What's Your Competitive Advantage?

Know the Reason You're in Business
If you can articulate a clear, specific reply to the following question from your customers: “Why should I do business with you?” you know your competitive advantages. Your competitive advantages should be the foundation for all your strategic and operational decisions. Most companies have them (or had them) or they wouldn’t be in business. If you don’t have them, you can create them.

Don't Play the Lowest Price Game
Play the price game and you are tossing margins to the wind! Most businesses cannot exist by being the lowest-cost providers. Without a competitive advantage, price becomes your only differentiator. That’s not enough.

Become more conscious about why you are in business in the first place and what you are delivering that makes you unique. Help your customers increase sales, save money, be more productive, save time, solve problems, look good to their customers, enjoy life more and they will pay you for it. Offer something more important to the customer than the lowest price.

Competitive Advantages and Business Value
Business value is all about future cash flows generated by profitability and the risk associated with the predictability of those cash flows. Higher predictability enhances business value. Competitive advantages provide the opportunity for improved margins that are sustainable for some period of time in the future. This assumed sustainability improves predictability of
future cash flows and, in turn, enhances business value.

A Competitive Advantage is:

Objective, not subjective - Words like “quality”, “trust” and “reputation” are so overused - they have become nothing more than meaningless noise in the market place. Steer clear of claims that are matters of opinion.

Quantifiable, not arbitrary - A statement that “95% of our business comes from referrals” is more likely to be believed by your customers than “we have great customer service.” Get specific.

Not claimed by the competition – Identify exactly what benefits your product/service brings the customer that others don’t. Claim it first.

Not a cliché - If you say “we exceed our customers’ expectations”, do you know what those are (in their terms not yours)? Do you measure and can you articulate how you exceed them? Would your customers confirm that statement? Walk the walk if you’re going to talk the talk.

Sustained Competitive Advantages
The best competitive advantages are long-term sustainable ones. But most are not. They can last months or years but, seldom decades. They have to be recreated. Identifying your competitive advantage is not a one-time exercise.

Competitive Advantages Are Not Simply Strengths
A strength is not a competitive advantage. Strengths such as quality, knowledgeable people, low-cost production and good customer service are important to compete but they are givens - not differentiators. As much as you might like them to be, there is nothing unique or noteworthy about responsiveness, longevity or being a family-owned business.

Strengths are defensive weapons. Competitive advantages are offensive weapons.

Customers need you to show them what you mean by “quality” and “good customer service”. What makes a true impression are facts and details.

Instead of saying: "We provide...

"...Good Customer Service", consider saying:
“Our service staff promises to return all calls within one hour of being received and, if necessary, we will have a technician at your location within six hours” Be specific. Consider offering a financial penalty to yourself (benefit to the customer) if you don’t deliver on the promise.

"...Quality", consider saying:
“Last year, less than half of 1% of our customers returned one of our products.” Return costs are low with good products.

"...Customer Satisfaction", consider saying:
“If you are not satisfied, return it for a full refund, no questions asked.” Reduce your customers’ buying risk.

"...Our People", consider saying:
“Our engineers have a minimum of 15 years of experience, twice that of our nearest competitor.” Simply stating “our people are the best in the industry” won’t cut it. Back up your boast with measurable numbers.

If you claim a competitive advantage, make sure you provide it every time. Broken promises will drive your customers into your competitors’ arms. Making claims you can’t meet is worse than not making them at all. In our next newsletter we will discuss Identifying Your Companies’
Competitive Advantages.

Best regards,

Steve Hammes
Hammes Business Planning

References: Creating Competitive Advantage by Jaynie L. Smith and Gaining
and Sustaining Competitive Advantage by Jay B. Barney

Internal Valuation Formulas - Know their limitations

At some point in the life cycle of a business the owners must deal with the question of what their business is worth. If there are multiple owners this is typically addressed when drafting business formation documents. Often in these closely-held ownership situations that issue is answered by defaulting to book value as an internal valuation formula.

Book value is quantifiable and easy, assuming accurate financial statements are prepared. But it almost never represents the fair market value of a business.

In today’s business environment many revenue producing business assets are not reflected as such on the balance sheet – such as technology and intellectual property. In business, the most important assets walk out the door every day and the cost is expensed through payroll. Internally developed systems and competencies that contribute to profitability are expensed when paid. And off balance sheet commitments and contingencies will not be reflected in book value.

You sometimes hear the argument that as long as all owners buy in and sell out of the business under the same valuation methodology - such as book value - it is consistent, fair to all and doesn’t matter whether it represents fair market value or not.

But other external factors will start to disturb these well intended arrangements.

Consider:

• If the ownership interests are ever included in an estate or gifted, they are required to be valued at fair market value, which will usually require an appraisal. It may be difficult to get business appraisers and the IRS to concur that book value is fair market value.
• A disgruntled exiting shareholder may challenge the valuation arrangement as not being fair market value which can be costly to defend even if unsuccessful.
• Ultimately most businesses are sold to third parties which will determine fair market value. In that event previous ownership interest transactions may be challenged.

Some advice on internal valuation arrangements:
• Tie any internal valuation formula to the income statement.
• Have calculated values documented and agreed to annually by all owners so the topic has a chance to get fair discussion and thought.
• Stay in touch with valuation issues in your industry and similar organizations so you can continue to factor new information into your valuation methodologies.
• Consider getting input, either formally or informally, from a business valuation professional on your ownership interest valuation methodology.

Whatever valuation method you use make sure you consider fair market value and try to stay within some range of it.