Creating competitive advantage is the way a company can ensure its success in the long run. The Internet is full of literature about what competitive advantage is, but how do you create it? How do you sustain it? This is the topic of this article. As you can imagine, this article only cannot be enough to describe all the flavours of creating competitive advantage. Nonetheless, it is a good starting point that can get you started.
I heavily rely on research by Peter Drucker and Jim Collins to make my case on creating competitive advantage. Particularly good read are two books by Jim Collins: Good to Great, and Built to Last. I also take into account some comments by Warren Buffet and Charlie Munger on what makes a business good.
What is Competitive Advantage?
You may know this already, but let’s have a common definition we can use so that we have some basis to build the rest of the article. There is no universally accepted concept of competitive advantage, so it is important to define it here before we can start discussing how we create it.
Competitive advantage is the set of activities that a company undertakes that distinguish it from its competitor.
This definition alone, is not enough, because “being different” is not enough to have a competitive advantage. You need to be different in a way that others cannot imitate: that is competitive advantage. So, we can expand our definition as follows:
Competitive advantage is the set of activities that a company undertakes that its competitor cannot engage in easily.
Note that this definition resonates well with the one from Peter Drucker. Instead, it is different from the ones from other authors that do not believe in differentiation (see Blue Ocean Strategy on HBR). Yet, we believe in this definition because if something can be imitated easily, and if that something generates profit, sooner or later other players will join that market making it more competitive.
Creating Competitive Advantage
Now that we have some common ground about what competitive advantage is, we can start to discuss some way a company can develop its advantage and sustain it over time. We present several strategies and paths on creating competitive advantage.
Network Effect
This is the classic, and you might have heard about this already. If you have a product that gets more valuable as more people use it, you have a network effect. That is the case with social media, but also with delivery apps like Uber Eats. Facebook by itself is not quite useful. However, it gets more and more useful as you find all your friends here. If a competitor was to create a rival to Facebook, it will be hard for people to switch because they have all their friends here – and no one in the new platform.
The same is true with Uber, or Uber eats. Let’s take the example of Uber, the service to hire a car with a driver. People come to uber to get rides because it has many drivers, and drivers join Uber because it has many users asking rids. This special type of network effect is called a two-sided platform.
In general, network effect is a competitive advantage you capitalize in two ways:
- Your product increase in value proportionally to the number of people using it
- Customers have high switching costs to move to a competitor
To implement this competitive advantage, you need to act swiftly so that you become the dominant player in your niche. This is what Facebook did when they purchased Instagram for 1 billion dollars, becoming leaders of the new trend of image-based social media. Later on, TikTok came up with video-based social media, and now Facebook is lagging behind because of TikTok’s network effect.
Placing Yourself at the Opposite of Competitors
This is another classic example of creating competitive advantage. In this case, you engage in a set of activities that are opposite to your competitors and that they cannot match without jeopardizing their own vision.
Let’s take the example of DuckDuckGo, a search engine that make its core the anonymity and privacy of users. It does not collect information about user’s research patterns and behaviour, unlike Google and Microsoft Bing – the two dominant players. Google in particular has most of its business model relying on custom-tailored advertising, for which it needs user information. If they were to implement the same approach of DuckDuckGo, they would be in trouble in generating revenue the way the used to, and be unable to fulfil their vision as a whole.
So, in spite of being significantly bigger, Google cannot compete with DuckDuckGo in its niche.
Another more traditional example is with low-cost airlines, Southwest in the US, and more recently Ryanair in Europe. Such carrier have stripped down service to the bare minimum and eliminated part of the infrastructure that full-service carriers have. This enables low-cost airlines to keep costs lower. If a full-service airline is to compete with a low-cost airline, it will struggle to maintain the infrastructure it needs to provide full-service. It is no surprise that, to this date, there is no airline that has been operating both full-service and low-cost models at the same time and remaining profitable over the long term.
The approach for a full-service airline to enter the low-cost market is to create a spin-off, a separate entity dedicated to the low-cost market. This has shown successful in the past.
This concept of differentiation, placing yourself at the opposite of your competitors, it is key to creating competitive advantage in a way that can be sustained in the long term. There are many more examples on this on HBR, however I think you get the overall point. Let’s now move on to something that is less classic.
Be Ambitious for the Company
Most of the competitive advantage that you can have comes from the people you have on board. Those are the people that work for your company and believe in its mission. Having the right people is key, especially in senior management roles but at all levels. Those people believe in the core values of the company and in its ultimate success and are not afraid of difficulties or challenges.
Those are the people who wants the best for the company, have high ambitions for the company but are self-deprecating for themselves. They do not seek glory or status for their own, they relentlessly seek the success of the company, and only that. This is what Collins defines as “Level 5 leader”, which is like the apex of leadership according to Good to Great.
Having this kind of people on board is important because the future is uncertain and markets and business priorities may change over time. Yet, the right kind of people can quickly adapt to what is needed.
Creating this kind of culture and this mix of people takes time, years if not decades. Yet, companies that do that can have a significant advantage. Here, some big names in tech come to mind: Amazon has a strong culture for delivering results, and this is remaining true even as Jeff Bezos left the helm. We can say the same thing from Apple, which analysts feared wouldn’t be able to bring innovations to market in the post Steve Jobs here, and instead it thrived more than any expectation. This is because Jobs instilled a culture of creativity and perfection which outlived him, and hopefully will remain true for generations to come.
Have a Clear Focus
Having a clear focus is crucial when creating competitive advantage. You need to be really clear on where you are going, and then get there, pursue that with insistence. Note that here I don’t mean knowing the focus of the company from the start. It generally takes time to develop and refine, but eventually it becomes evident what the focus of the company is, and then it is pursued with no restraint. Everyone is aligned on that focus.
This is important because it can focuses your effort on creating the competitive advantage, and later sustain it. Without a clear focus, you will squander your energies across many different initiatives, with one potentially cancelling the previous one. Instead, with a clear focus, you keep compounding. This is what Munger calls “building a moat” that separates from your competitors. The clearer your focus (and the more the time passes), the wider the moat will get.
We can come back to Collins to have another example. His research team identified how Kimberly-Clark, a company producing paper products and consumer products, decided to get out of the paper business (its most profitable segment) to fully pursue the consumer market. The choice was not easy, but it originated from the fact that the company saw the paper business just peaked and would decline in margins in the coming years. Instead, they foresee a future only in consumer products. Yet, to fully commit to it without having a foot in two shoes, they completely dropped the paper business. There was no going back, it was literally a “burn the boats” move. Kimberly-Clark turned out extremely profitable in the years that followed and now it is established in this market.
Creating Competitive Advantage in a Nutshell
Creating competitive advantage takes time, but I hope this article gave you 4 great ways to start doing that. If you are in a hurry, here are the key takeaways on how to create competitive advantage:
- Build a product that increases in value as more people use it, and that has high switching costs for the user
- Do something that is at the extreme opposite of what your competitor do, in conflict with their values
- Have people who believe in the company values and advance them before themselves
- Develop and maintain a clear focus over the long run
If you implement everything, your company will for sure stand better chances for success. Since you are here, it is clear you are interested in business strategy, so continue developing your skill with this strategy article.
