A company with no competitive edge fights a losing battle - it has no chance of winning clients against other companies. For that reason, as soon as you decide what you would like to bring to the market, you need to answer a question why anyone would want to buy it from you. Let’s start from the beginning.

 

Are you at an advantage? Ask your client only.

 

Competitive advantage comprises the gist of competitiveness.  So, what is the Holy Grail of Business? From amongst many definitions coined by experts in management my favourite is the one which describes competitive advantage as a set of traits that constitute a source of value for clients and distinguish the firm’s offer from those of its competitors.  The offer should be interpreted broadly here – it embraces the whole client experience: before, during and after the transaction.

One needs to understand that it is the client and not the entrepreneur that decides if the value and offer diversification truly exist. In other words, whether the enterprise has a competitive advantage or not depends on the subjective evaluation of the client. Consequently, apart from the concept of the advantage and its execution, it is absolutely essential to communicate the advantage effectively. This aspect is sadly neglected by small businesses and should be addressed in a separate article.

 

To sum up the above, in order to gain (at least for some time) a competitive advantage, one needs to adopt a concept, implement the principles that ensue, and communicate them regularly.

 

Today we will focus on the first stage, namely the elements based on which the competitive advantage can be built. 

 

The lowest price – better not to take a risk 

 

Being competitive is often understood as equivalent to offering low-price products or services.  Actually, it is only one of many possible options; low prices can form the grounds of one of the strategies, but entrepreneurs need to keep in mind that this particular strategy is difficult to put into practice and virtually impossible for small business.

 

Competing on price must be the consequence of applying cost leadership strategy.  If the enterprise is proficient in cost optimisation and uses the economies of scale, then it can afford to compete by offering lower prices than those of other market players.   Otherwise, low-price strategy is a kamikaze attack: it leads to a price war, decreased margins and the ultimate destruction of business. In other words: if your cost control is not perfect and you do not use economies of scale – forget about price reductions and look for something more suitable instead. Good examples of successfully employed price strategies are the campaign of Biedronka conducted on the Polish market and the practices followed by WalMart in the U.S. In these cases we could observe the difficulties associated with cost optimisation – both of the companies made efforts to save up on labour costs (which had, by the way, the lion’s share of the overall costs) which caused much trouble and a brand image crisis in the process. This strategy is really tricky and applying it does not consist in price reductions only.

 

Commoditization – what next?

 

Apart from the price strategy, the differentiation strategy can also be followed.  Nowadays, the phenomenon of commoditization seems to be a critical issue for the companies that sell products and even for those that offer services. What is more, the companies that have successfully applied the differentiation strategy so far at more at risk now.  Unfortunately, even the most unique products are quickly imitated today, and the copying process seems to be increasingly shorter. Commoditization is sometimes labelled as the profit killer – if customers do not see any evident differences between products, they would opt for the cheaper ones. Companies that have patent protection may feel relatively safe in this respect, even though we have all heard about great patent feuds of tech companies that take place all over the world before courts -  hence the idea to strengthen competitive advantage with certain elements other than the product. Please note that it is best to select several different ones.

 

And here we arrive at the crucial question: what elements to choose when making up your configuration of client benefits?

Concepts are abundant, but the one that is most easy to follow refers to five areas:

 

Obviously, the above model approach is by definition simplified, but the very purpose of modelling is to adjust complex schemes to clear up the cognitive process and make the necessary assumptions. As the authors of this concept point out, companies should not attempt at excelling in all these areas, because it is not possible to achieve.

 

You need to decide which element will determine your company’s advantage, then select one more to consistently support your first choice, and remember that all the remaining areas should not lag behind the average of the market.  Otherwise, whatever you accomplish, e.g. by improving the product, will be ruined by unacceptable price or poor customer service. 

In the next article I will briefly discuss the elements above and quote some real-life examples.

 

Agnieszka Pieczyńska

Management consultant &

Owner of a consulting firm