COMPETITIVE ADVANTAGES 103
Competitive advantages
If you understand your business (see Chapter 4) and have analysed your market and com-
petitors thoroughly (following the advice in this chapter), you should have emerged with
a clear understanding of where you have advantage over your competitors.
The list on page 104 indicates 12 sources of advantage – but this is not even scratch-
ing the surface. If you look hard you might find competitive advantage arising from very
obscure areas of your business activities.
Competitive advantage is relative. It arises from the strongest links in your value ladder
relative to your competitors. This is not quite the same thing as your core competencies,
because your competitors might be more competent in the same areas. Alternatively,
they may be bad at something that you do only moderately well. Of course, they or a new
competitor might rapidly remedy this. Clearly, the best competitive advantages are those
which are sustainable over time.
The value ladder and competitive advantage
At the risk of being repetitive, look back at the value ladder (see Chapter 4). This is
an excellent way to measure yourself against your competitors. The left-hand bar in
Figure 5.3 shows selected cost components of a product, with profits added so that
the height of the bar shows the total selling price (in, say, dollars). The right-hand
bar shows the same analysis for a competitor.
Both of you are selling for the same price (the total height of the bars is the
same), but your opponent is sourcing components for less than you. This tends
to suggest that your adversary has competitive advantage in the purchasing
department. But you are spending less on marketing. So you have competitive
advantage in this area. Right? Maybe not. Spending extra on some activities (such
as research and development, staff training, marketing and customer service) is
an investment that brings long-term returns. It looks as if your slick competitor is
buying more cheaply and investing more in future sales.
Of course, it could also be that your underhand competitor is buying cheap
unreliable components from overseas (perhaps paying much more in shipping) and
pumping money into marketing in order to shift the goods.
We could go on building scenarios around this chart. The immediate message
is that you need to know more to reach the correct conclusion. The information
required is probably in the public domain – how reliable are your competitors’
products, what marketing strategy do you observe, and so on. The broader mes-
sage is that comparing your costs and profits breakdown with those of your
competitors can be extremely instructive. It can highlight your competitive advan-
tages very clearly.
t
104 CHAPTER 5 KNOW THE WORLD
You
Profit 300
Marketing 100
Components 275
A competitor
Other 625
Marketing 200
Components 200
Other 625
Profit 275
Figure 5.3 Measure against competitors
Twelve sources of competitive advantage
1 Strong research and development capabilities.
2 Access to intellectual property – trade names, trade secrets, patents,
copyright, etc.
3 Exclusive re-selling or distribution rights.
4 Ownership of capital equipment (specialist machinery, exploration equipment,
delivery fleets, surplus capacity).
5 Superior product and/or customer support.
6 Low-cost (and perhaps high-volume) production.
7 Other economies of scale.
8 Superior databases, management information, and data-processing ability.
9 Marketing skills related to specific customer types (e.g. defence), market
segments (teenagers), channels (retail, telesales), etc.
10 Access to working capital.
11 Other excellence in management, operations, administration, etc.
12 Barriers to entry.
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