9 Ways to Create a Material Competitive Advantage

Do you have a clear competitive advantage? it is common for competition between businesses to be incremental. Making small improvements to your product or service offerings or business model in response to what they are doing, that can lead to having only a marginal advantage over your competition.

Instead, I want you to think about something that you could start developing now so that in 3, 5, or 7 years, you will have built a moat between you and your competitors and that leads to higher profitability.

Why do you need a clear advantage?

Your business should not just get bigger over time, it should get better. Just having a bigger business leads to greater demands for more revenue and an equal amount of expenses. The risk here is that if you don't get better, you actually get weaker as you scale.

It's easier to get disrupted by newer, more agile competition because you become obsessed with "feeding the beast" rather than making leaps and bounds in what you have to offer. That's why you need to be thinking about building 'better' not just 'bigger' by establishing a clear competitive advantage that makes it harder for your competitors to compete with you in the medium-term.

9 areas to think about

Here's 9 areas you could focus on, in order to build a material advantage with examples for each of companies that have excelled in their market.

Industry chokepoints

By taking control of the distribution, regulation, or some critical infrastructure or enabler that everyone in that market needs over time you can build significant competitive advantage over time. Consider in Australia two great examples:

• AICD (Australian Institute of Company Directors) - This business is basically an education business, with 55,000 members. They turn over around 80m in revenue (50m from education, c. 30m from membership). I love this business because they sought to shape and influence the standards for company directors and therefore became the premium education business for corporate governance nationally. They have a significant competitive moat as a result.
• PEXA - owned by Link Administration Holdings who listed last year at 3.3bn. They created the technology to facilitate digital property settlements, this means no more lawyers or banks meeting in an office on a day to settle property and exchange titles. They have now become the standard - and the vast majority of property contracts in Australia now settle via the PEXA platform. Huge competitive advantage.

Customer captivity

Cochlear. A perfect example of customer captivity. Why? Well think about this… they embed a device into a patient's head, and it remains there for up to 70 years. You have a patient who is now in a perpetual upgrade cycle, forever! Having a unique product or service that needs maintenance, or one that a customer can't live without means you are looking at a potentially massive customer lifetime value.

Product strategy

A great example of this is Apple who which control the ecosystem of hardware, software and services attached to their products. Importantly - their "lock in" style ecosystem where everything works seamlessly inside the system but less seamlessly outside it allows them to keep customers longer, increase average spend per customers and ultimately leads to material profitability advantages when coupled with their premium pricing.

Superior brand reputation

Now this is no easy feat, you can't just start off with this a superior brand reputation - it has to be earned. But investing time into building a reputable brand can pay dividends if it allows you to build price and loyalty advantages. Just think of Nike and how their reputation allows them to charge significant premiums for products that they can produce at the same cost as competitors who charge 30-50% less than them.

Pricing power

Scale = pricing power advantages. If you can build scale your key suppliers will reduce their prices to win your business. Bunnings is a great example where they use their scale and big shop formats to be able to source and offer the largest range at the lowest cost.

Operational advantage

Drop shipping (where someone else holds the stock you sell and sends it straight to the customer) is a new and unique style of business that has become more prevalent with the growth of online shopping. But it only became possible for Amazon to dominate because of their amazing logistics and distribution network. This has created a major operational advantage for them as no other platform can offer both the platform, AND the distribution network Amazon can.

Depth of integration

Open Table has won major market share by not only helping restaurants attract customers and book them, but the software permeates the restaurant where it then manages tables, guest profiles, inventory and more. Once you are embedded inside a client it becomes difficult for them to switch to an alternative leading to material competitive advantages for your business.

Intellectual property

Patents, trademarks, copyright and trade secrets can all be valuable assets of your company and protecting them as intellectual property could be what makes your business impossible to compete with over time. Just look at Google's search algorithm, KFC's chicken flavouring, or Coca-Cola's recipes. All of these are valuable IP which make their businesses difficult to compete with as they've mastered and protected that IP over time.

Nicheing down

If you've read all the above and thought.. nah I can't do ANY of that... what you CAN do is niche down.

It's very easy to chase "shiny balls" as your business gets bigger. As you begin to scale, you may start to feel that there are not enough customers in your current segment to sustain your desired growth. So you start creating products or services for other segments which starts to lead you down the path of becoming a generalist, not a specialist.

But people pay a premium for specialists, rarely for generalists.

A great example of this is hiPages. I interviewed Roby Sharon-Zipser a few times on the podcast. They were in the business of generating leads for Tradies. The business got bigger, and they needed to generate more leads. So they took a look at their business model and thought... well we need to grow, and we're great at lead generation, let's do lead directories for other industries! So they set up a bunch for other sectors... but pretty quickly, they plateaud, and then started going backwards.

What happened? They became nothing to no-one. They didn't have capacity to truly understand the needs of that many customer types. They started to become generalists.

So how did they fix it? They realised their key customer who trusted them was Tradies. They realised Tradies have lots of other un-addressed problems in their business models. So they got rid of all their lead directories except for Tradies and built new kinds of software to help Tradies solve other business problems like having an integrated system for finding customers, quoting, invoicing, accounting and more.

Over the course of 3 years after this decision, they doubled their business from 25m to 50m. By focusing on ONE customer type, not LOTS of customer types.

The first place to look for growth is always to consider how you can solve more problems for customers who already love you, rather than finding new customers.

It's not always the fastest path to growth, but it builds material advantages over time as you become the most experienced and trusted provider for that customer type in their market.

Ok... so how do I get started on building my material competitive advantage?

• Re-read the content above, and then ask yourself:
• What initiative could I start investing in now that over 3, 5, or 7 years will help me develop a material competitive advantage?
• Is that initiative likely to lead to us being very difficult to compete with for our competitors, or to leave as a provider for our customers?

Will it likely lead to greater levels of profitability than the industry average? How and why?

These should get your thinking started.