4 Sources of Competitive Advantage in Business

I would like to share with you guys another thing I learned from the book Why Are We So Clueless About the Stock Market by Mariusz Skonieczny. Nope, I won't be talking about stocks.... Yet. What I'm going to talk about is how to stay competitive in business or the things that protect your business. In his book, Mariusz said that there are 4 sources of competitive advantage that gives a business the ability to stand out in competition and just recently, survive the recession.

Why bother learning about them? It's because these are what makes you stay in business or keep money flowing in to your business. Moreover, a competitive advantage gives you an edge over your competitors. Before I end this article, I will try to relate this to common Filipino scenario who operates on the middle class and are running small businesses or part-time business.

The 4 Sources of Competitive Advantage

Intangible Assets - This refers to things such as copyright, patents, company reputation, brand, etc. Most of us know that patents protect an inventor be it an individual or a company from having their inventions copied by some other people or claim it as their own. Copyright prevents people from using your work without permission (unless you expressly grant so) and in the same way, prevents people from claiming it as their own. Reputation and brand can be mutually exclusive or not as to television brands. What kind of TV do you buy? People would most commonly think that a well known brand is always a better buy if not the best buy. You wouldn't want to put your money to a bank without a good reputation. These are examples of how intangible assets give a business a competitive edge.


Switching Costs - Have you heard of the term "lock-in"? Yes, do you feel locked in a service being provided to you? Say, you're subscribed to a local telecoms company and you want to switch to another but you can't because then you'd have to tell all your friends about your new number and worse, you might miss some very important calls during the process? That is a good example of switching cost. Switching cost creates an advantage to your business so that you retain customers because it would cost them some time or money to switch to another product or service. So when your customers stays with you what does that mean? More money coming in!


Network Effects - Also known as network externality. How easy is it for new customers to adapt to your product or service? If your product is good, easy to use or your service is excellent then more customers will come to you. Can you think of a good product that you have grown loyal to? Would you recommend it to your friends and relatives? I guess a good example is the use of Microsoft Products. When Microsoft Windows came out it was so easy to use than the regular DOS or text based progams. So people have grown a liking to it and have recommended it to more people and those people recommended it to more people so on and so on... Another good example is facebook. Since most of my friends have switched over to facebook from friendster then I have grown a liking to the service as well. It's quite obvious how network effects have applied to facebook... Like who is the biggest social networking site right now and number 2 most visited website in the world? When a lot of people use a particular product or service, the product or service becomes more valuable and thus increase in value. If you like my blog, please share it so more people will read it and it will increase in value. XP


Cost Advantages - If you can lower the cost of your product or service without compromising profitability then you have a cost advantage over your competitors. If you remember on the last global economic recession, a lot of companies were announcing bankruptcy while McDonald's announced profits. I would guess that it's because the people who used to dine-in, in expensive restaurants suddenly switched to cheaper options such as McDonald's. The price of the final product might also be determined by the cost of raw materials. Therefore, it might actually be possible that the cost advantage of a business is not on the product that we see on the store shelves but on what we do not see or what goes behind the scene such as cheap inventory cost from suppliers.

Competitive Advantage For The Average Pinoy

Office Business - Some of us Filipinos would go through all the trouble of selling stuff in the office. Yes, this is not entirely considered as a business but a lot would love to think of it as such. The problem with this type of setup is it's easy for your colleagues to get access to your supplier or just copy your business. One competitive advantage you could have though which I consider as an "intangible asset" and it's your good reputation in the office and your salesmanship. They could always figure out where you get your stuff and how much you really sell them but if you're a good salesman, that can't always be copied.


Sari-Sari Store (or small convenience store) - There are 2 competitive sources that a Sari-Sari store could exercise in my opinion. Intangible assets and cost advantages. Intangible assets such as the reputation of the store owner. Do they serve fast? Do they talk nice to customers? "Cost advantage" is of course in effect if the store owner could have access to cheaper supplies then he could sell his merchandise at a cheaper cost.


Store or Office Space - If you're renting an office space for your business then chances are that switching costs applies to you. If you want to move your business to another location you may have to re-invest on transportation and unit improvement to make your new office or store look good again. These things prevent a tenant from moving out of their rented space and thus gives the landlord a competitive advantage. I remember for one of the companies I worked for... My employer considered leasing a bigger office because our headcount was expected to grow in a short period of time. He said that it's better to do that than move to another office in the future which would not only cost money but also time.

Unfortunately I could not think of anything that would relate to network effects as I am very excited to publish this article after almost 2 weeks of hiatus! I'm interested in what you think. Do you have a business? Does any of the above apply to you?

Photo credit: pshutterbug