Module 1: Entrepreneurship

Closing the Window

Sustaining Competiveness

Sustainable Competitive Advantages

What are Sustainable Competitive Advantages? @@@

Sustainable competitive advantages are a set of assets, characteristics, or capabilities that allow
an organization to meet its customer needs better than its competition can. Sustainable
competitive advantages are difficult to duplicate or replicate.

Sustainable competitive advantages answer the question, “What are we best at in our market?”
The answer creates a set of 2-3 long-term, unique strengths that a customer values.

Your competitive advantage is what you, your company, or your department does better than
anyone else. The sustainable part refers to your ability to continue doing those things long-term.
And yes, you can have more than one advantage, and you can also develop advantages.
However, you

The Two Traits of Sustainable Competitive Advantages @@@

1 They are unique to your organization.

Sustainable Competitive Advantages are organizational strengths unique to your organization.

These are the strengths that set you apart from your competition. It’s what you do well and
is distinctly valuable in your market.

2 They are valuable to your clients.

Competitive Advantages are traits or strengths important to your clients. If the strength you’ve
identified is essential to you but not crucial to your client, it’s not a sustainable competitive
advantage. A competitive advantage is a strength or reason your clients choose you over
your competition. It must have value to your customer!

What isn’t a Sustainable Competitive Advantage?

We see organizations incorrectly identify competitive advantages all the time. It happens, but here
are a few quick ways to know if what you’re looking at is truly an advantage.
  Competitive advantages are not a list of your strengths.

Often starting with what something isn’t is easiest. Your competitive advantage is not a list of your
strengths. Strengths can become competitive advantages, but they are not just a list of all your
strengths.

 They can be created easily.

Competitive advantages, by definition, are not easy to create or replicate. If they’re easily created
or copied, they might be growth opportunities instead. Sustainable competitive advantages are
long(er) term in nature, meaning it takes time for a competitor to replicate it.

They are also not competitive advantages of your competitors.

We see this one common mistake again and again in identifying competitive
advantages – a competitive advantage is not a strength you have because your
competition also has it. Strengths that keep you competitive in your market are
essential but are considered table-stakes. Essentially, they are the required strengths
to keep your organization at the table in the marketplace. A statement that explains
what your company is best at.

Your business name + What you are best at + Why

Honda is best at developing because its products are the

precision engines and leaders in reliability and
power trains technological advancement

Google is best at optimizing because it continues to

searches for any type of innovate and push technology
information past what was thought
possible
 How to Identify Your Competitive Advantages

Here’s a quick overview of how to identify your competitive advantages:

1. Identify strengths. From the strengths section in your SWOT, identify your most valuable
strengths.

2. Identify customer wants/needs. From your customer research or customer analysis,

identify your customer’s top wants and needs that you can solve.

3. Find the overlap. From your list of customer strengths, find the overlap between strengths
you possess that provide value or solve your customer needs.

4. Axe the strengths your competitors also possess. Sustainable competitive advantages
must be unique. If your competitor also has it, it’s not a competitive advantage. It’s a table
stake.

So, Why Do You Need to Identify Your Sustainable Competitive Advantages?

The short answer is this: knowing your competitive advantages helps you build a better, more
thoughtful growth strategy. As part of our growth strategy series, understanding your competitive
advantages helps answer the question, “How do you win?”

You need to know what your organization is best at to help build a thoughtful growth strategy.

Think of competitive advantages like your competitive moat. What are the strengths you have that
help keep your organization protected from the threat of competition? Moats are hard to build and
penetrate. Competitive advantages are too.
Five steps to get a sustainable competitive advantage:@@@

Today’s business environment is very competitive. It’s now a lot easier and cheaper to start a
business, particularly with technology enabling business to be conducted online and internationally
to win customers in foreign markets.

The explosion of online retailing is an example of this, and all this competition and activity makes it
difficult to stand out from the crowd.

The challenge is to resist being another ‘me too’ business. The way to avoid this is by developing
a sustainable competitive advantage that differentiates you from your competitors.

Sustainable competitive advantage is the key to business success. It is the force that
enables a business to have greater focus, more sales, better profit margins, and higher
customer and staff retention than competitors.

It is the major driver of long-term business value and is what purchasers will place the most value
on when looking to acquire a business. Without a sustainable competitive advantage, you risk
being another ‘me too’ business that muddles along achieving less than satisfactory results.

