial sales and customer discovery. It’s an interesting example of systematised synergy between key parts of an organisation’s operations.

Leadership

Where would Apple have been without Steve Jobs? Berkshire Hathaway without Warren Buffett? Charismatic and/or super-talented leadership can be an effective form of competitive advantage.

Two notes of caution: the need for succession planning, and the need for checks and balances to prevent runaway self-obsession. See what happens in football when managers lose their touch. Manchester United fans will understand both these issues.

Lock-In

Once customers buy our product they find it expensive/difficult to switch to our competitors’.

Apple’s iOS and Mac OS X platforms are great examples of the effectiveness of this approach.

Mobile phone and broadband companies use this tactic in the form of extended fixed-term service agreements.

Loss Leader

Similar to Open Source, a loss leader strategy uses low cost or free offers to attract customers who then buy other products or services with higher margins. The ability to fund a loss leader strategy is likely to rely on competitive advantages elsewhere in terms of Capital and/or Cost Base.

Monetisation

We charge for our product in a way that is more attractive for customers and/or is more productive for us.

One approach here is to use lease or hire-purchase finance to make payments align with usage and thereby sell to customers who can not afford to pay for the product up-front. The car industry uses this system to make car purchase more accessible. But note that all the manufacturers now do it, so none of them gains a competitive advantage.

Monopoly

We produce something valuable/essential that no-one else can legally replicate.

Patents confer an enforceable legal right to prevent our competitors from using a specific invention. Large technology businesses equip themselves with an armoury of patents.

Trademarks and copyright play a similar role.

Domain names and social media accounts provide a new form of monopoly. There can only be one ‘pets.com’.

Network Effect

The more people that use our product the more valuable it becomes to all of them.

Facebook and Twitter are classic examples.

Open Source

A stunningly innovative competition strategy has emerged in the 21st century. Who would have thought that you could get rich by giving your product away?

The trick is to use the open source option to attract and retain the largest possible user base while selling ancillary services, like consultancy, packaged versions, hosted systems and the like, to a (much) smaller but still valuable sub-set. Red Hat Linux is a classic example.

Organisation

Often under-rated, good organisation is the effective and systematic co-ordination of strategic leadership, management and operations. It is one of the most effective sources of competitive advantage.

Why so?

Firstly, because it is more or less invisible to the competition, so it is difficult to identify, let alone copy.

Secondly, because well-run organisations are resilient in the face of change. And change is the one true constant.

Thirdly, because well-run organisations attract and retain good staff and enable them to do better work.

One way to encapsulate and capture good organisation is in the form of improved internal systems and procedures. This is a key part of McDonald’s business strategy. For example, it operates a website just for staff dedicated to supporting its employee handbook and procedures.

Personal Connections

We have personal access to customers that our competitors can not reach.

Some parents pay large amounts of money to endow their children with this kind of advantage via access to the networks created by exclusive private schools and colleges.

Less expensively and more professionally, industry conferences offer companies a way to make valuable personal connections between their staff and potential customers. This kind of advantage should not be underestimated particularly for service companies.

Platform

If you can make your product or service into a platform on which other organisations can build their own businesses then all the businesses that build on your product become your salespeople and you will gain a customer every time they make a sale.

Salesforce, Google Play and Apple’s Appstore are all examples of a platform strategy.

Salesforce has revolutionised the market for Customer Relationship Management (CRM) software by opening up its core product for a myriad of smaller vendors to build on, customise and add value to. Each of those companies becomes a free outsourced part of Salesforces’ production/development operation, allowing it to reach a wide variety of niche markets that it could not otherwise serve. At the same time it gives Salesforce an outsourced sales force (no pun intended) made up of all those organisations selling their own products while selling Salesforce in the process.

Product Features

One obvious way to compete in business is to offer a product with more and/or better features. This can be either absolute (i.e. my product does a useful thing that others do not) or qualitative (i.e. my product does something better, quicker, more cost-effectively than others).

This may be a classic strategy but it is extremely hard to maintain a competitive position based on product features in the long-term. You may build a ‘better mousetrap’ but, if it really is an improvement, then your design will soon be copied (unless you can protect your design with a patent and establish a Monopoly).

