GROWTH SECRETS: Building in sustainability

Many entrepreneurs think that their business is sufficiently protected by having a superior product or service or by making the product or services offering different in some way from their competitors.

This is often achieved through a combination of features and functions which customers value or through superior customer service, availability, after sales support and so on. It is highly likely that a winning combination can help secure the initial sale, however, this does not stop the competitor from copying what you do, maybe doing it better and then chipping away at your customer base and reducing your future market share.

A competitive advantage will gain you business at a point in time. The real challenge for any business is to build a platform which will protect that competitive advantage but also adapt it to ensure the firm retains its leadership position as the market evolves. The key objective is simply about protecting the business from erosion from an existing or new competitor. What is to stop a much better funded, larger, more aggressive competitor from duplicating what you have done and offering greater incentives for your prospects to buy from them? This gets down to: how are you going to protect your business?

Protecting the business is most often seen as erecting barriers to entry. That is, what protection can you put in place to protect your competitive advantage, your distribution channel, your on-going customer revenue and your source of supply.

The more conventional barriers to entry have one, or several, of the following attributes:

• High start-up costs
• Expensive to acquire
• Take a long time to acquire
• Protected by patent, trademark or copyright
• Restricted under license, rights or agreements
• Require specialised knowledge which itself is in limited supply
• Highly innovative and not capable of reverse engineering
• On-going customer revenue is protected with high switching costs or is contracted
• Distribution channel is owned or restricted under contract
• Source of supply is restricted or locked in under contract.

Strong barriers to entry usually create the basis for a sustainable competitive advantage and this in turn is a pre-condition to high growth. While you may have established a competitive advantage with your product or service, this is really only beneficial if you can sustain and/or protect it over the long-term.

Protection can be legal rights which attach to patents or licenses or they can be protected by being difficult, expensive or time consuming to copy. A business may protect itself by controlling elements of the market such as preferred outlets, distribution channels or essential components. Other firms may be effectively locked out of a market through customer or supplier agreements or by controlling the source of an essential resource input. The ability to defend encroachment is an essential factor in maintaining protection.

The firm which cannot defend a patent infringement, for example, has little protection against a large well-funded predator.

Competitive advantages are transient. There are numerous forces acting within markets which will undermine competitive positions. These include such factors as:

• Expiration of patents, licences and copyrights
• New inventions which provide better, cheaper and/or more effective solutions
• New processes which increase productivity or provide new benefits
• New ways of doing business which customers prefer
• Competition arising from more open trade agreements.

Thus a strong position at one point in time may be eroded either by the passage of time or by new products and/or new competitors coming into the market. Competing in the market with a constant stream of new products and penetrating new markets is hard work and fighting it out prospect by prospect puts a considerable strain on the business and it’s staff. In the absence of some overpowering long-term competitive advantage which allows the business some margin for error, you are going to have to battle for each new customer.

Some entrepreneurs are mesmerised by the size of a potential market. They take comfort in the fact that there will always be new customers to sell to. They seem to think that because there are large numbers of potential customers, they have some divine right to get their share as they pass by. However, the rate of company failures would suggest otherwise. It is not just the competitors you can see which should give you cause for concern, it is new entrants which come into your market with a different business model that can turn an industry on its head. The firm which has not bothered to block off the competitors will be the most vulnerable to such changes.

Many entrepreneurs search for the holy grail of ‘first mover advantage’. Being first to market can often provide a business with an opportunity to gain premium prices. For example, new markets can sometimes be readily harvested if the new business solves an important problem. Early demand often allows ‘cherry picking’ – taking those with the highest needs or those who are the most innovative as early customers. First mover advantages are most often associated with new inventions but can also be associated with new ways of doing business.

However, there is nothing in this strategy which suggests you can sustain the initial advantage. Once competitors imitate your product or service, they can attack your customer base.

High growth firms not only ensure they have a leadership in gaining initial sales but they put strategies in place to also reap the rewards of additional sales of the same product, cross selling complimentary products and gaining referrals to new customers.

Most firms have repeat sales to their existing customers. Once the initial sale is made, you need to move immediately to close the door behind you against competitors. You need to construct a situation which will ensure that future purchases are sent your way and not to your competitors. If you can prevent your competitors from selling to your customers, you have effectively protected that part of your income stream. Your objective is to lock down your customer so they prefer to buy from you even when your competitor introduces a better product or service which could more effectively satisfy the customer’s needs.

Clearly the most effective way to secure the long-term business of the customer is through an exclusive purchase agreement. This need not be to the customer’s detriment however.

There are some very good reasons why the customer may allow, or even encourage, this arrangement:

• Reduction in costs of preparing procurement agreements
• Economies of scale in ordering, freight, receiving and storage
• High learning curve costs in understanding the complexities of each organisation, their ordering and fulfilment processes
• Time and resources required in building relationships at multiple layers in each firm
• High start up costs in bringing on a new technology or process. This could involve organisational changes, data conversion and training costs
• Committed capacity to customers’ business.