At its most basic level, there are three key types of sustainable competitive advantage.
@@@

1. Cost advantage: the business competes on price.

2. Value advantage: the business provides a differentiated offering that is perceived to be of
superior value.
3. Focus advantage: the business focuses on a specific market niche, with a tailored offering
designed specifically for that segment of the market.

Most small businesses don’t have the market share and buying power to effectively
compete on price and are not big enough to be all things to all customers in a market.

Therefore, to successfully compete, small businesses need to develop a sustainable

competitive advantage that is based on providing superior value to a specific niche.

There is another advantage that is often referred to and that is first mover advantage. First
mover advantage is where the first entrant in a new market obtains an advantage over other
competitors that enter the market later.
However, while being a first mover may provide an initial advantage, in my opinion, it is not
sustainable unless it’s supported by one of the three types of advantages listed above.

Google and Facebook are good examples of this. Neither of these companies were the first
movers, yet both now dominate their respective markets.

Five steps to developing a sustainable competitive advantage @@@

1. Understand the market and its segments. Look for those niches that aren’t well serviced by
competitors and can be profitably targeted and sold to.
2. Develop an understanding of what customers really want and establish a value proposition
that grabs their attention.
3. Work out the key things that you need to do really well to support and deliver the value
proposition. For example, service levels, quality, branding, pricing, et cetera.
4. Understand what your strengths and core competencies are and how you can use these in
innovative ways to provide value to your chosen market.
5. Design your business model to support and deliver the value proposition.

At the end of this process, you will have a very clearly defined statement of:

 Who you will be selling to (customers and market segments);

 Why they will buy from you and not your competitors (the value proposition); and
 The key things you need to excel at to be able to consistently deliver your value proposition.

Once you’ve found your sustainable competitive advantage, you should use it in many ways, to
the business’ benefit.

Using your sustainable competitive advantage in your sales and marketing makes it easier for your
customers to understand why they should part with their money and give them to you rather than
your competitors.

This, in turn, makes it easier for your staff to sell your products or services and know their
promises will be delivered.

They know the whole business is focused on making sure the sustainable competitive advantage
is protected and capitalised upon.

Your sustainable competitive advantage can guide your decision-making and provide you with
direction and a sharp focus.
If a new opportunity for the business doesn’t support your sustainable competitive
advantage, then you should question whether to pursue that opportunity.

Is short-term growth that might erode your sustainable competitive advantage, more
important than building a long-term position of strength and stability?

This longer-term view and effective use of a sustainable competitive advantage can support a
higher return on capital invested in the business, even in the face of stiff competition.

This position builds value in a business and can add a premium to the sale price. That’s an
advantage every business owner wants.

Changing Role of the Entrepreneur

Entrepreneurs occupy a central position in a market economy. For it's the entrepreneurs
who serve as the spark plug in the economy's engine, activating and stimulating all
economic activity. The economic success of nations worldwide is the result of encouraging
and rewarding the entrepreneurial instinct.

A society is prosperous only to the degree to which it rewards and encourages entrepreneurial
activity because it is the entrepreneurs and their activities that are the critical determinant of the
level of success, prosperity, growth and opportunity in any economy. The most dynamic societies
in the world are the ones that have the most entrepreneurs, plus the economic and legal structure
to encourage and motivate entrepreneurs to greater activities.

For years, economists viewed entrepreneurship as a small part of economic activity. But in the
1800s, the Austrian School of Economics was the first to recognize the entrepreneur as the person
having the central role in all economic activity. Why is that?
Because it's entrepreneurial energy, creativity and motivation that trigger the production and sale
of new products and services. It is the entrepreneur who undertakes the risk of the enterprise in
search of profit and who seeks opportunities to profit by satisfying as yet unsatisfied needs.

Entrepreneurs seek disequilibrium--a gap between the wants and needs of customers and the
products and services that are currently available. The entrepreneur then brings together the
factors of production necessary to produce, offer and sell desired products and services. They
invest and risk their money--and other people's money--to produce a product or service that can
be sold at a profit.
More than any other member of our society, entrepreneurs are unique because they're capable of
bringing together the money, raw materials, manufacturing facilities, skilled labour and land or
buildings required to produce a product or service. And they're capable of arranging the marketing,
sales and distribution of that product or service.

