Competitive Advantage

While it’s been debated how long a company can sustain competitive advantage in a market, the aim of most firms is to deliver superior value to their customers in a profitable way. Research shows that the primary means to profitably deliver superior value is through differentiation. A study involving 25,000 companies over a 40-year period demonstrated that the firms achieving the highest return on assets delivered superior value because of their positive differentiation.13 Another study of 200 companies showed that 93 percent of the top 20 percent of financial performers have a strong form of differentiation in their core, which led to competitive advantage in their market.14 Differentiation enables a firm to charge a premium price relative to competitive offerings, operate at a lower cost than competitors, or, potentially, both. As ESPN president John Skipper said, “If you are going to compete, you have to have points of difference. There is no value coming into the market and doing the same thing.”15

Creating, developing, or discovering real differentiation that fuels the delivery of superior value takes time, thought, and the courage to make trade-offs with one’s resources. The intellectually lazy leader’s shortcut of offering similar products or services in the same way as competitors, only trying to do it slightly better, does not constitute differentiation. It’s common to hear these people complain that the products or services their research and development group have come up with don’t offer any differentiation. Look, if people selling bottled water can find ways to create differentiation, then so can you. One could argue that bottled still water is as close to a commodity as you could find. So, following that logic, all bottled water producers should have the same market share, right? Wrong. According to market research firm Information Resources Inc., Nestle Water Pure Life had a 10 percent market share in the still waters category as of May

2012 while Poland Springs was at 6 percent.16 As former Harvard Business School professor Theodore Levitt wrote, “One thing is certain: there is no such thing as a commodity—or, at least from a competitive point of view, there need not be. Everything is differentiable, and, in fact, usually is differentiated. All goods and services are differentiable.”17

A majority of leaders deceive themselves into thinking they’ve cultivated valuable differentiation. A study conducted by Bain & Company surveyed executives and their customers on the level of differentiation they believed the offerings possessed. The researchers concluded, “We found that while 80 percent of executives felt their offering was highly differentiated, only about 8 percent of their customers actually agreed with them.”18 True differentiated value isn’t determined by you. It is determined by your customer, and it shows up in the form of your profits.

Competitive advantage can be defined then as the ability to deliver superior value based on differentiation rooted in capabilities. Capabilities are comprised of resources and activities that are competitively relevant. Capabilities are what you do (activities) with what you have (resources). Competitive advantage isn’t defined as having the best product or a better service, because in the end, best and better are subjective, depending on the customer and the type of value they seek. Harvard Business School professor Michael Porter echoed these sentiments when he said, “There is no best auto company, there is no best car. You’re really competing to be unique. . . . Whole Foods Markets is not just trying to be a great food retailer. It’s trying to meet the needs of a certain set of customers.”19

One of the areas that surprises experienced senior leadership teams when they participate in my strategy development workshops is their lack of meaningful insights about the competition. In working with a highly successful mobile technology leadership team based in Latin America whose members averaged more than 20 years of industry experience each, they were unable to clearly and concisely articulate their competitor’s strategic approach to the market. They knew many facts about their competitors, things like locations, head count, service areas, contracting approaches, and product specifications, but facts are different than insights. Insights are created by the ability to piece together previously unrelated bits of information—to connect the dots—uncovering the competitor’s strategic intent and their relative advantage or disadvantage in the market.

A tool that may be helpful in determining a competitor’s strategic intent is the Competitive Advantage Profile. The Competitive Advantage Profile is a concise, yet comprehensive way to understand whether you have an advantage, disadvantage, or are at parity—and most important, why. Table 2.2 is the Competitive Advantage Profile template that can be used to break down the competition to more thoroughly understand the foundation on which they attempt to outperform you. The tool is a simple method of aggregating insights in eight areas that have been previously reviewed.

Table 2.2 Competitive Advantage Profile

You:

Competitor:

Competitor:

Position (Competitive condition)

Core competency (Area of expertise)

Capabilities (Resources/ activities)

Customer (Who they target) Need (Job they fulfill)

Approach (How they deliver value)

Benefits (Advantages)

Value proposition (Message)

The position describes a company’s competitive condition, its current place in the market: leader, challenger, or spectator. As you discuss the position, you’ll want to first determine what benchmark or metric you’ll be using to describe the competitive condition (e.g., market share, revenue, sales volume, profit, etc.). This conversation should include some preliminary discussion around why the competitor holds that position. If they are a leader, try to determine what has driven them to that spot: first-mover advantage, superior intellectual property, favored brand, and so on. Once you’ve moved through the remainder of the Competitive Advantage Profile, the answer to why they hold their particular position should become clear.

The second element in the Competitive Advantage Profile is the core competency. As you’ll recall from the previous description in the Coalesce discipline section, a core competency is the primary area of expertise. It’s the collective learning of a group residing in their knowledge, skills, and technology. A core competency is the know-how that serves as the foundation for their ability to deliver value in a competitively superior way. Examples of company core competencies include Berkshire Hathaway’s analysis, Nordstrom’s customer satisfaction, and Disney’s creativity.

The third component of the Competitive Advantage Profile is capability. A capability is an organization’s potential for using its resources to carry out specific activities to create value. Capabilities refer to the competitively relevant activities performed with key resources to drive the strategy’s success. Examples of capabilities include Nike’s brand management, Marvel Comics’ repurposing of content (e.g., transitioning comic book characters into action movie stars), and Nerf’s product development. Keep in mind that capabilities are the competitively relevant activities, meaning those that use resources in a way that creates differentiated value for the business.

Since competitive advantage is defined as “the ability to deliver superior value . . .,” it is important to see exactly how their approach to value and your approach to value match up. The remainder of the

Competitive Advantage Profile breaks down the value proposition into its discrete elements. The fourth component is the customer, who the business is specifically targeting with their offerings. The fifth component is the customer’s unmet need or job-to-be-done. The sixth element is the approach the company is taking in how they are going to uniquely fulfill the unmet need or job-to-be-done. The seventh element is the benefit provided to the customer by using a competitor’s offering. And finally, the eighth element is the summarized value proposition, or message to the market on why customers should choose one offering over the other potential options. It’s helpful to begin this exercise by completing the first column with your profile, which can later be used to compare to key competitors in order to identify differences that lead to either advantage or disadvantage.

A more thorough understanding of the dynamic of competitive advantage in your market will play a vital role in crafting future strategy. A study of 2,135 global leaders showed that only 53 percent would describe their firms’ strategies as focusing on the development of advantage versus their competitors. The remainder characterized their strategies as simply matching industry best practices and maintaining operational standards.20 It can be argued that competitive advantage is fleeting. It can be argued that your source of competitive advantage will sooner or later be copied. But it cannot be argued that you should constantly strive to deliver superior value to customers; in other words, creating competitive advantage.

 
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