Sources of Competitive Advantages

I wish to educate my readers more about the different types of competitive advantages a business can possess.

To start things off, what is a competitive advantage?

A competitive advantage is something that you or your business' competitor does not have that will allow you or your business to prosper economically.

A very important thing to note: In Business Skills 101, you will learn that you should never go into business unless you are certain you have a definite competitive advantage.

So what are these competitive advantages?

Well, if you read a company's annual report, a business textbook or business news constantly, you will notice that you will find about as many different competitve advantages as you would find the number of restaurants in a city.

When investing in a business, these advantages are what the investor should constantly seek out for. Some are easily identifiable, some might take a thorough understanding of a business to identify.

Some examples are:

1) You have a really, really good product that is well-known and established in the eyes of the consumer and in the market. A good example is Coca-Cola. It has been around for ages and is well-liked by many people. It is delicious to drink and you don't find other drinks that are as tasty as Coca-Cola.

2) A strong brand associated with the company. Some good examples of strong brands are Windows for the company Microsoft, the big M for McDonald's, the Colonel for KFC, and within Australia, the big apple for Woolworths and the name JBHi-Fi for JB Hi Fi the company.

3) A specific location in which your business is placed. If you own a hot spot such as in Melbourne CBD, then you are sure to attract more customers than say, if you open up store in a suburban place.

4) Patents for a specific formula for a product. If you invented something new, you can apply for a patent whereby no competitor is allowed to "steal" your product away from you and replicate it because by law it is illegal to do so due to the patent.

5) Excellent customer service. If you own a chocolate candy shop, and your sales representatives are always smiling to customers, treating them well, making sure they are attended to promptly when in your shop, then you are likely to have an advantage over your competitor.

6) Lowest cost provider. If your costs are the lowest amongst your competitors, you are in a position to price your product such that it will drive out all the competition. You will also be able to make abnormal profits due to the low cost structure.

7) Strong management team. If your business is well run, it is likely that management is able to steer the business in such a way such that even in a tough competitive environment, they will minimise their mistakes and maximise business growth opportunities.

8) Government support on your back. If the government likes you or your industry, then you are going to receive much support from them. If the government likes you, then you would likely out-manoeuvre your opponent in terms of taking up business opportunities (especially where tenders are involved).

Nevertheless, even though I have mentioned a few of the most important advantages a business could have, it is usually the small details that matter. Such example is that, if you have a director on your board that is also a director in a government agency that deals directly with your industry.

Why are entrepreneurs always excited people?

Entrepreneurs are always excited about their new start up or business opportunity because they can sense a competitive advantage that they have over their competitors which promises to bring lots of profits in the future.

Beware of bogus competitive advantages

Even though competitive advantages are exciting and feel good to have, the businessman should beware that they do not disappear over time. Such is the case where barriers to entry are low in the industry or that constant innovation by competitors would lead to obsolete products by your own business.

Therefore, an investor should aim for sustainable competitive advantages.

The investor should look primarily towards the long term outlook of the industry and whether such competitive advantages that he/she identifies today would continue to last into the future. That is the most important question of all.

An easy way to remember competitive advantages is to remember a quote in the famous Art of War by Sun Tzu,

"When your enemy has the high ground, it's over, so never wage war on Nepal"

Or by the Jedi Anakin Skywalker when he faces his father, the evil Luke Skywalker:

"Its Over I have the high ground"