Entrepreneurs are optimistic and future oriented; they believe that success is possible and are
willing to risk their resources in the pursuit of profit. They're fast moving, willing to try many
different strategies to achieve their goals of profits. And they're flexible, willing to change quickly
when they get new information.

Entrepreneurs are skilled at selling against the competition by creating perceptions of difference
and uniqueness in their products and services. They continually seek out customer needs that the
competition is not satisfying and find ways to offer their products and services in such a way that
what they're offering is more attractive than anything else available.
Entrepreneurs are a national treasure, and should be protected, nourished, encouraged and
rewarded as much as possible. They create all wealth, all jobs, all opportunities, and all prosperity
in the nation. They're the most important people in a market economy--and there are never
enough of them.

As an entrepreneur, you are extremely important to your world. Your success is vital to the
success of the nation. To help you develop a better business, one that contributes to the
health of the economy.

Suggest that you take some time to sit down, answer the following questions, and
implement the following actions:

What opportunities exist today for you to create or bring new products or services to your
market that people want, need and are willing to pay for? What are your three best
opportunities?

1. Identify the steps you could take immediately to operate your business more
efficiently, especially regarding internal operating systems.
2. Tell yourself continually "Failure is not an option." Be willing to move out of
your comfort zone, to take risks if necessary to build your business.
3. Use your creativity rather than your money to find new, better, cheaper ways
to sell your products or reduce your costs of operation. What could you do
immediately in one or both of these areas?
4. Imagine starting over. Is there anything you're doing today that, knowing
What you now know, you wouldn't get into or start up again?
5. Imagine reinventing your business. If your business burnt to the ground
today, and you had to start over, what would you not get into again? What
would you do differently?

Entrepreneurship is not static. New ventures grow through transitional stages and are
eventually harvested. Entrepreneurs must transition from their roles of micromanagers to
strategic managers

Most important and most challenging for the founding entrepreneur is coping with crucial
transitions and the change in management tasks from doing, to managing, to managing
managers.

Stage I: Existence

In this stage the main problems of the business are obtaining customers and delivering the
product or service contracted for. Among the key questions are the following:

 Can we get enough customers, deliver our products, and provide services well
 enough to become a viable business?
 Can we expand from that one key customer or pilot production process to a much
broader sales base?

 Do we have enough money to cover the considerable cash demands of this start-up
phase?
The organization is a simple one—the owner does everything and directly supervises
subordinates, who should be of at least average competence.
Systems and formal planning are minimal to non-existent. The company’s strategy is simply to
remain alive. The owner is the business, performs all the important tasks, and is the major
supplier of energy, direction, and, with relatives and friends, capital.

Stage II: Survival

In reaching this stage, the business has demonstrated that it is a workable business entity. It has enough
customers and satisfies them sufficiently with its products or services to keep them. The key problem
thus shifts from mere existence to the relationship between revenues and expenses. The main issues
are as follows:
 In the short run, can we generate enough cash to break even and to cover the repair or
replacement of our capital assets as they wear out?
 Can we, at a minimum, generate enough cash flow to stay in business and to finance growth
to a size that is sufficiently large, given our industry and market niche, to earn an economic
return on our assets and labor?
The organization is still simple. The company may have a limited number of employees supervised by a
sales manager or a general foreman. Neither of them makes major decisions independently, but
instead carries out the rather well-defined orders of the owner.
Systems development is minimal. Formal planning is, at best, cash forecasting. The major goal is still
survival, and the owner is still synonymous with the business.

Stage III: Success

In the Success Stage, the company has attained true economic health, has sufficient size and
product-market penetration to ensure economic success, and earns average or above-average
profits. The company can stay at this stage indefinitely, provided environmental change does not
destroy its market niche or ineffective management reduce its competitive abilities.

Organizationally, the company has grown large enough to, in many cases, require
functional managers to take over certain duties performed by the owner.
The managers should be competent but need not be of the highest caliber, since their upward
potential is limited by the corporate goals. Cash is plentiful and the main concern is to avoid a
cash drain in prosperous periods to the detriment of the company’s ability to withstand the
inevitable rough times.
In addition, the first professional staff members come on board, usually a controller in the
office and perhaps a production scheduler in the plant. Basic financial, marketing, and
production systems are in place. Planning in the form of operational budgets supports functional
delegation.
The owner consolidates the company and marshals resources for growth. The owner takes the
cash and the established borrowing power of the company and risks it all in financing growth.

