Getting Started

Identifying a competitive advantage and crafting an effective business strategy to support it is an iterative, ongoing process. The steps below highlight some of the issues and questions that should be considered when undertaking this exercise.

Understand the Competitive Advantages of Competitors

What to Cover

Carefully evaluate established or emerging competitors in the market to identify their strengths. Consider their weaknesses and what opportunities this creates for a new company to potentially establish a foothold in the market by addressing those gaps. Also evaluate companies that have established a leadership position in other markets for ideas and examples of how competitive advantages can effectively be developed. Review what is known about the competitive landscape to understand factors in the external environment that may be a source of competitive advantage. Then, name the competitive advantages that these companies have developed (i.e., what they do well that others cannot easily imitate), as well as the business strategies they have put into place to capitalize on them.

Where to Look

• Analyst Reports – If players in the competitive landscape are public, carefully review analyst reports for clues regarding a company’s core assets, strengths, and sources of competitive advantage. These publications may also provide information about the chosen business strategies of public companies.
• Personal Networks – Network with individuals in the field to gain insight into the competitive advantages and supporting business strategies that have been chosen by these companies, how well their strategies support their competitive advantages, and any difficulties they have encountered along the way (which might translate into opportunities for a new competitor).
• 2.4 Market Analysis – Refer back to this chapter for information on the competitive landscape in the field in question.
• 6.1 Operating Plan & Financial Model – Review this chapter for guidance on analyzing proxies.

Identify the Company’s Competitive Advantage(s)

What to Cover

Perform a detailed assessment of the company’s own strengths, weaknesses, and assets. Think about which ones potentially can be developed into competitive advantages, taking into account important internal and external factors (such as the availability of time, money, and necessary connections). Evaluate how the company’s competitive advantages align with the most urgent and important needs of customers in the market, as well as the strengths and weaknesses of competitors. Determine whether they are positional or capability-based advantages and how sustainable they are. Then, prioritize the list of potential advantages based on the likelihood that they could be achieved, sustained, and utilized to effectively differentiate the company.

Where to Look

Involve key members of the company in this assessment to make sure nothing is overlooked and multiple perspectives are considered. Be honest about which competitive advantages are truly feasible, sustainable, and substantial enough to differentiate the company. Validate the assessment with an outside expert or advisor if additional objectivity is required.

Create a Statement of Competitive Advantage

What to Cover

Articulate the most promising competitive advantages that have been identified in a concise statement of competitive advantage. This statement should convey in one or two sentences what the company does, for whom it does this, how this uniquely solves an urgent need in the market, and why competitors cannot imitate it.

Many companies have competitive advantages, but few can clearly and explicitly articulate them. Beyond just being an important mental exercise to gain a deeper understanding of a company’s advantages, a defined statement of competitive advantage helps the company more effectively persuade potential investors about its ability to capture the value created by its products and ultimately position itself in the market and convincingly demonstrate to customers why it is a more valuable alternative than the competition. Keep in mind that the statement must present a distinctive advantage that cannot easily be replicated by others and also can be demonstrated in concrete terms. Superlative claims will not stand up in the market. Continue honing the statement until it is clear, compelling, and “feels right” based on the fundamental strengths of the organization. It is also a good idea to test the statement with trusted advisors and a small group of customers for confirmation that it communicates a persuasive and differentiated reason for doing business with the company.

Where to Look

As noted above, it is essential to involve all key members of the team in the development of the statement of competitive advantage.

Set a Strategy

What to Cover

Based on the definition of its competitive advantages, determine the fundamental business strategies that make sense to pursue. Start by eliminating strategies that are not applicable (e.g., first mover is not an option if another company is already in the market; me-too is impractical if the company’s technology has differentiated features and benefits). Then consider which of the remaining strategies make the best match based on the business itself, the needs of the market, and the value propositions the company is trying to demonstrate to its stakeholders.

Where to Look

Make this decision with the management team. Involve the board of directors for additional expertise and to validate the approach. Recognize that this is just one aspect of a holistic business strategy, and invest time and energy in making sure the rest of the strategy lines up around the fundamental business approach that has been chosen (and vice versa).