competitive advantage factors

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Definition

Competitive advantage comes about from general elements described in competitive advantage and from types of innovation described in innovation. The strongest forms of competitive advantage come from business model innovation and management innovation. Below are categories of questions to prompt creative thinking of the possibilities for creating a competitive advantage with a business model design. These questions are from Hamel, 2000.

There are four factors considered in determining the wealth potential of any business concept --

  • the extent to which the business concept is an efficient way of delivering customer benefits;
  • the extent to which the business concept is unique;
  • the degree to a fit among the elements of the business concept; and.
  • the extent to which the business concept exploits profit boosters that have the potential to generate above-average returns.

Efficient --
To create wealth, a business model must be efficient in the sense that the value customers place on the benefits delivered exceeds the cost of producing those benefits.

  • Have we tested our assumptions about the value customers will actually derive from our products or services?
  • Do we understand in detail the costs we will incur in providing that value?

Unique --
The greater the convergence amongst business models, the less the chance for above-average profits. The goal is to create a business model that is unique in its conception and execution. Of course, the goal is not uniqueness for its own sake. To produce profits, a business model must be unique in ways that are valued by customers.

  • To what extent does our business concept, depart from the average within are our industry or domain?
  • How many points of difference can be identified across the major components of the business concept?
  • Will these points of difference bring new benefits to customers?

Fit --
A business concept generates profits when all its elements are mutually reinforcing. A business concept has to be internally consistent -- all its parts must work together for the same in goal.

  • Do all of the elements of the business model positively reinforce one another?
  • Are there some elements of the business model that are at odds with other elements?
  • What's the degree of internal consistency in our business model?
  • Is there anything that looks anomalous to customers?
  • Define the synergy between the major element interrelationships.
  • Does the network of the parts make the whole more than the sum of the parts?

Profit boosters --
Profit boosters, fall into four categories. The first two, increasing returns and competitor lock-out, are synonyms for monopoly. The entire goal of strategy is to create imperfect competition.

  • Increasing returns.
    • Network effects
      • Do we have a business concept that taps into the network effect?
      • Can we find opportunities that create network economics where none currently exist?
      • If not, can we somehow hitch our business concept to the network multiplier?
    • Positive feedback effects.
      • Where's the flywheel that will perpetuate our early success?
      • Where are we creating a virtuous cycle of increasing returns?
      • Where could we create positive feedback effects within our business model?
      • Can we set up a very short learning cycle that will allow us to improve our products and services faster than anyone else?
      • Should we be heavily discounting our products or services, or giving them away for free as a means to generate positive feedback effects that would allow us to outpace competitors?
    • Learning effects
      • What parts of our business model might be subject to learning curve effects?
      • Where does accumulated volume count, and how much does it count as a percentage of total costs?
      • Are we taking full advantage of every opportunity to learn?
      • Are we building that learning into our products and services on a real-time basis?
  • Competitor lock-out
    • Preemption.
      • Do you risk becoming a perpetual follower?
      • Are there any first-mover advantages implicit in your business concept?
      • Where do you plan to preempt, and how do you plan to follow-up on that?
      • How are you going to turn being first once into being first again and again?
    • Choke points
      • Is there some standard, some protocol, an interface, or bit of infrastructure that you could uniquely own?
      • Are you creating any assets that will be critical to the success of other companies -- so critical that you can effectively charge a ""toll""?
      • Are there some scarce assets or skills that you'd like to deny your competitors?
      • Can you lock up these assets or skills in some way?
    • Customer lock-in. You have to be careful; a customer that feels locked-in is a particularly angry beast. You've got to use velvet ropes. Customer lock-in is just a fancy way of saying ""switching costs"".
      • Could this business concept reduce our customers' ability or desire to buy from other suppliers?
      • Is there anything in this business concept that would induce customers to limit their freedom of choice?
      • How could we bind our fate with the fate of our customers even more tightly?
  • Strategic economics
    • Scale. Scale can drive efficiencies in many ways: better plant utilization, greater purchasing power, the muscle to enforce industry-wide price discipline, and more besides.
      • Does our business model offer us a chance to build scale advantage?
      • Where does size payoff in this business concept?
      • Will the scale advantages outweigh any loss and flexibility?
    • Focus. A company with a high degree of focus and specialization may reap economies compared with competitors with a more diffuse business mission and less coherent mix of services or products. Focus is not about efficiency in a cost sense; it's about efficiency in don't-get-distracted, get-all-the-wood-behind-one-arrow sense.
      • Does our business concept have a laser-like focus?
      • If not, do we run the risk of trying to ""boil the ocean""?
      • What advantages would we gain by being more narrowly focused?
      • What economies of scope, would we lose if we were more focused?
    • Scope. The idea here is almost the inverse of focus. The company that can leverage resources and management talents across to broad array of opportunities may have an efficiency advantage over firms that cannot. Scope economies come from sharing things across business units and countries: brands, facilities, best practice, scarce talent, IT infrastructure, and so on.
      • Where are the potential economies of scope with our business concept?
      • Can we find any ""dual use"" assets -- things we can exploit in more than one business?
      • What skills could we leverage across businesses, countries, or activities?
  • Strategic flexibility.
    • Portfolio breadth. Focus is great, but if the world moves against you, you may lack other options. Linking the fortunes of your company to the fortunes of a single market can be a high-risk gamble. The company with a broad offering may be more resilient in the face of rapidly shifting customer priorities and a more narrowly focused competitor. A portfolio can consist of countries, products, businesses, competencies, or customer types. The central point is that it helps to hedge a company's exposure to the vagaries of one particular market niche.
      • What are the advantages of a wide portfolio of products and businesses?
      • How can we hedge our bets in this business concept?
      • Does this business concept force us to put all our eggs in a rather small basket?
      • Is the reduction of earnings variability, for example, a positive strategic benefit?
    • Operating agility. A company that is able to quickly refocus its efforts is better placed to respond to changes in demand and can thereby even out profit swings.
      • How quickly does the demand function in our business change?
      • Is there an advantage to investing in flexibility (i.e., in processes and facilities that would allow us to respond rapidly to shifts in demand)?
      • Could we earn consistently higher profits, if we were able to respond more quickly to changes in demand, or to changes in input needs (e.g., were able to quickly incorporate the latest components in our designs)?
    • Lower breakeven, a business concept that carries a high breakpoint is inherently less flexible than one with a lower breakpoint. Capital intensity, a big debt load, high fixed costs -- these things tend to reduce the financial flexibility of a business model. In doing so, they also reduce strategic flexibility, and that they make it more difficult to pay off one thing so you can go on to do another thing.
      • Does our business concept give us a lower breakeven point than the traditional business models?
      • How could we tweak the business model to lower breakeven point even further?
      • What would be the benefits of a lower breakeven point?
      • Could use a lower breakeven point to buy ourselves more flexibility or deliver more variety to customers?


For value chain activity drivers of competitive advantage see competitive advantage.

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