“How to Gain a Competitive Edge”

WHAT TO EXPECT

This Business Builder will help you to become more competitive by identifying the features of your operation you should focus on to maximize your efficiency and your product’s appeal.

WHAT YOU SHOULD KNOW BEFORE GETTING STARTED [top]

By accurately identifying and analyzing your firm’s target market and its relative competition, you may recognize potential opportunities for success in selling your product or service. These opportunities, which your competitors may have overlooked, will provide your firm with the vision to develop marketing mixes far superior to your competition.

To ensure your firm’s market staying power and survival in today’s marketplace, it is important for you to gain and maintain a competitive differential advantage in your target market.

The state of the economy has a profound impact on your customers’ buying habits. Twenty-first century customers have become more concerned with repaying their debts, lowering capital expenditures, and reducing costs by concentrating on products or services that satisfy their basic needs. Although not willing to lower their standards, both individuals and corporations are more selective in identifying products or services to satisfy their needs.

Before getting started you will need to familiarize yourself with some basic terminology as it relates to customers and their markets.

The first step is to analyze your competition. What type of competition exists in your target market, and what impact will it have on the firm’s ability to gain a competitive edge?

The uniqueness of your firm’s product or service, the number of competitors, the size of your competitors, the overall demand and the price will all be key factors in your gaining the competitive edge.

There are four basic forms of competitive structures that differ based upon the number of competitors, relative ease of market entry, types of products and knowledge of the market. These structures are defined as follows:

1. Monopoly.

A firm that produces a product or service with few or no substitute products or services. The company that has absolute control over the price in the market is considered a monopoly. An example would be your local utility companies.

2. Oligopoly.

This structure exists when a few sellers of products or services control the supply of a large proportion of your market. These firms tend to set similar prices and create more difficult barriers for entry into the market. The steel industry is a classic example of an oligopoly.

3. Monopolistic Competition.

This structure consists of many firms with moderate barriers to entry. Firms competing in this market attempt to develop differentiated market strategies to establish their own market share. Firms selling software products would fall into this category.

4. Perfect Competition.

Highlighted by unlimited competition and hardly any barriers to entry, individual firms operating under this structure would be unable to influence the price or supply of a particular product or service. Agricultural products are the closest form of pure or perfect competition.

Let’s look at the chart below to help identify the characteristics of each type of competitor.

Characteristic	Monopoly	Oligopoly	Monopolistic Competition	Perfect Competition
Product Differentiation	Unique	Minor	Some	None
No. of Competitors	None	Few	Quite a few	Many
Size of Competitors	N/A	Large	Middling	Small
Price competition	None	Little	Some	Total
Control of Price	Complete	Much	Some	None

What is your target market?

A market is an aggregate of people, who, as individuals or organizations, have needs for products in a particular class, and who have the ability, willingness and authority to purchase such products. This Business Builder will use the term market in that sense, and not use it in the more general sense of a marketplace or mass market.

In reviewing your market, consider two types of markets:

1. Generic Market. This market is represented by sellers offering substitute products or services that are dramatically different than your product from a physical and conceptual viewpoint. The generic market is a broader market where items like automobiles, designer clothes, or vacations may all be in competition with each other.
2. Product Market. This market is represented by sellers offering substitute products or services that are similar to yours from either a physical or conceptual viewpoint.

How are market opportunities classified?

You will need to review the needs of your existing and potential customers. If those needs are being inadequately addressed by your company, determine how those unfulfilled needs may be satisfied or how those needs currently being met by you and your competitors may be met better.

To accomplish this, you will need to analyze your firm’s competitors and their current activities. This will require a thorough analysis of the variables that impact your target market.

There are four kinds of opportunities that your firm may pursue: market penetration, market development, product development and diversification. Listed below are some highlights relative to each opportunity.

1. Market Penetration. This is characterized by a firm trying to increase existing product sales in its present market, for example, by developing an aggressive marketing mix, attempting to increase product use, win competitor’s customers, or target non-users. Some of the questions you might want to address are:

   • Why are customers currently buying my product or service?
   • What might motivate my market to buy more?
   • How can I persuade my competitor’s users to switch to my product or service?
   • How can I motivate non-users to try my product or service?
   • Can I reinspire former users of my product or service to begin purchasing again?
2. Market Development. This opportunity is characterized by a firm attempting to sell its current products or services to new markets (i.e. opening your business in a new geographic area or advertising in different media to attract new customers).
3. Product Development. A firm that offers new or improved products to existing markets is pursuing a product development opportunity.
4. Diversification. This opportunity would be utilized by a firm moving into a totally different line of business. It may be characterized by unfamiliar products, markets, or levels of production.

Which type of opportunity should I pursue?

If you are starting a new business or trying to improve your position in your existing market, product diversification would be the least favorable opportunity to pursue. The most promising opportunities for your firm are likely to be improvements in market penetration or market development.

