Competitive Advantage through Differentiation

Competitive Advantage through Differentiation


For a business to achieve earnings superior to the average in the industry it must have a competitive advantage. Without possessing a competitive advantage a business is doomed to depend on the economic fluctuations in the markets. When the economic conditions are favourable it does well, and when the economy is poor it suffers. I suggest that depending the economy is looking for scapegoats. The real weakness is commoditization of the business. In good times and in bad times having a competitive advantage will earn superior returns.

 Last month I discussed the importance of achieving a competitive advantage through having a low cost advantage. In today’s post I discuss differentiation as the source of competitive advantage.

 Without differentiating a business we will earn the average income in its industry. For some high paying industries like cardiac surgery or specialized dentistry the average industry income may be satisfactory, however that is not the case for most businesses. The average lawyer, accountant, dry cleaner, renovator, wine grower, or graphic designer will make an average living for their industry. Their income may be at times satisfactory but is never spectacular, unless they possess a competitive advantage achieved through differentiation.

 Differentiation means providing a unique benefit to customers. Being unique means the benefit is not available elsewhere. If we do not differentiate our business then we are commoditized and no different from others, and the customer will search out the cheapest alternative.

 Differentiation allows for superior pricing, larger sales and stronger loyalty. The last item is particularly important to professional service businesses, where customers don’t really understand and trust the services being provided and frequently skip from one provider to another.

 Differentiation is the result of the value chain activities that we provide. It does not have to be about our product being better or our service being more competent. It may occur at any point in the value chain. It could be a result of our human resource policies concerning recruitment and compensation, incentives and training. It could be because of our infrastructure dealing with response time to customers, our having proprietary knowledge and software, or our financial strength and the ability to provide special terms to customers.

 Selecting where to differentiate should be based on creating value for our customers, and understanding buyer value means understanding the buyer value chain. Our products /services are an input to their value chain. A business creates value for a buyer that justifies their paying a premium price, or it creates value through lowering buyer cost or raising performance, thus creating a competitive advantage for the buyer.

 The buyer then acquires their competitive advantage through:

  • achieving a lower cost position
  • achieving a lower financing cost
  • our providing installation and support
  • our providing training
  • achieving a lower overhead
  • reducing direct labour
  • reducing failure rate

 Providing a competitive advantage for our customers provides our business with a strong competitive advantage. This competitive advantage will keep our business thriving in good times and healthy in lean years.

Running a Business for Cash

Running a Business for Cash


When faced by a financial crisis a business owner must focus on the following three important areas:

 Reassessing the business model.

  1. Changing operations to reflect the new environment.
  2. Ensuring that enough cash is available.

In my last two posts I discussed the importance of a business model, and addressed the need for a business to make operational changes. Today I will focus on the topic of running the business for cash.

 No matter how profitable a business, running out cash will lead to insolvency. Keep in mind that unless you have a successful business model and the business is run effectively the business will eventually fail. Assuming the first two criteria exist, how do we manage a business from a cash perspective?

 Understanding the various elements of a balance sheet may be helpful.


  • If we carry debt it may be wise to convert debt to equity. Equity is more expensive but does not require repayment and is therefore cash saving. This is easier said than done because a bank will not ordinarily agree to this arrangement, but another type of lender might.
  • The proper use of debt may save cash. Long term debt should be used to acquire capital assets and short term debt should be used to finance working capital such as receivables, inventory and trade payables. Often business owners improperly use short term debt to finance capital acquisitions.
  • Consider refinancing short term debt into long term debt to conserve cash.
  • Examine your cash cycle. A cash cycle begins with your purchase of raw materials, storing the goods in inventory, processing them into finished products and selling them. At sale time we have a receivable but only when we are paid can we pay for our purchases. Until we collect from the buyer we don’t have the cash, and so the cycle resumes.
  •  Shorten the cash cycle. The sooner we collect the receivables the sooner we pay off our debts. The lower our inventory, the lower our cash requirements.
  • Shorten the sales cycle. Speed up the time from acquiring leads to converting them into paying clients.
  • Shorten the marketing campaign cycles. Speed up the sequences from marketing decisions to advertising to leads and ultimately to customers.
  • Shorten the finance cycle. Shorten the time for finance approval, or the time from when an order is received to the time of merchandise delivery.
  • Speed up the credit approval cycle.
  • Speed up the billing cycle. Send out an invoice the same day the work is done or goods shipped.
  • Shorten the collection cycle. Review the terms of sale. Call the customer as soon as the bill is past due.
  • Deposit all payments daily.
  • Delay paying select suppliers.
  • Minimize the inventory on hand.
  • Consider deferring planned capital expenditures.

