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How to Save Your Business with a Competitive Advantage
I love clichés. One of my favorite clichés is, “Failing to plan is planning to fail.” This cliché is very simple but not understood by many in business. Why? Too much emphasis is placed on short-term planning instead of long-term results. When a person runs a marathon, the focus is on setting a good pace with every step, so he or she will have enough stamina to make it to the finish line. That is what I want you to focus on when trying to save your struggling business. Don’t be totally distracted by low sells in the short term but plan to be successful in the long run. I practice this strategy everyday in my business, and I am definitely seeing my long-term plans coming to life.
THE COMPETITIVE ADVANTAGE
The one common factor I noticed in my pursuit for a $100,000 income and the individuals I studied making $100,000 is the focus on long-term objectives. Focusing on long-term objectives is the key to success. Long-term planning needs to be addressed before short-term planning can even be considered. This might seem like a backwards approach, but there is a strategic explanation for this type of planning. When you are grand planning, short-term objectives are created to strategically support long-term objectives. In other words long-term objectives are the end results of grand planning, and short-term objectives make up the blueprint on how to reach end results. Another key difference between short-term and long-term objectives is the timeline. Grand plans that are created in the short-term are for a period of less than one year, and the timeline for long-term objectives is usually from a period of two to five years.
The ultimate goal of long-term planning is to create a competitive advantage in the target market. Creating a competitive advantage is one of my favorite topics in business management. When an organization is able to create a competitive advantage, it corners a market and becomes the only one that can offer a particular product or service under certain conditions. Under these conditions a competitive advantage exists when an organization is able to meet or exceed the expectations of its customers, and competitors can not duplicate or imitate the same success in the long-run.(1) This means you have created a product or service that cannot be copied by your competitors for at least two to five years, maybe even longer in some cases. For this period, you have gained a competitive advantage. Not only would you have a sustained competitive advantage, but you would be able to make higher profits and dominate the competition. Michael Porter, one of the leading experts on the concept of this subject, believes a competitive advantage is created by adopting one of the following three strategies:
1. Focusing on becoming the overall low-cost leader in an industry
2. Focusing on the creation and marketing of unique products for varied customer groups through differentiation
3. Focusing on having special appeal to one or more groups of consumer or industrial buyers, concentrating on their cost or differentiation concerns (2)
FOCUSING ON BECOMING THE OVERALL LOW-COST LEADER
Being a low-cost leader in an industry means an organization offers a product or service for a lower price. The organization is also able to produce the product or service cheaper than the competition. This is definitely a win-win situation. Competitors cannot beat the price you set for your product or service, and it costs the competition more to produce the same product or service. If you are aware of my previous writings, then you know I like to take negative situations and turn them into positive ones. Let’s look at the illegal activities of drug dealers for an example. When I examine the illegal activities that exist in our communities, I realize that this is a practice that has been in effect for a long time. Drug dealers use the practice of being the low-cost leader. They purchase and sell illegal drugs for the cheapest price, lower than the competition. There are geniuses on the streets in our communities. For many drug dealers, if they had taken another path and applied their ambitions and creativity to a legal hustle, many of them would be Chief Executive Officers (CEOs) of Fortune 500 companies and making millions of dollars, (maybe even billions) legally! These men and women have mastered the concept of supply and demand without taking a single economics course, but they are offering the wrong product and service to our communities.
What if these geniuses would realize their mistakes and decided to legal hustle instead of selling drugs? If this was to take place, I believe our communities would be a much safer place and more prosperous in the long run. They should target a bigger market that has bigger profits. Not only is the legal market bigger with substantially larger profits, but it keeps them alive and out of prison. The point I’m making is that if drug dealers can cut out the competition with this strategy, then you can find a way to cut cost and sell your product or service lower than the competition.
