Entrepreneurs often use the words ‘capability’, ‘competency’ and ‘competitive advantage’ to describe their businesses. These definitions, however, are frequently misunderstood. Having a competitive advantage is more than having core competencies. This is why Amazon trades at over 170 times earnings while the average gas station can be purchased for three times cash flow. It’s important to clarify these concepts, which can provide a framework to help you identify and nurture your business’ competitive advantages.
Let’s start with definitions. All internal activities (e.g. billing, HR, sales) that a company performs are capabilities. Activities that are performed well are competencies, and competencies that are central to a business’ strategy are core competencies.
For instance, if a business caters to cost-conscious customers, its core competencies are most likely centered on factors such as cost and supply chain management, since these activities directly support the production of lower cost goods. Core competencies that are both unique to a business and yield advantages over rivals are said to be distinctive competencies.
For example, Crossworks Manufacturing Ltd.’s expertise and proprietary technology allow the company to design, patent and produce some of the most exclusive and beautiful diamonds in the world. By investing in the capabilities that lead to distinctive competencies, entrepreneurs can help their businesses create competitive advantages over rivals and maximize value.
With this in mind, there are four questions entrepreneurs need to ask themselves when evaluating the capabilities of their businesses:
1. Is it hard to copy?
A competency that can be easily copied does not remain an advantage for long. When evaluating whether a competency has the potential to become a sustainable competitive advantage, ask yourself, how easily can my competitors duplicate this? Patents expire and products can be copied, but intangible competencies such as proprietary technologies, trade secrets, branding and corporate culture are all very difficult to imitate. Espro, for example, has a number of award winning coffee presses and products that have helped it build a niche among coffee aficionados. Espro’s sustainable competitive advantages include a culture that ensures the company will continue to develop innovative products.
2. Is it valuable to your business?
The competency should be valuable to you as a firm and provide you with access to a variety of markets and customers. Through 4G LTE wireless technology, CCI Wireless provides high speed internet access to communities in rural Alberta, which lacks telecommunication infrastructure and inhibits affordable high speed internet access. Being able to offer high speed internet over Wi-Fi is a valuable competency because it allows CCI to offer a highly competitive product to a large underserved market.
3. Is it really competitively superior?
The competency should allow you to provide a more valuable product or service to your customers (e.g. lower cost, higher differentiation). We were impressed with our client GlassMasters’ inventory management and forecasting capabilities. Regardless of the location you visit or the make and model of your car, there is a high probability that GlassMasters has your windshield in stock and can replace it on the first visit. A quick turnaround is highly valued by customers, giving GlassMasters a competitive edge over less responsive rivals.
4. Can it be trumped by other capabilities?
The last question to consider is whether the competency in question can be superseded by another capability. The taxicab industry, for example, has always been protected by the limited supply of taxi tokens issued, thus the number of taxis and drivers on the road. Technology has eroded the value of this advantage by allowing anyone with a car to shuttle passengers from point A to point B. Resources are limited so it is important to focus your investment dollars on the competencies that will most likely lead to a sustainable competitive advantage.
If your business has a sustainable competitive advantage it can defend its position in the market, outmaneuver competition, convince stakeholders about how and why it will succeed long into the future, and command a higher valuation.