 None of the above strategies alone may be the answer to the cash flow problem, however when combined their cumulative result may make the difference between survival and insolvency.

Managing Through a Financial Crisis

When faced by a financial crisis a business owner must focus on the following three important areas:

  1. Reassessing the business model
  2. Changing operations to reflect the new environment
  3. Ensuring that enough cash is available

The Business Model

A business model does several things:

  1. It explains why customers buy from your company. It’s seldom because you do the best work. Other dentists, builders, accountants etc. are just as competent. It’s not because you have the best team, as others also have great players. The reason your customers prefer your company vs. your competitors may be for a variety of reasons, such as price, convenience, location, inertia (too lazy to change), trust, or other intangible factors. For example, perhaps you provide 24/7 service and the competition does not.
  2. It explains how you are able to charge prices that provide a profit, and how you provide enough value that customers will pay for what they receive from you.

The importance of a business model cannot be taken for granted. Environments change quickly, and the value you once provided may no longer be so special. In fact, your company’s added value may have become mainstream, and now all players in the industry are providing a similar service (remember when banks closed early and stores were closed on Sundays?).

Consequently, when faced with a crisis business owners must immediately examine their business model to ensure that it has remained relevant and valuable. In fact, the savvy owner will have a clear understanding of how valuable their business model is, and if it is protected from or threatened by the competition. When the environment changes, a weak business model will lead to a loss in gross margins and overall profitability and market share.

Next month we will examine the changes that need to be made to business operations when a crisis looms on the horizon.

Growing Your Business – No Longer Just a One Man Show

What is the difference between a CEO that operates a one man show, vs. a CEO that leads a real team?

Too many of us create a business consisting only of ourselves and two to three workers, and there it stays. In too many cases there is a lack of a business plan and sense of mission for the enterprise, and other more personal challenges such as limiting mind sets. We can refer to this type of business as a “one man show”.

What are the other attributes of a one man show?

First, the CEO owns the whole company. The owner’s view rules. The owner makes the decisions and the workers are only there to carry them out. Because of the small structure, the owner doesn’t do much planning, and may not even be aware of the importance and value of a business plan.

These owners compete on price and have a small number of customers. They care about their product but often don’t consider their staff worthy of further development. They have difficulty raising money and managing cash flow; work long hours, and at best make a living.

CEOS that break out from this level have a product that has taken off. New lines are being developed and new customers are flocking to their doorstep. They have a steady customer base, so instead of competing on low prices, value that is important to their customers is being added to their product. At this point the expansion creates complexity and demands a new management structure. The CEO begins to delegate and searches for staff that can bring value and further growth.

We all start small. However, those businesses that move from a one man show to a growing business usually do so within five years. Within five years their billings can reach one million dollars. The right CEOS will make it happen. They will create the right team as well as the right value proposition for their customers.

Developing An Extraordinary Guarantee

Guarantees, and especially those that are in some way even better than ‘money back’, are a proven way to attract prospects. But how to develop such a guarantee?

The best thinking on the issue of developing guarantees now involves using the concept of ‘risk reversal’.   There is no better way to change the perceived benefit of a product or service than to offer an ‘extraordinary guarantee’ that switches the risk of making a wrong choice from the buyer to the seller – risk reversal. In effect a risk reversal guarantee inspires the prospects trust by announcing: “I’m so confident in our products, services and business that I’m prepared to put my own money where my mouth is and make it impossible for you to lose out on this transaction.”

By knowing what the customer really wants, and then making it clear that they will get the result they’re after from this deal or else the seller shoulders the consequences, makes their buying decision so much easier.   And that’s what offering an extraordinary guarantee can do.