Do you have a competitive advantage and how sustainable is it?

There are some firms which happen to be lucky and get overnight success but such examples are few and far between. In order to achieve long term success, companies have to acquire necessary skills and resources in order to compete with others who have been in business for decades. The value creation for companies, and long term growth largely depend upon these competitive advantages which they can only acquire after hears of experimentation and hard work. While government policies can protect firms from unexpected changes occurring in the market, they must learn how to maintain sustainability as the governments can change exposing companies to unforeseen dangers.

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It is not easy at all to identify or define resources or skills which bestow an unsurpassable competitive advantage to a certain company. Most often, organizations use signals like Key Performance Indicators, customers’ feedback, sales growth and market shares to determine what they need to do to compete with others more successful companies. These factors are a good indication of whether a firm is performing better or worse than its competitors but there are still many common pitfalls which they need to avoid at any cost.

For example, some organizations use profits as an indicator of competitive advantage but most often, this strategy could lead them to disaster instead of success. Profits are not a good indication of where you are better than your opponents. If we also include opportunity cost and replacement cost in the profit rather than analyzing it purely in accounting terms, we come to the conclusion that profit statements are often misleading and don’t present the true pictures of company’s competitive advantage and how sustainable it is.

Therefore, it is imperative for business firms to consider other dimensions of sustainability. For instance, companies must invest in such area of their business which can offer a sustainable cash flow in the long run. Instead of just looking at profits, they must identify the reasons responsible for those numbers and figures. In this regard, the two most important of the reasons that ensures sustainable competitive advantage are Size and Time.

However, size cannot determine alone whether your organization has a competitive advantage or not. There are many tools which can help you analyze how good you are as compared to others. For example, an organization has to be efficient in order to get competitive advantage. For that matter, it must scale the economy properly and have some savings. Similarly, if an organization is present in more markets, it will definitely earn bigger profits. Large organizations also offer more learning opportunities to their employees and all these factors combine to make an organization more efficient. Big organizations usually have better bargaining power when it comes to dealing with buyers as well as suppliers.

As far as Time is concerned, first movers always have some absolute pre-empt advantages. They have the keys to open the market, enter the market and close the doors behind them. They can legally forbid others to follow their footsteps and this is one of the biggest source of competitive advantage in some countries. Furthermore, in some businesses such as oil and gas, cable distribution and rail road networks, it is physically impossible to catch the first mover due to extremely high costs. Finally, the phenomenal success of first movers will force others to mentally concede the defeat and stop pursuing them in the market.

Similarly, followers might have to spend triple the amount of time and money to get where the first mover already is and this is called the relative advantage. However, it sometimes also becomes a disadvantage for them because others can simply copy their products, services or the way of working and make a name for themselves. Therefore, if a company is really willing to spend money and time, it can outwit the first movers and in some cases, eliminate them from the market as well.

However, it is usually very difficult for the rest of the pack to imitate the success and profits of the first movers because they enjoy some exponential market advantages. For instance, they have an established fan base and their products are used and accepted throughout the world, MasterCard, Visa and American Express being typical examples. It is virtually impossible for other credit card companies to penetrate this particular market and achieve the level of success these companies have enjoyed and same is the case with other markets. Once a company gets late, no matter it is small or large, it will be extremely difficult for it to get to back to the race and win it as is the case with Nokia.

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