Factors of Competitive Advantage

Does your company have a competitive advantage? A competitive advantage is the edge one company has over another. It is the reason someone will purchase what you have to offer even if they have no idea who you are. This is important for small businesses because many only offer the same value as the next guy or gal in line.

Let’s take a look at the factors that allow a competitive advantage to exist prior to an established relationship. No matter what you are selling, defining your target market and maintaining a strong position to attack that market is vital for success. How is this achieved, you ask? Within any given market there are three areas in which a company can strive to gain an edge and consequently more sales. These areas are:

  • Cost
  • Quality
  • Lead

Cost

Cost is simple—it’s the price you are charging for your product or service. What will your product or service cost? All too often people are under the impression that the cheaper the product is, the more likely it is to sell. While that is partially true, companies that only compete on cost generally don’t offer a quality product. Who competes on cost: Dollar stores, distributors, larger companies pursuing higher volume and lower profit margins.

Quality

The general public does know what to think in terms of quality. The common viewpoint is that the higher the quality the better. The quality that is generally assessed is in relation to the standard of excellence. From an engineering standpoint, the quality of a product relates to the elimination of variability. If a product goes out the door the same way every time it is a “quality” product. If each time a part is ordered it has a high degree of variation, it is be considered a low-quality product. This extends also to the customer service you provide. Who competes on quality: McDonalds (that’s right, their cheese burgers taste the same all over the world).

Lead

The lead refers to the turnaround time required from the moment the order is received to the moment the item is in the mail. The fastest turnaround time exists when items are in stock. Who competes on lead time: Made-to-order manufacturers.

How They Relate

You can think of these three factors as three vertices of a cube, or the X, Y, and Z axes. While there are three axes, companies usually only compete in one or two of the three areas. Wal-Mart focuses on lead by keeping inventory in stock and maintains lower costs, but it does not always have the highest quality components.

If a company is known as a high-quality, low-cost company, they will probably have a longer lead time. Conversely, if they are known as a high-quality, short-lead company, they will generally demand a higher price for their goods. The nature of a free market regulates this “give and take.”

A company can have the advantage in all three areas only at the point of a paradigm shift, when a company breaks into a new unsaturated market. Once a competitor is on the scene, the ability to maintain a 100% advantage is lost.

A fourth factor that fits in with a long-term competitive advantage is relationship. The three factors above will help you win someone over in order to build a relationship with them; however, the relationship itself will give you an edge once it is established.

This is a very important business truth that will be extremely helpful in assessing your market. Understanding the competitive advantage your company strives to maintain will allow you to focus your efforts on those areas that support your overall vision. It will also help you to understand where your competition is coming from and what market segments they are likely to facilitate.

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The Competitive Advantage Spectrum

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  3. Succeeding In The Workplace
  4. Key Small Business Success Factors
TJ

About TJ

Engineer and Entrepreneur