FOCUSING ON DIFFERENTIATION
The second factor for creating a competitive advantage is differentiating your product or service from the competition. An excellent example of this practice would be the automobile wars of the 1980s. In the 1980s Japanese car manufacturers hit the U.S. market hard with their products. The Japanese were beginning to gain large segments of the U.S. market from American car manufactures. How did this happen? This was a result of a practice called Total Quality Management (TQM). TQM is a management philosophy that focuses on implementing the highest level of quality at every stage of creating a product or service. From the beginning to the end of the creation of a product or service, quality has to be the highest priority. This is what the Japanese practiced in the manufacturing of their cars. When the Japanese began to manufacture cars everything was important, from the screw that holds the headlight in place to the type of metal used on the bumper.
With this practice, Japanese car makers began to build cars that would last over 20 years compared to the five or six years an American car would last. Throughout the late 1970s into the mid 1980s, American cars were built to last until a customer had ultimately paid a car off. I used to hear my dad complaining about him not having any problems out of his cars until he was one year out from paying it off. When the American car was finally paid off, it was time to go and buy another one because the car was in terrible condition. Japanese automakers had been selling cars in the U.S. since the 1970s, but it wasn’t until the 1980s that consumers realized that their cars, after being paid off, were still running. In many cases, the cars were running as good as the first day they were purchased. Americans started to take notice of the reliability and longevity of Japanese cars, and the demand for these cars exploded. What was the difference between American and Japanese cars? Quality was the difference, and the Japanese created a competitive advantage in the U.S. car industry with this quality. The American car manufacturers did not catch on to this concept until the late 1980s. By this time, it was almost too late. I believe Ford was the first car manufacturer to catch on to this concept. In the late 1980s and early 1990s, Ford adopted a new motto of “Quality is job #1”. If you noticed, the Japanese held a competitive advantage for approximately 10 years before American car manufactures recognized the need to increase the quality and reliability of their cars. What is different about your product or service, and can it dominate the target market? These are the questions you need to ask when trying to create a competitive advantage through differentiation.
FOCUSING ON SPECIAL APPEAL
The last factor for creating a competitive advantage is having an appealing product or service in the target market, by addressing the cost and differentiation concerns of customers. I recently saw a commercial on TV that clearly addresses this focus. If you have ever had to purchase ink for a small printer, you know the cost of replacing ink cartridges is outrageous. An ink cartridge costs an average of $30. Many customers have been complaining about the high cost of replacing ink cartridges and are always searching for lower prices. In the commercial the company offered a new printer to the market that will offer ink cartridges for less than $5. Not only have they cut the cost of ink by more than 80%, but they have introduced a new product along with the cheaper ink cartridges. Competitors cannot duplicate this idea for awhile, because their printers use the expensive ink cartridges, exclusively.
My favorite way to gain a competitive advantage is recognizing a need that already exists in the market and fulfilling that need, with special appeal. Unlike the first two factors of a competitive advantage, the need was already in the market, and customers were demanding change. In the first example, customers didn’t demand a change in price but were more than willing to purchase the product at a cheaper price. All the drug dealer had to do was outbid the competition with a lower price. In the second example, the need for more quality cars existed, but customers did not recognize the need for change. The Japanese carmakers had to make the American people aware of their high-quality products. In the case of the ink cartridges, customers recognized the need and were demanding change on their own. The low cost to replace the ink cartridges is very appealing to customers. In order for competitors to duplicate this product, they will have to design a new printer, offer a cheaper ink cartridge, then introduce both products to the market for a competitive price. This could take at least a couple of years to accomplish! Fulfilling an existing need in the target market is more effective than identifying a need in the target market and making customers aware of that need.
Analyze all three strategies, and figure out which one works best for your business. I want you to remember this statement my fellow entrepreneurs: a storm might rage and destroy everything in its path for a short period, but the sun has to shine eventually. Focus on the sunshine that will exists in the long term if you can handle the storms of the short term. Have faith for a brighter day but prepare for war everyday that you open up for business.
Edgar Alan Cole, M.B.A.
1. Grimwade, N. (2009). Competitive advantage. The Princeton Encyclopedia of the World Volume 1, pg. 208. 6pgs. Retrieved August 5, 2010, from ProQuest database.
2. Pearce, J. and Robinson, R. (2004). Strategic Management (9th ed.). New York: McGraw-Hill Companies.