In a previous article entitles “Factors of a Competitive Advantage” I covered the three main areas a company can compete without an existing relationship. The three areas again are Cost, Quality, and Lead Time. Each of these factors is present in the market place and is taken into account whenever someone is making a buying decision. In other words the reason people make a purchase decision between two products is because one of them is cheaper, of better quality, or is readily available. Understanding this dynamic can help you better serve your target market and allow you and your business to provide the greatest value possible.
The Competitive Advantage Spectrum
When thinking about how you can compete in your market it may be helpful to think in terms of the following spectrum.
Cost, Quality, and Lead all exist as areas in which you can compete but unless you are the only player in an emerging market (Company “D”) you will not have an advantage in all three areas. Most companies start off having an advantage in one area and work to compete in two. If you are just starting your business think long and hard about this because your pursuit to compete on too many factors could lead to your ultimate demise. It is better to excel in one area than it is to compete moderately in two. Many small businesses don’t understand this and try to be all things to all people.
While it is true that any business in any industry can position itself wherever it pleases on the competitive advantage spectrum, industries themselves often demand relative positioning. Web based companies often have real time products that are available at the click of the mouse. This means lead time is of little concern throughout the market segment and businesses will compete on Cost and Quality. An example of this could be Microsoft Operating systems and Macintosh Operating Systems. Both are readily available so competing on lead time is not of concern. Both Microsoft and Macintosh positioned themselves to offer solutions to different target markets. In terms of the spectrum Microsoft offers a better quality solution for the price for business oriented customers. Macintosh on the other hand offers a better quality solution for the price for graphic processing and artistic consumers.
Much of the retail industry has also found its corner on the spectrum. If you think of Wal-Mart, where would they be positioned? They would be somewhere close to Company “C”. They seek to have a large inventory of low cost products available to the general consumer. This in turn means they inherently have the super high quality merchandise that may be found in a boutique store specializing in a focused product group.
What about Company “A”? One business type that would be in this neck of the woods would be custom furniture companies. Competing on cost and quality they often provide a long lead time. An order could be placed and it may take a few months for the product to be delivered. The products will be of higher quality than what you could pick up today but you will have to wait for them to be put together.
Small Business Vs. Large Business
Understanding how small and large business relate to the spectrum and how they compete can further equip you for success. Large businesses often cater to the general needs of many whereas a small business is positioned to provide specific needs to few. So, where does this put them in the spectrum? A small business should almost always be positioned in the neighborhood of Company “B”. They should never be positioned to compete on Cost, small businesses need to be as far away from that position as possible. As a small business there is inherently little money behind the organization so competing on cost can be futile. A small business should provide the highest quality solution in the shortest amount of time as possible and charge a premium.
Large businesses on the other hand are geared to provide boxed solutions at as competitive of a price as possible. Large businesses often must compete on price because they are taking part in very mature markets. As stated earlier Wall-Mart leverages the economy of scale to bring a lot of inventory in that is of little cost but often doesn’t have the greatest quality (Company “C”). It is hard for a larger organization to compete against custom solutions so often times they don’t. Larger establishments want to partake in a market segment that has a high volume of similar needs.
An example of an emerging market would be Microsoft in the early years as they pioneered consumer oriented operating systems. Apple was right behind them but for a time the Microsoft OS was the only thing people were using on PCs. Finding a new market with no competition is quite difficult and is often found on accident. Many Startup companies operate on this premise of discovery working to find or create a new market in which they are the first competitor. If this works out the monetary reward can be huge but as you may have guessed the failure rate is much higher than the success rate.
Even if you are fortunate enough to be the first competitor in a market it would behoove you to determine how you will maintain your advantage in the future. The triple advantage will be lost the second another competitor shows up on the scene. Chances are they will enter your newly formed market asking where they can provide value where your company falls short.
Why You Care About Competitive Positioning
If you have not started your business yet consider yourself lucky, now you can do so knowing the best way to position your company on the competitive advantage spectrum. Use this spectrum when assessing your competition; it may give insight on where they can be out performed. This will also help you to not give away your competitive advantage. In the Theory of Constraints the Viable Vision is often achieved by providing quality products quickly at a premium. This means you are getting much more out of your efforts than you would be trying to compete on every factor. I have seen this work first hand and it is amazing. The value in providing a part or service quickly can easily outweigh the value inherent to the part itself. So, take some time today and figure out where you are located on the spectrum, then figure out where your competitors are positioned.