Thursday, December 18, 2008

Your Competitive Advantage

The most fundamental element of any business plan is to first identify the competitive advantage of your business versus current and expected future competition. Some argue that a business plan starts with defining the "market need" that your business shall be fulfilling. I disagree except in the case of the truly new product or service (and very little offered for sale by the hand of man is truly new). A business can prosper merely by providing a better and/or cheaper service or product to the target market than the existing competition. Was there a need in the market for a new competitor? Not really. But every market rewards those competitors who deliver functional equivalents that are better or cheaper. Even in the case of the truly new product, the question of competitive advantage must be answered. For example, the originator of the automatic car wash in the 1950s still had to plan against the existing business model, i.e., the hand car wash. What was the competitive advantage of the automatic car wash over the hand wash? Faster and cheaper!

The crux of whether a business succeeds or fails boils down to one fundamental question: why will the target customer choose our product or service over the competition? If your business plan does not answer this question in convincing fashion, all the fancy charts and graphs with sales projections are meaningless. The marketing plan, likewise, becomes meaningless because it is fatally impossible to market a product or service that has no competitive edge motivating the customer to purchase.

I further submit that all competitive advantage strategies fall into two categories: better or cheaper. Cheaper is fairly straight forward on its face; however, it does come with other shades than the Walmart variety (best price period). For instance, one view of the cost of owning a luxury auto may include the resale value and maintenance costs over time. The upfront cost of a domestic luxury auto may be substantially lower; however, a foreign competitor may persuasively demonstrate that the overall three year cost of owning it's brand is lower when also considering resale price and maintenance. Another variation on the price strategy is to compare a combined price and quality metric of your product with the competition. For instance, in the internet service provider wars of phone companies with DSL versus cable companies offering faster cable internet, the phone companies typically offer the lowest high speed internet price. The cable companies counter by advertising a modestly more expensive service but with much better performance speeds. For customers downloading videos and music, speed is prized but the price point must stay within a narrow range above the DSL rate to successfully compete in the market. One quibble on the above point is the case of the old axiom about retail marketing--location, location, location. One never wins arguing against old sayings.

Quality constitutes a broad battle front in any market. Rarely are there performance metrics to directly compare. Many avenues exist for a competitor to approach in the establishing that his product / service is better than the competition. Examples: speed of delivery, warranty, durability, easy of maintenance, ease of integration with customer's business, history of reliability, and degree of product (service) customization to the consumer's needs. But, again, it all boils down to my product is better than yours.

Before embarking on writing your business plan, spend ample time articulating in convincing fashion the competitive advantage of your business.

P.S. My wife works in the fashion industry for which all the rules in this article about price and quality go out the window. In the fashion world, your product automatically becomes "better" when celebrities wear it and outdated when celebrities stop wearing your stuff. I have no idea how the fashion industry works and, therefore, consign it to its own business universe that I refuse to comment upon.

1 comment:

university said...

I completely agree with the discussed elements of a business plan. Better and cheaper products and services truly give a competitive edge over the rest. Every business plan has to take into consideration what is it in store for the consumers which will result to customers patronage and business success.