What are Your Sources of Competitive Advantage?
Since the start of COVID-19, a number of people in my network reached out to talk. Back in March, my calendar started filling up with individual phone calls or group Zoom meetings and many were with people I hadn’t talked to in a long time. Friends, business colleagues and acquaintances were taking a fresh look at their business strategies and, given my background as a mentor, investor and advisor, looking for feedback . As there were more meetings than normal, I started keeping track - I stopped counting at about 75 and started to reflect on the common threads of conversation.
One theme that came up again and again was a company’s ability (or inability) to identify their “sources of competitive advantage”- which during a pandemic was increasingly important to understand. These advantages can be many things but basically boil down to a company’s “secret sauce” and include:
Skilled and experienced people
Stronger development capabilities
Ownership of infrastructure
Cost advantages
Access to protected IP
Superior relationships with customers
Better access to markets and market data
Distribution and marketing channels in place
Access to working capital
Preferred Access to Markets
Incumbent Barriers to Entry
These should be easy for an established company to articulate but often what an executive thinks is as an advantage really isn’t. For example, many companies servicing Alberta’s energy sector realized they didn’t have anything very special to offer when commodity prices fell. In contrast, one local crane company I met with realized their advantage was not serving the Alberta energy sector but instead lifting “big things” anywhere. As the capital spend in the oil sands dried up (which was a major source of their business), they started lifting wind turbines and other big things in the renewable energy sector in non-Alberta markets. If they had relied purely on Alberta markets, they would probably be out of business today.
Startups and any others developing new products, as you might expect, really struggle with this and unfortunately for them, articulating a competitive advantage is one of the biggest determinants for attracting an investor or first customers. If clear advantages don’t currently exist, an investor is betting that the people involved will have the ability to build up a competitive moat.
Sometimes a key competitive advantage may not be obvious. One company I’m involved with is developing a quality assurance tool for manufacturing lines using AI and computer vision. The markets they are targeting are somewhat specialized and centred in Asia. When we first met, I couldn’t see how they could compete as they were located on the Prairies with a limited local market. However, I then found out the CEO’s brother owned a factory in Asia that would be his first customer and his hometown was the home of dozens and dozens of factories for which their product could be a game-changer. Those contacts created a significant competitive advantage as his product solves their specific problems and they will be his critically important first customers.
Articulating competitive advantages in detail is great exercise for any company to go through.
Using a framework like Michael Porter’s Five Forces or even using the list above as a starting point, you can identify where you are strong and where you need to widen or deepen your competitive moat.