Nearly every successful business gets there on purpose. It’s no accident that Apple, McDonalds, or Mercedes are leaders in their industries. This growth (and profit) is a direct consequence of careful positioning. Before turning an idea into a business there are some basic questions you must be able to answer. You have to know everything you can about the industry into which you are entering. You must understand what is going on in the world and whether the timing makes sense. All of this means becoming an expert on consumer preferences, competitors, growth of the industry, and where the current industry has gaps that can be filled. Once you identify these gaps and understand where (and if) there is growth potential in your industry you can begin to target these areas with laser focus. All this information is critical to positioning.
If you are confident there is a place for your business in your industry and the broader world, then you can begin to differentiate yourself from the competition with your positioning. Investors need to see that your business has growth potential that competitors do not. Without this, there is no incentive to support you over someone else. Competitive advantage is a crucial piece of optimal positioning.
Why Competitive Advantage Matters
Competitive advantage is about creating an idea in a way that differentiates it from the competition and positions your business for optimal results. You want your business to play on an uneven field and give it every single advantage you can. Chances are even if your idea is incredible there is someone who has had a similar idea as you. The difference comes in the execution and the positioning of that idea.
For example, the iPhone is an undeniably successful product. As such, no sane investor would back a company who was simply producing similar smartphones that had similar features at similar prices. The smartphone brand in question would have to compete on an unlevel playing field; they need to position themselves in a way that they beat the iPhone. Perhaps this company sells comparable smartphones at half the cost because of new manufacturing technology. Maybe they offer a unique folding display that is patent protected. Whatever the competitive advantage may be, demonstrating this advantage to investors and partners is crucial to secure long-term engagement and support.
What does Competitive Advantage Look Like?
Competitive advantage comes in several forms. Depending on the macro context of your industry and environment different positioning strategies may be more effective.1 Some key examples of competitive advantage include:
- Intellectual Property: This is the advantage generated by owning the right to information, designs, or processes that your competitors do not. Pharmaceutical companies can have a massive advantage over the competition if they own a patent which makes them the only company to produce a specific drug.
- Brand: Your brand and what it stands for can be an incredible asset. However, this can take years to build to a point where it matters; consequently, while this should absolutely be something that you point your business to, this should not be something you rely on early in your business’s trajectory.
- Expertise: Your company’s team can be an advantage. Even if your company is entering a highly crowded market segment if you can leverage experience and attention to detail to produce a marginally better product, that can be a distinct advantage.
- Inherent Unfair Informational Advantage: This advantage goes hand-in-hand with expertise. Understanding an industry, product, or consumer better than the competition will lead to more effective decision making and a better product or service.
- Process/Service Levels: Another differentiating factor that can draw in revenue is the quality of service or service processes and methodology. If consumers had the choice between two identical chicken restaurants, but one had higher-quality facilities and friendlier staff it is clear which business would succeed.
- Pricing: Producing the same product at a lower price is always a good way to draw consumers, but it is not always sustainable. Often producing a product at a lower cost can decrease quality and will scare off consumers after a few bad experiences. This strategy also is not insulated from the competition. There is nothing to stop your competitor from dropping their price or a new entrant from appearing leading to your company being squeezed out of the market or your margins being damaged/unsolvable.
What Your Competitive Advantage Needs to Prove
Understanding your company’s position in its given industry is a critical part of having a solid business plan (for more on that click here2). A successful business will understand exactly how they plan to make money and be able to execute that plan.
The best advantage is one that targets unmet consumer needs. Ideally, this advantage will be something that other companies have not yet realized, or for whatever reason have simply left out of their business plans. Once those needs are identified, the best business plan will begin to narrowly focus on these gaps in service and generate a competitive advantage through solving them.
The reason for this focus is to prove to investors and partners alike why they should have confidence in your business. If an investor is confident they will see growth on their investment, then the chances they back you increase exponentially.
Make Your Positioning Sustainable
Identifying and understanding the macro and micro context of your industry is only the first step in positioning. It is equally important to ensure that your position will continue to exist in the long term and cannot be easily filled by competitors. If anyone could position themselves in the same way you have, your business risks getting shoved out of the industry. Established competitors will always have an advantage when it comes to name recognition and consumers stick with what they know and recognize3.
An excellent example of a sustainable competitive advantage is Trader Joe’s (a unique American grocer). Many supermarkets either focus on value or high quality and organic products. TJ’s saw a gap in the market for a grocer that met both needs simultaneously. They took their shot and focused on releasing a smaller number of high-quality products for which they controlled the production. This allowed TJ’s to keep costs down while also penetrating the highly competitive “organic grocery” segment. Established brands like Kroger and Whole Foods have tried to keep up by slowly offering similar products, but because each brand was already established as “value” and “premium” respectively they could not easily loop back around and patch the hole in their strategy. The result is that TJ’s is one of the most well-known grocery stores in the United States and continues to act as a stopgap between the more premium offering of Whole Foods and the more value-oriented larger-scale chain grocers (Kroger, Vons, Stop & Shop, etc).
Having a good idea is not enough to start a business. That idea needs to be fleshed out and refined until it is flawless. A good product or service does not guarantee that people will pay attention to it, much less spend money on it. There must be an advantage between your company and the competition. That competitive advantage must be sound, impactful, and sustainable. Not only will understanding your industry and strategy poise your business for long-term success, but it will ensure your business is thoughtfully positioned for any prospective investors or partners as well.
1 Link to business model article
2 Link to business plan blog article