In 2007 when Apple released the iPhone it was streets ahead of the competition, but that position has been continuously eroded ever since. Twelve years later, Apple is now just one of a number of suppliers (Samsung, Huawei, Sony, Google, etc.) making excellent smart-phones.

A secondary problem with a feature-based competitive strategy is that it can lead to bloated products that, perversely, then become less attractive. Microsoft Word might be a classic example. Where this has happened it can create a market opening for a competitor offering a radically stripped-back alternative.

Production

We can produce the same thing less expensively than our competitors.

Lower input costs
Better production process (more efficient, higher quality)
Special resources — we can access (or control access to) important resources that our customers and competitors cannot.

Putting the Catalogue to Work: Competitive Advantage as Applied to this Article

Let’s ‘eat our own dogfood’ and consider this article as a product and see how the competitive advantage strategies in our catalogue apply.

With that in mind, the first question is what is the competition? As noted in the introduction, the 500lb gorilla in our room is Michael E. Porter’s great book. Alongside that there any number of articles and resources easily accessible via the web. Let’s take one representative example, an article on the entrepreneur.com website by Peter Voogd called ‘Five Ways Entrepreneurs Can Gain a Competitive Advantage’.

With respect to these two competitors, the competitive advantage position of this article might read as follows:

Strong points relative to Porter: cost of acquisition, convenience, specialisation, synergy.
Weak points relative to Porter: branding, endorsement, status, product features, monetisation.
Strong points relative to Voogd: product features, synergy, future proofing.
Weak points relative to Voogd: branding, status, monetisation.
In summary: not a great situation, but not hopeless either.

Usefully, reviewing the catalogue suggests some productive areas to work on: Delight for example. Maybe I can add some great jokes, powerful and memorable anecdotes or a memorable and apposite hero image to delight my audience. Maybe I can work on my Branding to level the playing field a bit against the other two. Maybe I can get an Endorsement from someone who matters. And so on.

Advantages that Last: Categorising Different Sources of Competitive Advantage

Finally, let’s consider how to categorise the different sources of competitive advantage and which, if any, might be most valuable in the long run.

As mentioned in the introduction, Michael Porter writing in 1985 identified three generic strategies for competitive advantage: cost leadership; differentiation; and focus.

Many of the ideas catalogued here can be readily mapped into Porter’s model. For example, Specialisation is another way of talking about focus. Brand, Synergy, Risk, Resilience etc. are all forms of differentiation. But some do not seem to fit so easily into the three-part structure. Lock-In, to name only one, seems hard to place.

An alternative way to divide competitive advantage strategies is according to their likely resistance to competitive pressure over time.

From this point-of-view we can see that most of the product feature-related strategies like Delight, Values, Monetisation, Versatility, Design and so forth can all be more or less successfully attacked and eroded by competitors over time.

On the other hand, Brand, Leadership, Organisation, Network Effect, Synergy, Lock-In, Sales, Production, Personal Connections and Monopoly are all potential ingredients of a long-lasting Castle and Moat system.

From which it is easy to see that the best business strategies will be those that are based, at least in part, on long-lasting sources of competitive advantage. And that is why that quest is one of the key goals for any entrepreneur.

Thank you so much for reading this far. I hope you find this article useful.

Any comments or suggestions for improvement will always be very welcome.

About the author: Over a career spanning nearly four decades, founding and developing a digital agency (www.cogapp.com), volunteering on the boards of entrepreneurial non-profits and working on associated start-ups, I have been fortunate, at first hand, to see hundreds of different organisations grappling, more or less successfully, with the issues raised in this article.

Wondering how my business(es) and our clients could do better has been a persistent itch which writing this article has helped me to scratch.

Alex Morrison, Brighton 2019

Competitive Advantage for Entrepreneurs

Introduction: Why and How

A Catalogue of Competitive Advantage Strategies

Putting the Catalogue to Work: Competitive Advantage as Applied to this Article

Advantages that Last: Categorising Different Sources of Competitive Advantage

Written by Alex Morrison