Why is it important to gain a competitive edge?

In today’s marketplace, there are thousands upon thousands of products and services available to fulfill the needs of individuals and businesses. Your ability to identify and exploit the features and associated benefits of your product or service and demonstrate how it is different or better than the competition will provide you with a competitive edge. The edge or advantage will provide your firm with the tools to:

1. Increase sales and market share.
2. Improve profit margins for a given period of time in new or existing markets.
3. Ensure your survival in extremely competitive markets.
4. Develop hard-to-copy marketing mixes.

GAINING A COMPETITIVE EDGE [top]

To get started, you will need to compile all the data collected about your target market trends, customers, products and competitors. Listed below is an outline of the various market plan elements you will need to review to identfy your competitive edge or advantage:

1. Market Positioning
2. Company Resources and Opportunities
3. Evaluation of Opportunities
4. Defining the Process
   • Operational Efficiency
   • Customer Service
   • Product Leadership
5. Choosing a Competitive Edge

Market Position

How can I determine my position in the market?

The identification of your firm’s strengths and weaknesses is an important task that needs to be accomplished before any competitive edge can be developed. Try to analyze these factors from outside sources since perception (how you are perceived by others) is really the key. To determine your position in the market, you must ask many open ended questions of various types of sources.

Besides your personal assessment, your employees, customers and suppliers are good targets for questions regarding how they view your firm in the market. Some of the more typical questions that might be asked are as follows:

Employee-related questions:

• Why is the company a success?
• What has caused it to grow?
• What does the company do best? Why is that so?
• What should the company discontinue doing and why?
• What should the company consider adding and why?
• What are the characteristics of your typical customer?
• Why does your customer buy from you?
• What does the company do well? Can you give me a recent example?
• What does it do poorly? Can you specify?

Customer-related questions:

• How long have you been a client or customer of ABC Company?
• How did you hear of them?
• What criteria led you to select them?
• Do they perform all of your work in this area?
• What do you like best about them?
• What do you like least about them?
• Compared to other firms, what are their advantages? Disadvantages?
• Are there any other services you would like them to provide?
• Would you recommend them to others?
• How would you describe them?

Company Resources and Opportunities

Generally speaking, all firms possess some type of resource or resources that help distinguish them from other firms. To develop attractive opportunities, you should make good use of your strengths, while avoiding competition with firms having similar strengths.

To uncover your firm’s strengths, you should evaluate the functional areas of your firm (production, Research and Development, marketing, general management and finance), in addition to your present products and markets. This assessment of your firm’s internal capabilities and resources will enable you to determine your strengths and weaknesses. Examples of resources that may impact your firm’s pursuit of selected opportunities are as follows:

1. Financial Strength. Economies of scales that are achieved by steel and public utility companies require large amounts of capital. For these types of markets, small producers would have a tough time competing due to the large capital requirements. In some industries that have no economies of scale, larger companies may have trouble competing with smaller ones who provide changing styles and more flexibility. In this scenario, financial strength may be an advantage for the basic business, but a weakness when it comes to changing styles and flexibility to meet a variety of customer needs.

Listed below are some pertinent questions regarding financial strength that may be addressed:

• Is there an inverse or direct relationship between per unit cost and production?
• What is your current debt? Long-term debt? Plan for future major expenditures?
• What is your expected rate of return?
• What credit terms do you offer? Are they too generous?

2. Raw Material Reserves. The level of raw material reserves may play a major role in minimizing costs associated with production and the delivery of your products to market. In the wake of increased demand, potential price increases and raw material availability may have a significant impact on product cost.

Some pertinent questions may be:

• What is the cost of materials?
• Is your source of suppliers dependable?
• Does the quantity of supplies available fluctuate? If so, do prices fluctuate?
• Can you use substitute materials?

In order to minimize this impact, many companies will build up raw materials reserves. An example of this would be paper companies trying to control lumber reserves.

3. Physical Plant. The actual location of your plant may have an impact on your ability to deliver your products to market. If your plant is located close to your suppliers and/or market, this strength may prove to be a competitive edge allowing you to minimize your freight cost and delivery time. Well-located plants are usually a strength, while poorly located ones may be a significant weakness.

Questions you may want to address are:

• Is your plant or office size adequate?
• Is your equipment critical? Does it need to be replaced? Is it flexible?

4. Patents. If you possess a patent for a basic process in the manufacture of your product, this may provide a distinct advantage over the competition. It may force your competitors to substitute processes that are inferior or more costly and time consuming. Your possession of a patent will usually provide you with a competitive edge in selling your product.

5. Brands. If your firm has developed a group of loyal supporters, it may be difficult for other competitors to invade your market. Brillo soap pads provide an example of this type of brand loyalty. Late-comer S.O.S. had a tough fight for market share, because the name Brillo was synonymous with soap pad throughout most of the twentieth century.

