Competitive Advantage: To Have and To Hold. – Part 2.

Finding & Building Competitive Advantage

In this second part of our discussion on competitive advantage, we introduce and dismiss the concept of “Sustainable Competitive Advantage” and dig a little deeper in our pursuit of business value.

We have presented the clues behind competitive advantage in a prior blog. To paraphrase here, “Competitive Advantage is the seed(s) you have and others wish they had.”

Possession of Competitive Advantage meets the following tests:

1. It exploits an opportunity and at the same time neutralises threats to you … it creates VALUE.
2. It represents a unique-to-you advantage – It is RARE.
3. There are no replacements or substitutes in similar configuration or business models – It is NON-SUBSTITUTABLE.
4. To an observer – there is a peculiar complexity or unmatched ambiguity surrounding it – or it is, or has become: HARD-TO-COPY.

So, when we speak of Sustainable Competitive Advantage, we are asking the question, “Can your business erect and hold sufficient barriers to completely halt competitors obtaining the seeds that have provided the benefits you possess?”

People like me who live in the practical world know that every small business has the chance of being a big business; and every big business will eventually be overtaken by another and then it will wither and eventually die.

Erosion of competitive advantage by the many competitors, copy-cats and substitutes in the market is certainly going to occur; your ability to stay ahead of the game creates the sustainable in “Sustainable Competitive Advantage” … I do believe Competitive advantage exists – but that it is only ever present for short periods. Being realistic, Sustainable Competitive Advantage is far easily detectable in academic modelling and studies; it is the business equivalent of that state of personal being we call nirvana.
But do not get me wrong – aiming for and striving to build competitive advantage definitely adds value.

Very briefly, when a firm is sitting at level 5 or effectively the bottom rung of my “competitive advantage” ladder (below) – the owner is not able to show possession and control of the resources necessary to provide a defendable position – that firm is effectively up ship creek. – In blunt terms – valueless.
1. Do you have specific ownership through invention or discovery?
2. Ownership through possessing exclusivity in the rights to use someone else’s invention or discovery?
3. Ownership as in (2) above coupled with specific ownership of needed resources?
4. Defendable ownership of resources?
5. Neither ownership nor exclusivity nor defendable possession?

Blog to have and to hold

If you are on level 5 – your goal for your business is to move up a rung or two.
Academic texts when examining and finding examples of sustainable competitive advantage present two schools of thought. On the one hand there are academics who argue it is about the constant refinement of the resources that you bring to bear on products or services. This is an inward-looking task.

Others however, believe that it is better reflected in the constant scrutiny for opportunities. Therefore, it is an outward looking task.

Finding and building competitive advantage.

Let’s assume we can find time to do both tasks … to look for constant refinement of our systems and processes and also – to keep an eye on the external environment in which we operate.

Here is the activity tip – irrespective of your position in this debate, take the view from the helicopter…. You have heard it before – work on the business, not in it. Constant scrutiny is essential – you have to look into that cascading river of data (called the information age) that flows around you.

If you accept this – here now are a few tips on how to recognise the relevant data permitting you to disregard the rest.

The areas I have observed where people have found opportunities are not complex at all: The winners I have worked with simply found the causes and or the sources of change before any-one else did.

Change

All change creates movement – it is the unexpected and unanticipated sets of outcomes that are important. Therefore, accepting that change occurs and being alert to change – creates value. The things you need to be alert for include – political, economic and social change, technological, environmental and legal issues. Taking advantage of change that impacts your business creates value. Not taking advantage of change – destroys value.

Process

It is a fact that all our internal steps can be tweaked, improved, made simple. Just as truthful is that all processes are vulnerable to being impacted by both internal and external events. People and processes need to be evolutionary. Being alert to the cause and effect relationship of systems and processes; being driven to constantly simplify “process” pursuant to events or change … provides competitive advantage and value.

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Disparity

We are in a constant state of flux; the congruencies between our firm and all that surrounds it can be assessed as having a positive or negative causal relationship. The connectivity (relationship) between our firm, the industry generally and the markets we serve therefore, should be seen as moving between chaos and stability. So; build and listen to a monitoring system looking for disparity. Cracks turn into ripples; that turn into earthquakes and become tsunamis… The valuable businesses have monitoring systems and are alerted when the cracks occur… not when the tsunamis hit.

Planned Abandonment

Because all businesses have a natural human tendency to cling to “yesterday’s successes” rather than seeing when they are no longer useful, we fail to see the early “seeds” of competitive advantage. Even when we plan for change, we fall somewhat short of this goal sometimes… but in the act of re-invention, we are a whole lot closer to competitive advantage, and hence value; than those who do not plan for their re-invention at all.
Businesses we know are disappearing. We now do not sell products but experience. Find competitors who provide solutions and choices that we can take and combine in more focused ways. One of Peter Duckers’ (A leader in management thought. circa: 1909–2005) more direct observations on strategy, actually focused on the need for “planned abandonment.”

Action Plan

There is a combination of resources, that individually or in combination actually meet the criteria of rare, hard-to-copy, non-substitutable, and valuable. You might be that struggler who does not yet have defendable ownership – However it is more likely that you do not yet have the will and imagination to utilize what you do possess. Finding that energy and appetite for change will bring value to your customers today and tomorrow.

Kind Regards,

Kevin Lovewell
Business Broker
Copyright © Negotia Group and Kevin Lovewell

Blog to have and to hold 3

Kevin Lovewell

M: 0401 308 385
E: Click here to contact Kevin Lovewell
Member & Registered Business Valuer
Australian Institute of Business Brokers

Graham Long

M: 0428 649 791
E: Click here to contact Graham Long
Member & Registered Business Valuer
Australian Institute of Business Brokers

Kevin Lovewell

M: 0401 308 385
E: Click here to contact Kevin Lovewell
Member & Registered Business Valuer
Australian Institute of Business Brokers

Graham Long

M: 0428 649 791
E: Click here to contact Graham Long
Member & Registered Business Valuer
Australian Institute of Business Brokers

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