Competitive Advantages That Last — Market Viability
For years, I have provided business planning services to companies like First Republic Bank, Goldman Sachs, and the Nelson Mandela Foundation. Frequently, I see them try to assess a potential new market. Here’s the step-by-step guide I use to help them determine the financial viability of their ideas.
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Once your organization has established the unique value to provide to the right customers, you need to make sure you can keep them. A durable, competitive advantage will put your organization in a favorable position above other contenders battling for your customers, so you can succeed over the long term.
Here are some strong and defensible competitive advantages that can lead to viability in a new market, plus the weaker advantages to consider avoiding:
Strong Competitive Advantages
Competitive advantages that are strong allow you to build and grow a viable business over time. This means you can defend your market share from competitors, or you can attract and maintain customers in the new market. Here are some of the most formidable competitive advantages:
Proprietary Advantage — If your product delivers better results through proprietary technologies, algorithms, formulas, processes, etc. that are the property of your organization alone. This advantage usually allows for more superior, faster, or less expensive production, and thus helps you surpass competition to thrive over time. (Note: In some industries like Pharmaceuticals, proprietary formulas a critical part of success).
- E.g. The solar lighting company d.light created a new technology and design that enables it to deliver 4 hours of reliable lighting for a fraction of the resources versus competitors — significantly reducing its costs and increasing its longevity in the market.
- E.g. KFC’s Original Recipe has been a trade secret for decades, allowing them to avoid ingredients being revealed to competitors and copied (which would not be possible as a patent).
IP, Patents (Intellectual Property) — Similar to a proprietary advantage, an organization can secure patents for exclusive rights to use a part of their technology, software, formulas, or branding. This can have a positive impact on viability by reducing your competition for the lifetime of the patent. (Note: As a bonus, you can license out or sell your IP for additional revenues).
- E.g. Circ MedTech patented a device that performs non-surgical circumcisions to reduce rates of HIV/AIDs in Rwanda, allowing for a meaningful advantage in serving customers where competitors cannot replicate the service.
- E.g. Disney bought the distribution rights to Star Wars (a 30+ year old media franchise), and since its acquisition in 2012 has propelled the franchise to make billions in revenue from film, TV, trademarks, and merchandising in just 6 years. This is an example of how owning IP can drive success in a new market.
Information Advantage — A collection of data, knowledge, or access that allows you to adapt to marketplace changes faster than others. Information advantages can result in optimized execution ahead of your competitors, or heavy savings on resources.
- E.g. An architect who regularly attends city council meetings to better understand local guidelines for builders, could advantageously know their design specifications will be immediately approved for customers — keeping them a step ahead of competition by seeing both regulation and demand.
- E.g. DonorsChoose is a nonprofit that has uniquely collected data on the needs of teachers across the United States through their crowdfunding platform. This allows them to have a distinct information advantage in developing targeted campaigns, through insights only they may have.
Exclusivity Agreements — Entering into contracts or strategic alliances with related organizations or customers. Signing a multi-year contract, co-branding partnership, letter of intent, or memorandum of understanding with a partner can bring greater profits, as revenues are usually implied to be guaranteed. Exclusivity agreements can also inevitably lead to your customer having more focus your product, prompting more feedback, and better customization offered by you — this minimizes competitors’ influence and increases your viability in the market. (Note: Look for agreements that are exclusive in your favor, as mutual exclusivity may not be beneficial as a provider).
- E.g. Fashion designer Victoria Beckham had an exclusive line with Target for selling children’s clothing, suits, and dresses. Target in turn increased their sales — ultimately making this collaboration beneficial for revenues.
Customer Experience — It is possible that the same unique value you provide to the customer, is the same sustaining quality of your entire business. If you offer a premium or high-convenience product that allows you to benefit clients in way that others cannot, this may also be your defensible competitive advantage.
- E.g. American Express credit cards are known for world renowned customer service and fraud protection. Although its prices and fees are usually higher than competitors, they maintain an advantage by guaranteeing premium quality of service.
- E.g. Aravind Eye Care Hospital in India offers the highest quality of care including overnight stays for eye surgeries for fractions of the cost of competitors in the UK. The superior quality of care provided has enabled them to continuously attract new customers from various regions.
Cultural Connectivity, Resources, Function — If your internal resources create a situation where you can better deliver the product to your customer, it can also put your organization ahead of others.
- E.g. A food delivery service in a region may maintain an advantage if the team speaks the native language, while competitors do not.
Weak Competitive Advantages
Not all competitive advantages are created equal. Some competitive advantages are inherently weak because they are short-lived, easily replicated, or can be undercut by a competitor. Here are examples of weak competitive advantages:
Relationships — Business relationships such as prior personal connections with potential customers. Relationships can be useful early, for initial feedback and sales outreach, but it may not be enough to retain a customer long term. (Note: Your relationships can easily fade if a competitor offers your customer a lower price or creates an exclusive agreement, see above).
- E.g. If your close friend is the point-person at your customer, just remember they may not be able to keep your offering if they are promoted to another business unit for example.
Lower Price — Although having a lower price than competitors can stimulate demand to gain market share, this strategy leaves little room for increasing prices when your product matures, and thus shrinks your profit margins over time. In addition, customers may perceive your product as low quality and price sensitive customers are less likely to remain loyal over time. Last, your competitors can undercut your prices, driving down potential long term revenues for your entire industry.
- E.g. Walmart’s “Every Day Low Prices” worked for some time, but eventually Amazon undercut them with lower prices for shopping and delivery combined.
Early Timing — When you can take advantage of being a first-mover to offer a product. However, it is difficult to significantly occupy an entire segment of the market over the long term with timing alone. This is because it takes a tremendous amount of resources and constant innovation to maintain.
- E.g. Nokia was the first global phone brand, however, now Apple and Samsung are dominant as they’ve learned from the mistakes of Nokia and other predecessors.
Size Advantage — Having a larger or broader distribution channel than any competitor. Size advantages are difficult to create, let alone sustain, as your massive distribution may not reflect true customer preferences. Thus, you’ll be attacked by numerous, smaller, more nimble competitors who can offer new features faster to outperform you.
- E.g. IBM is one of the biggest data analytics companies in the world, yet their packaged software has not embraced the flexibility desired by the customer of today — this has caused declining revenues for the behemoth.
Establishing a defensible competitive advantage can propel your organization in a new market. Take time to initiate and protect your advantages, in order to keep your business successfully and consistently making money over the long term.
In part 5 of this series we will take a deeper look into the parties that serve as your competition.
Kaego Ogbechie Rust is CEO at Foresight Advisors — working with foundations, investment firms, non-profits, and for-profit ventures — offering comprehensive support across vision & strategy, investing & financing, and operational planning during critical periods of your growth.
If you’re looking for help, contact kaego@foresightadvisors.com or visit www.foresightadvisors.com.
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