6. Skilled People. A skilled sales force would be a definite strength that could be used as a competitive advantage in selling your product. A sales force without contacts or know-how would be a distinct disadvantage.

• Do your employees have the education and training they need?
• How do your compensation and benefits compare to the industry norm?
• Do you reward exceptional performance?
• How does your turnover rate compare to the industry norm?

7. Management Attitudes. Top management attitudes toward growth of the business plays an important part in strategy formulation. It will affect the development and introduction of new products and services.

• How important to you is growth? Market share? Maximizing profits?
• How much do you want market share to grow in the short run? In the long run? And profits?

Evaluation of Opportunities

Subsequent to evaluating your firm’s resources (for strengths and weaknesses), the environmental factors impacting your firm, and your management objectives, you should screen and evaluate the various opportunities that have surfaced. To do so, the following steps should be taken:

1. Match these opportunities against your firm’s resources and objectives.
2. Eliminate those opportunities that are mismatches.
3. Analyze the remaining opportunities using one or more of the following approaches:
   • Total profit approach
   • Return on Investment approach
   • Expected value approach
   • Boston Consulting Group approach

The measurement criteria used to evaluate each of these opportunities should include both quantitative and qualitative components.

1. Quantitative components would summarize the objectives of the firm and include items like sales, return on investment and profit targets.
2. Qualitative components would consist of issues summarized to address the following types of questions:
   • What kind of business does my firm want to be in?
   • What business should I exclude?
   • What weaknesses should I avoid?
   • What strengths and trends should I build in?

Defining the Process

In simple terms, the process of gaining a competitive edge consists of several steps:

• Discovering what your capabilities and resources are in your target market.
• Finding a place in the market where you will be able to position those capabilities.
• Developing a strategy to capture and maintain your position.
• Implementing and fine tuning your strategy.

To improve the odds that successful competitive strategies are developed and implemented, the following factors should be considered:

• Personal Strengths.
• Company Strengths.
• Market Position
• Competition
• Market Trends

There is no single factor which dictates what your firm needs to do in the market. You need to assess the interaction of all these factors and interpret how that particular grouping of factors affects your firm’s ability to market your product or service.

In determining how to achieve your competitive edge, you will need to address your market, your company’s philosophy, and the type of product or service you provide to your target market. This will help you determine whether you want to focus on operational efficiency, customer service, or product leadership in building your competitive edge.

Let’s look at these areas on a individual basis to determine which area of focus is more suitable to your firm.

Operational Efficiency. This term describes a firm that attempts to utilize processes to provide its customers with dependable products at a competitive price. Factors you may wish to consider in improving your operational efficiency would include the following:

1. Try to match all your business activities with real and distinct customer needs. You will need to identify all of your customers needs and align or adjust all of your activities to ensure customer satisfaction.
2. If you are currently expending time and resources for activities which do not correspond to specific customer needs, reduce or eliminate these activities entirely. This reduction may involve outsourcing and worker elimination, an investment in more state-of-the-art products to improve efficiency, or a conversion from manual to automated systems for inventory or billing.
3. Develop job descriptions providing for cross-functional responsibilities which requires everyone to be responsible for customer service. Suppose you wanted to lower production costs. Each of your departments would need to work with one other as a team to identify ways to simplify processes and lower costs. For example, a computer company’s salespeople may work closely with its service technicians to ensure that their customer’s products are being properly maintained.
4. Develop a screening process for suppliers, distributors and other vendors that ensures cost efficiency and timely transfer of products or services to your customer.

In what areas do I need to be operationally efficient in order to outperform my competitors?

Operational efficiency focuses on efficient production of your product or service, distribution capabilities, and customer satisfaction. It requires that you outperform your competition as follows:

• Respond rapidly to changes in market demand by adjusting your product or service.
• Ensure that each customer is provided with a quality product that has the reliability and consistency to satisfy their needs.
• Control production costs to provide your customers with your product or service at a competitive price.

Customer Service. Many service-oriented companies develop competitive strategies involving customization of their product or service to meet individual customer needs. They rarely try to compete on price.

If your firm wishes to gain a competitive edge through customer service, the following factors should be considered:

• Flexibility. Try to be flexible in delivering your products or services to your customer. Can you deliver different assortments to different shoppers?
• Make sure that your employees are provided with the proper training, responsibility and authority to satisfy your customers’ needs. Relationship selling (building long term relationships with your customers) should be encouraged.
• Ensure that an infrastructure exists to provide a customer service information system capable of collecting and analyzing customer data to be used by both management and employees for making intelligent customer service decisions.

Many companies use quality of service reports to rate customer service by customer, district, area or region of the country. This will provide you with a measurement tool to identify strengths and weaknesses in your product or service. This can help your firm highlight any issues which may require corrective action.

