Understanding Competitive Advantage

Several years ago, I went to a great lecture about understanding competitive advantage.  It really changed the way I thought about our business and about who we wanted to be.  Understanding the different ways to build competitive advantage can help you define your best strategy.  It can help you define your target market. Understanding competitive advantage can also be useful in predicting when culture clashes might occur during a merger or an acquisition.

What is Competitive Advantage The talk was based on a 1985 book by Michael Porter entitled, Competitive Advantage, .  In the book, Porter argues that you can find ways to be better than your competitors in cost, focus, or differentiation.  However, it is hard to be good at all three.  Thus, you can more successfully develop an advantage by being very clear on how you are competing.

Cost is a concept many of us can immediately grasp.  One way to compete, is by being less expensive than your competitors.  However, in order to be less expensive, you need to be incredibly efficient in your operations, often need to use high volume to drive price, and need to be very focused on ways to keep your costs down.  It is hard to add bells and whistles to either your product or your service and to compete as the lowest on cost. 

Differentiation is how you show consumers why your product or service is better and thus why it should cost more.  If your strategy is based on differentiation, you are not competing on cost but instead are competing on either having a better product, a better service, or providing a better experience.  Differentiation can often be thought of as quality, but quality defined in different ways.  It might mean most innovative, most kind to the environment, or best customer service. 

Focus is a way of keeping your costs low by being very specific about what you are providing.  Instead of trying to be a big box store that provides a lot of different types of low-cost items, focused companies look to provide a niche service or a specific product.  In addition, they might try to keep costs low by building a system in which it is hard for customers to move away after starting.

Competitive Advantage: The Grid

These concepts can be graphically represented with the below grid:

The three factors discussed by Michael Porter can be used to define four different strategies.

In a cost leadership strategy, the goal is to be the least expensive player in the market. In this strategy, you are trying to reach a broad base of consumers and to win them over on cost.

A cost focus strategy is different in that you are trying to win customers and keep costs low by narrowly focusing on a specific niche in the market. Papa Murphy keeps pizza costs low by selling pizzas you cook at home. This is a narrow group of pizza eaters. In a similar strategy, RedBox rents DVDs very cheaply in a convenient way. The narrow focus is on those who want easy, cheap access to a movie.

A pure differentiation strategy says that you are competiting for a broad group of consumers who are interested overall in a high quality product. Apple is a good example of this strategy. They charge high prices for a product that they aim to make more innovative and higher quality than the competition.

In a focused differentiation strategy, the business is aimed at a specific segment of the market that is willing to pay for a specific sort of high quality service. Mercedes-Benz doesn’t try to make cars for everyone. Instead, it concentrates its efforts on high end vehicles.

The Competitive Advantage Grid in Different Markets

All the businesses listed above are successful businesses. There is no right or wrong decision on which strategy a business pursues. The grid can be used to explain variation in many types of industries. The grid below shows successful grocery stores who have positioned themselves in different ways :

Again, all of these providers of food are successful. Walmart makes money by volume and keeping its cost low. Metropolitan Market and Zabars service expensive neighborhoods with the high quality gourmet food and thus charge high prices. Whole foods and local farmers markets work specifically to make customers feel like they are doing the “right thing” by supporting local farmers and organic farming practices. They charge and justify a premium for their feel good products. Amazon Fresh is a reasonably price option that is focused on the niche of home delivery.

Here is a similar grid representing the hotel industry:

Competitive Advantage in the Veterinary Space

The same concepts apply in the veterinary industry. The grid below gives some examples:

Implications for Veterinary Owners

Looking at these examples, you can see that as a veterinary hospital owner, you have choices on how to position your hospital. When I was part of a veterinary study group, several of the member emergency hospitals had pursued different strategies. One ER had focused on low prices, extremely efficient operations and serving as much of the geographic area as possible (cost leadership). Another hospital had focused on truly being the most state of the art with prices to match. They were early to add both subspecialists and equipment (differentiation). A third hospital had opted to avoid subspecialties to focus just on reasonably priced ER, internal medicine and surgery (cost focus). Our hospital had worked on being the best place to provide care for a pet who was critically ill (differentiation focus). All of us were successful.

What doesn’t work is deciding to be low cost but buying a CT or being high priced but not emphasizing quality. You also have to be careful when you focus on a niche as you can be more vulnerable to market changes.

Competitive Advantage culture clashes in a merger

When we think about selling our hospitals, price is expectedly top of mind. Having enough to pay for college for kids or supporting oneself in retirement are important goals in an end of career sale. However, if you intend to stay and work for the new owner, culture alignment is very important. If you have built your veterinary practice on a low price, high efficiency model but you sell to a corporation that believes in high prices and is less concerned about operations, you will likely feel frustrated. If you have specifically targeted a niche market providing long appointments at high price but the acquisition company runs low cost high volume clinics, you will be equally frustrated.

Conclusions

An understanding of Porter’s competitive advantage scheme can help if you are just starting a new practice, if you are working on strategic planning, or if you are considering a merger or sale. Think about “what matters to you?” and build your strategy on that basis. Want to help as many pets as possible at the lowest price? Learn about companies such as Southwest Airlines and Walmart. Want to be the best in your specialty? Your prices need to be high enough to support the investments in time, research, and equipment. Want to be a niche provider? Don’t get distracted by equipment or products that won’t support your focus. Understanding your competitive advantage can be the key to a successful strategy.