September 15, 2010 at 3:34 pm | Blog
The best businesses to be in are the ones with high barriers to entry.
Think about it – why do doctors and lawyers and dentists earn so much money? Because there are barriers to entry – medical school, the bar exam, dental school – keeping people from getting into these professions. That keeps the supply scarce – we can’t all be doctors and dentists and lawyers.
Professional qualifications are one type of barrier to entry. But have you considered that your business might be able to create its own barrier to entry – that is built on your company’s competitive advantage?
If your company truly understands its competitive advantage, you can “build a moat” around your business – you will establish such a lead over your competition that no one else will be able to beat you in your market. Competitive advantage creates scarcity in your market; just as “not everyone can be a dentist,” if “not everyone” in your market can do what you do, that makes your company even more valuable.
Just as “the only dentist in town” can earn a great living because of the barriers to entry keeping people out, your company canbecome “the only” one in your market – if you understand and embrace your competitive advantage, and become widely respected and recognized as “the best” at what you do.
For example, if your company can offer the following results, you might have a significant competitive advantage to share with your customers:
- Guaranteed on-time delivery. Can you be more reliable than anyone else – and are you prepared to bet money on it?
- Same-day service. Can you be faster than anyone else in your market?
- 99% success rate. Can you be more accurate than anyone else in your market?
- 24/7 on-call service. Are you able to go the extra mile to be available when your customers need you?
- The “wow” factor. Is your product or service so much better than anyone else that your customers feel compelled to talk about it with others? Do you get a lot of word-of-mouth business and referrals? If so, you’re doing something right – and you have asignificant competitive advantage.
Internal Competitive Advantages
In addition to these “external” competitive advantages, there are also “internal” competitive advantages. These take a long time to develop, but they are often the best way to build a “wide moat” around your company.
For example, Walmart is a wide-moat company – no one is ever likely to beat Walmart at low-price, mass-market retail. Walmart’s biggest competitive advantages are internal – it’s sheer size, its logistics, its buying power. Customers at Walmart don’t see Walmart’s elaborate network of warehouses and its skill at distributing the right products to the right places at the right time; but they benefit from it in terms of lower prices.
Similarly, Coca-Cola has an almost insurmountable lead in the beverage industry because of its worldwide distribution – almost anywhere in the world, you can buy a Coke. Coke is able to enjoy this competitive advantage because of its internal capabilities – its powerful distribution networks and its canny marketing ability to find and capitalize on new markets for growth (such as China).
Smart Advantage helps companies who are not (yet) the Cokes and Walmarts of the world to uncover their true competitive advantages. You might not have a universally recognized brand (like Coke) or massive scale to bargain with your suppliers (like Walmart), but we can use market research and strategic insights to uncover what it is that makes your business competitive in your market.
Some companies are able to pinpoint their own competitive advantages internally, but it is more often the case that companies don’t know their own strengths – it takes an outside observer to help them identify their true competitive advantages.