For the customer service approach to successful, in what areas will I need to outperform my competition?

If you want to gain your competitive edge through customer service, you must outperform your competition in the following areas:

• Make sure your product is tailored to the individual needs of your customers.
• Make sure your customer service is tailored to individual needs.
• Make an effort to provide relevant information and service to each customer segment.

Product Leadership. Many high technology companies are always searching to provide state-of-the-art products and services to their customers. Their new products or services are formulated based on the specific demands from their marketplace.

If product leadership is the competitive edge your firm wishes to adopt or maintain, the following factors need to be considered:

1. Your firm must ensure that there is effective two-way communication with your customers. Management, production and engineering personnel should talk with customers, distributors and dealers to learn how your products are being used and to identify new challenges that are facing your customers. One effective way to get useful feedback from your customers is to establish focus groups to discuss their challenges and opportunities.
2. It is important to maintain an environment within your firm that stimulates your employees to be creative and entrepreneurial–and a corporate culture that encourages them to share their new, fresh ideas.
3. Make sure you implement the best ideas in a reasonable and timely fashion. Don’t fall victim to analysis paralysis. In most cases, it is far better to make the wrong decision than to make no decision at all.
4. Always try to find ways to improve your product. Be proactive, not reactive to the marketplace.

Listed below are some of the actions your firm would need to take to outperform your competition from a product leadership position:

• Endeavor to be perceived by your customers as the perennial technology leader.
• Try to provide your customers with enhanced benefits through frequent product improvements, marketing each specific competitive advantage or differential over previous products. Be sure though, that each improvement corresponds to your customer’s product needs and is easy to implement.
• Quickly commercialize your firm’s ideas.

Choosing a Competitive Edge

The competitive edge your firm chooses will depend on the reasons your customer will buy a particular product or service. Remember that customers who must meet specific needs are not ready or willing to make do with the wrong product. Some may like the newest product that technology has to offer, while others may opt for more convenient quality products at discount prices. Also keep in mind that the strategy you choose depends on what your market demands, the product or service you offer, your firm’s values, resources and expertise. Choosing the appropriate strategy for your product or service will provide you a competitive edge by allowing you to better serve your customers’ needs.

In all instances, you should direct your efforts toward satisfying the customer and achieving a competitive or differential advantage. In your marketing plan, it is important to review, develop and promote this differential advantage your firm has over the competition. The most important question is:

Why would my existing or potential customers buy my product or service over that of the competition?

Remember to ask not what your advantage can do for you, but what your advantage can do for your customer.

CHECKLIST [top]

Gaining a Competitive Edge

Market Position

___ Have you identified your firm’s strengths and weaknesses?

___ Have you identified and analyzed these factors using internal and external sources?

___ Have you compared your strengths and weaknesses against those of the competition?

___ Do you have a clear understanding about what your firm does best?

Company Resources and Opportunities

___ Have you evaluated all functional areas within your firm?

___ What resources do you possess or lack that help distinguish your firm from each competitor?

___ What opportunities exist for your firm? Why do you consider them opportunities?

Evaluation of Opportunities

___ Have you screened your firm’s opportunities by matching them against your resources and objectives?

___ Have you eliminated mismatched opportunities?

___ Have you evaluated each opportunity using one of the recommended approaches?

Defining the Process

___ Have you identified your capabilities in your target market?

___ Have you determined where in the market you can position those capabilities to gain a competitive edge?

___ Have you developed a strategy to capture or maintain your position in the market?

Choosing a Competitive Edge

___ Do you have a clear understanding of why customers would rather buy your product or service vs. one of your competitors?

___ Will your product or service satisfy the customer’s need?

___ Have you decided how your firm will gain or maintain a competitive edge in your target market?

 

RESOURCES [top]

Books

Managing Strategy Implementation by Patrick C. Flood et al. (Blackwell Pub., 2000).

Developing a Winning Marketing Plan by William A. Cohen. (John Wiley & Sons, 1987).

Marketing Your Product by Donald G. Cyr and Douglas A. Gray. (Self Counsel Press, 1998).

The Marketing Plan, 3rd ed. by William M. Luther. (AMACOM, 2001).

How to Sharpen Your Competitive Edge by Don Reynolds, Jr. (Sourcebooks Inc., 1994).

Internet Sites

"Put Your Company to the Test," by David Kelly and Beth Gold-Bernstein. Information Week (October 18, 1999), 146.

"Plan of Attack." Entrepreneur 23:8 (August 1995), 150 (7). DacEasy / Best Software.

"Off-Base Pitch: Focus on How Customers and Non-Customers Differ," by Aaron Goldberg. AdWeek Magazine’s Technology Marketing 22:7 (July-August 2002), 6.

"Scientific Approach to Managing Competition," by Theodore Modis. Industrial Physicist 9:1 (February-March, 2003), 25-27.

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