Our last post talked mostly about premium positioning and its influence on the probability of success for your business model. One of the sidelights included the fact that you need to justify your premium positioning. Specifically, you need to be able to demonstrate value to your consumer. Part of the way you can bring this increased value to your consumer and maintain a substantial lead on competition is finding a source of competitive advantage. There are lots of different types of competitive advantage, and some of these have been alluded to earlier. Competitive advantage is what you do that gives your business a unique, sustainable, non-obvious, and slightly opaque perspective.
Let me describe exactly what I mean. First, we talked in an early blog post about the fact that, as investors, our team looks for a non-consensus opinion on whatever market you are in. This is similar to when we focus on competitive advantage. You need a unique business take on the value stream you are describing. We described Porter’s Value Stream in an early blog entry, and for now, it suffices to say that you must have some unique spin on the value stream for your firm in your industry.
This can be competitive advantage coming from how discreet elements in the value stream interlock. That means you may focus on how your inbound logistics and operations go together. There may be opportunities as you bring a new substrate into your system to position it for eventual easy outflow from your system. You may be able to eliminate inventory etc., altogether. These are ways to look for competitive advantage in how the pieces of your business fit together. That said, and I can’t suggest this strongly enough, you should focus on a unique take on your business model. Meaning it is not simply how the discreet activities fit together but rather what discreet activities you are performing in what proportion, and in what way, to what final effect. This represents the portion of competitive advantage that focuses on having a unique position in your industry or field.
Once you have a unique position carved out, this position needs to be non-obvious. That means the more simple and straightforward this seems the more likely everyone is to do it. Also, the more obvious the advantage is, the more easy it is to discern and copy. So, one of the categories on which we recommend you evaluate your competitive advantage is just how obvious an idea this would be to everyone else in your field with a similar amount of knowledge.
After the non-obvious criteria we recommend that your competitive advantage be slightly opaque. That means there is no need to share with your competitors exactly how you do what you do. Further it should be not easy to discover with merely casual contact with the company. This means that whether you are able to process data and information more quickly, you are able to compete with data analytics to a greater degree than other companies, or you are able to speed up your decision cycle to make accurate, clear decisions based on the data you obtain from customers and other sources, people contacting your business should be unable to tell how you do it.
Competing on data, for example, is one focus for current, modern businesses. Sometimes, owing to the sheer volume of data and the processing power required to interpret the data, this methodology is called Big Data. Big data can be a powerful source of insight but it is not typically used in small businesses or brand new startups owing to the significant time, intellectual capital investment, or possible need for massive data warehouses etc. Also there may be challenges in implementing insights from Big Data into the frontlines of your company. So, again, we recommend that whatever the competitive advantage you create, you make it a semi-opaque one that other competitors in your field are not easily able to discern from a casual interaction with your company.
Next, we recommend several other important characteristics of your competitive advantage. For example, we recommend that it be sustainable. That is, those things on which you choose to compete must be expected to persist, must be able to be replenished, and must be able to make for an effective going concern. You need to be able to have the elements that contributed to your competitive advantage persist and have reasonable expectation that you can sustain those things on which you have chosen to compete. This is no easy task, yet sustainability is one of the hallmarks of a good competitive advantage.
However, you should note that competitive advantage is very different than a strategy in the market. As Michael Porter has described in his previous work, and as we have referenced earlier in the blog, competitive strategy and competitive advantage are truly distinct. The manner and market architecture in which we compete relates to our competitive strategy and the characteristics of our business model including its specific resources, modes of delivery, etc, are some of the sources of that competitive advantage which may influence our strategy. How you run the race is strategy, and the body you bring to run represents your unique advantage.
Competitive advantage can even come, in part, from the market you have chosen to enter. Some startup texts recommend that you start a business in a field in which is feels like you are running downhill. Meaning that you should open your business in a field in which it seems that you have an unfair advantage owing to either certain expertise, an extensive contact network, information about where the market is going, or some similar impressive advantage. Starting off with a good selection upfront about which market to enter can translate into a higher likelihood of success in your chosen field. (Notice, however, that by choosing wisely which market to enter, you may have made it more likely that your business will succeed but as we have described earlier it is by no means a sure fire prospect simply because you have chosen so wisely.)
So we have discussed briefly some of the key elements of competitive advantage. We recommend that you focus on building a sustainable competitive advantage that is non-obvious, slightly opaque, and can be translated into a unique strategy and a unique position for your business. Rather than compete in everyone else’s game which has often been ironed out early on and years prior to your starting your business, we often recommend that you evolve a game changing take on the market. This is in line with blue ocean strategy as we described earlier on in the blog.
Whatever you choose to do, we recommend a premium positioning paired with a sustainable, non-obvious, unique source of competitive advantage. This will prevent you from difficult errands we have seen created by startup owners including: strategies that are focused on competing based upon price, strategies that are focused on competing in a manner in which the business is not built to compete, or focusing on a source of competitive advantage which is easily extinguished with the next technological leap or slight fluctuation in the market.
My colleagues and I hope that you found this brief description of the nature of competitive advantage useful. These are some lessons that are textbook level from such books as Understanding Michael Porter. However, as is usual, once we have read the lesson in the text book we must go live it several times before it sinks into us and becomes part of our practice. Here, we continue to hope that you are able to use this blog entry and others to avoid issues we have seen and experienced with new startup companies. Please, use this to learn from our mistakes rather than having to make them yourself.