Stage IV: Take-off

In this stage the key problems are how to grow rapidly and how to finance that growth. The
most important questions, then, are in the following areas:
 Delegation - Can the owner delegate responsibility to others to improve the managerial
effectiveness of a fast growing and increasingly complex enterprise? Further, will the action be
true delegation with controls on performance and a willingness to see mistakes made, or will it be
abdication, as is so often the case?
 Cash - Will there be enough to satisfy the great demands growth brings (often requiring a
willingness on the owner’s part to tolerate a high debt-equity ratio) and a cash flow that is not
eroded by inadequate expense controls or ill-advised investments brought about by owner
impatience?
The organization is decentralized and, at least in part, divisionalized—usually in either sales or
production. The key managers must be very competent to handle a growing and complex
business environment. The systems, strained by growth, are becoming more refined and
extensive.

Both operational and strategic planning are being done and involve specific managers. The owner
and the business have become reasonably separate, yet the company is still dominated by
both the owner’s presence and stock control.
This is a pivotal period in a company’s life. If the owner rises to the challenges of a growing
company, both financially and managerially, it can become a big business. If not, it can usually be
sold—at a profit—provided the owner recognizes his or her limitations soon enough. Too
often, those who bring the business to the Success Stage are unsuccessful in Stage IV ,
either because they try to grow too fast and run out of cash (the owner falls victim to the
omnipotence syndrome), or are unable to delegate effectively enough to make the company work
(the omniscience syndrome).
It is, of course, possible for the company to traverse this high-growth stage without the original
management. Often the entrepreneur who founded the company and brought it to the
Success Stage is replaced either voluntarily or involuntarily by the company’s investors or
creditors.

Stage V: Resource Maturity

The greatest concerns of a company entering this stage are:

 First, to consolidate and control the financial gains brought on by rapid growth and,
 Second, to retain the advantages of small size, including flexibility of response and
the entrepreneurial spirit.

The corporation must expand the management force fast enough to eliminate the inefficiencies
that growth can produce and professionalize the company by use of such tools as budgets,
strategic planning, management by objectives, and standard cost systems—and do this without
stifling its entrepreneurial qualities.

A company in Stage V has the staff and financial resources to engage in detailed operational
and strategic planning.

The management is decentralized, adequately staffed, and experienced. And systems are
extensive and well developed. The owner and the business are quite separate, both financially
and operationally.

The company has now arrived. It has the advantages of size, financial resources, and managerial
talent. If it can preserve its entrepreneurial spirit, it will be a formidable force in the market.

If not, it may enter a sixth stage of sorts: ossification.

Ossification is characterized by a lack of innovative decision making and the avoidance of risks. It
seems most common in large corporations whose sizable market share, buying power, and
financial resources keep them viable until there is a major change in the environment.
Unfortunately for these businesses, it is usually their rapidly growing competitors that notice the
environmental change first.

Reach These Start-up Milestones

Six months after Start-up: You should be defining your processes, who your customers are,
what your company does and how you beat the competition. “By six months, you should be able to
handle your business operationally,” says business strategist Robert W. Bradford, co-author
of Simplified Strategic Planning. “Although, it may still be a bit rocky because you’re working the
kinks out.”

One year to 18 months after Startup: Most new businesses will reach profitability at this point.
You should at least be breaking even: Your spending to get new customers should equal the
revenue they generate. Your operations should be smooth at this point, says Bradford, and “you
should certainly understand what the key factors are in attaining and improving profitability by one
year.”

Three to five years after Start-up: At this point, you should be more effective and efficient in
generating customers. You’re continually improving what you’re doing, and now it’s important
to evaluate your strategic growth plans. Ask yourself: How do we beat or avoid competition?
How can we play the bigger game? Says Bradford, “This is one of those dangerous points where a
lot of entrepreneurial businesses are comfortable, and they never move beyond where they are.”

Six to 10 years after Startup: Is your business on autopilot? Can you go on vacation and return
to smooth sailing? Think about expanding geographically or into new products or markets--you
may also be thinking about exit strategies and succession planning at this point. Adds Bradford,
“That’s the point where you say, ‘I know how to make this work. Now I move to the next level.’ “