Basic rules for creating a competitive advantage.

  • Sell a product or a service that is a basic necessity
  • Be the first capture a lot of market share
  • Operate in an industry with little competition
  • Sell a unique product that doesn’t change much
  • Provides a unique service that’s difficult to replicate
  • Be the low cost producer and/or seller of basic necessities

What that looks like financially…

  • High Margins
  • Low R&D Costs
  • Consistent Profits
  • Accumulation of cash
  • Inventory rising with revenue
  • Low to No Debt
  • Retained Earnings

A competitive advantage is the ability or position that allows an organization to outperform competitors. It is considered the basis for durable profitability in a competitive market. In other words, firms that have no advantages can only compete on price. This quickly becomes unprofitable, particularly if the competition have lower costs.

The product, service, or manufacturing process a company has can add to competitive advantages over any other currently competing product or existing technology. Cost savings from efficiencies at scale add a lot to the competitive advantage, but this is a dangerous game if the company outsources any of the process to other companies.

Examples of competitive advantages.

Scale
Leveraging economies of scale to drive unit costs down.

Variety
Offering a great variety of products and services can lead to efficiencies such as reduced cost. Customers may also value variety such as the selection offered by a large supermarket.

Know-how
The skills, abilities and experience of your employees is a critical factor in most industries.

Processes
Efficient operational processes that get things done faster, cheaper or better.

Culture
Organizational culture are the norms, values and beliefs that are unique to every organization. For example, some companies embrace aggressive innovation while others tend to resist the most conservative of changes.

Capital
Access to deeper financial and human resources than the competition is a major advantage.

Risk Management
The ability to optimize the risk-reward ratio by identifying and controlling risks.

Quality
Delivering products and services that are perceived as high quality in the eyes of buyers.

Reputation
Reputation are the opinions held by employees, customers, partners, regulators and the public about an organization. A good reputation is known to be extremely valuable.

Information Technology
Technology built into products, services or processes.

Innovation
An ability to develop new iterations, approaches, or completely new ideas that represent a leap forward in a particular area.

Customer Satisfaction
An ability to consistently delight customers is important in most industries and technological advances has accelerated the ability to do so.

Information
Access to better information, faster than the competition.

Trade Secrets
Things that a business knows that competitors don’t. The term implies that such knowledge advantages aren’t explicitly protected by property law but are carefully kept secret. For example, the recipe for coca-cola or code at the back end of a technology giant.

Intellectual Property
Legal protections such as copyrights, trademarks, patents, and industrial design rights that prevent competitors from using content, designs and inventions.

Business Connections
The network of business connections as an organization.

Location
A superior location such as the only retailer in a well known hotel or high end residential building.

Experience
An experience associated with products, services and brand that is valued by customers. For example, the friendliest restaurant on the block or the one with the best vide.

Governance
Governance is the practice of directing an organization to ensure alignment with all stakeholder interests and compliance to relevant laws. Over the long term, governance is critical to reputation, risk management and access to capital.

Values
A sense of purpose and values behind an organization that inspires customers and motivates employees.

Brand Recognition
The ability for customers to identify the visual symbols such as products or logo associated with a company’s deliverables. Buyers are more ready to trust what they recognize.

Identity
A unique identity associated with products, services or brand that stands out in the minds of customers. Identity includes both visual symbols and anything that gives an organization personality.

Work Ethic
Some organizations are simply harder working than the competition resulting in significant advantages over time.

Strategy
A long term goals of an organization and any actions needed to execute it.

Tactics
The actions within strategy to take advantage of opportunities as they present themselves.

Partners
A strong partner or network of partners that offer something the competition can’t match.

Customers
Key reference customers, evangelists, raving fans, major accounts or strong advocates of a brand are a competitive advantage. Think Apple.

Labor Costs
In some industries, low labor cost is a significant advantage putting competitors who operate in high cost countries at a disadvantage. Think US versus China.

Bargaining Power
Bargaining power is the ability to exert dominance or influence in a negotiation.

Natural Resources
Superior access to natural resources such as spring water or crude oil or trees with a reputation for quality.

Aesthetics
A sense of taste and style in design of products, services, locations and content. A component of visual branding.

Barriers To Entry
Barriers to entry are obstacles that new competition faces to enter a market. In many cases, barriers to entry is the strongest or sole competitive advantage of a natural monopoly.

Critical Mass
Getting to the ideal durable size for an industry. The term critical mass also applies to overcoming the difficult initial phase of a new product or technology.

Market Power
Market power is the ability to influence the market price of something. Most companies have no ability to affect market prices. In a commoditized industries, large firms also have virtually no effect on prices. For the few firms that are able to establish market dominance, it is a potent tool as changing the market price impacts competitors.

Network Effect
The network effect is the tendency for the value of a technology, product or service to be proportional to the number of people using it. It can be difficult to compete with anything that has a strong network such as a popular social network or brand with lots of franchise owners.

Energy
Access to inexpensive power is a major cost factor for many industries.

Switching Costs
Switching costs are obstacles that customers face if they want to switch to another provider. A pool of customers that face high switching barriers can be a valuable asset. It is also a competitive advantage for incumbent firms with large customer bases.

Economies Of Density
Locating in a city or in close proximity to multiple cities is more efficient for logistics and provides better access to the right resources such as employees or suppliers.

Business Principles
Principles are foundational statements and beliefs that are designed to guide strategy and operations.

Sustainability
The pursuit of social and environmental practices can be a competitive advantage that has implications for business fundamentals such as branding, compliance, access to capital et al.