How to win: understanding your competitive advantage

How to win states why customers in your chosen segments choose you over the alternatives, and why they will keep doing so. Answers come in only two families. You deliver the same thing at lower cost, or you deliver something different that customers will pay for.

A real advantage shows up in evidence: a price premium, a share that holds, customers who stay, tenders won. A stated advantage passes one test: a competitor could not put the same sentence on their own wall.

Most businesses, asked why customers choose them, answer "service and relationships". So does every competitor. That answer is not wrong, exactly. Service and relationships are the price of being in the industry, so they give no advantage. This page is about finding the real one.

The two ways to win

Lower cost. The business delivers what the segment wants at a lower cost per unit than competitors. It can then price below them or earn more at the same price.

Cost advantages come from a few durable sources. Better access to inputs: materials, labour, capital, technology, information. Scale that spreads fixed costs and buys better. Accumulated experience that has squeezed waste, rework and duplication out of the process.

Operating choices, such as a newer plant or a leaner roster, also lower cost. But they are usually easy to match and rarely last.

Something different. The business delivers something customers value enough to pay for. Features or quality that fit their needs better. Service that is faster, more reliable or more expert. A brand that saves them the effort of checking.

Differentiation only counts if customers will pay for the difference, in price or in loyalty. A feature customers admire but will not pay for is a cost.

The two families pull in different directions. A cost leader watches its costs. A differentiator watches its customers. A business trying to be both usually ends up as neither. It sits above the cost leader on price and below the specialist on distinctiveness.

Example: A regional manufacturer's plant sits closer to its two largest state markets than any competitor's. Freight per tonne is lower. It wins on price in those states while earning the same margin as competitors earn elsewhere. Here the advantage is cost, worth exactly the freight difference times the volume.

Why "service and relationships" is not an advantage

Every industry has table stakes: the things a supplier must do to be considered at all. Delivering on time, answering the phone, knowing the customer's name. These are necessary but not distinctive, because every surviving competitor does them too.

The test of a stated advantage is whether a competitor could say the same thing. "We are close to our customers" or "we are more customer centric" fails. "We are the only supplier with stock in every state, so a trade customer never waits more than a day" passes. The claim is specific and checkable, and it is not true of the competitors.

Take the how-to-win line on your one-page strategy. If it would fit on your nearest competitor's page without editing, you have described the industry, not your position in it.

Example: A mid-sized software firm's pitch says "deep domain expertise and a partnership approach". Its win-loss review shows it wins when the buyer already runs one of its two integrations. It loses everywhere else. The advantage is the integrations. The pitch has never mentioned them.

Find the evidence

An advantage that exists leaves marks in the numbers. Look for them before claiming it.

• Price realised against competitors for comparable products, after discounts. A premium that holds shows differentiation. A discount needed to win shows its absence.
• Share by segment, and its trend. An advantage holds or grows share in the segments where it applies.
• Retention and churn. Customers who stay when a cheaper alternative arrives are telling you something.
• Win rates, and the reason for each win and loss, taken from the buyer's account over the salesperson's.
• Customers' own ranking. Ask a dozen customers what they buy on and how they weight each criterion. Ask where you and each competitor sit on it. The answers usually differ from the ones the sales team gives.

If none of these shows a difference, there is no advantage yet, whatever the strategy document says. The exercise has done its job. Finding an advantage becomes the strategy's priority.

Understand the economics of the advantage

Once you have named an advantage and found its evidence, ask about its economics.

What is it worth? For a cost advantage, the unit cost gap times the volume it applies to. For differentiation, the price premium times the volume, or the retention it buys. The number tells you how much to spend defending it.

What sustains it? Cost advantages last while nobody can match the access, the scale or the experience. Differentiation lasts while nobody can copy the feature or redesign a service to the same level. It also lasts while no alternative promise displaces the brand.

Advantages that rest on a bundle of things that reinforce each other outlast any single one. The hardest to copy are usually the hardest even to describe. They sit in the way the business works, beyond any asset it owns.

What would erode it? Every advantage has a known enemy. Access to inputs changes. Complexity undoes scale, and so does a technology that lowers the minimum efficient size. Experience leaks when people leave, or a new process leapfrogs it.

A feature is copied. A service is matched. Customer needs shift and the brand's promise stops mattering. The businesses that keep an advantage have named its enemy and watch for it.

Example: A branded product has earned a premium over private label for a decade. The premium has narrowed every year for four years as the retailer's own brand has improved. Nobody has put the four numbers on one page. The advantage is eroding at a measurable rate. That measurement is the strategy's most important fact.

Capabilities: what makes it hard to copy

Advantages persist when they rest on capabilities that pass four tests. The capability is valuable: it lowers cost or raises what customers will pay. It is rare: competitors do not have it. It is hard to copy. The capability is embedded in how the organisation works, took years to build, or depends on assets and relationships that are not for sale.

Last, it is yours to keep. The value it creates stays with the business and does not leak to the people or partners who hold it.

Two practical rules follow. Name the two or three capabilities your how-to-win depends on, and assess them as they are, including the ones you do not yet have. Then fund the gaps as the strategic investments they are, with more than a training line in next year's budget.

Sometimes a strategy needs capabilities the business plainly lacks, and nobody says so. An unspoken gap like that is the most common way a good page produces a bad year.

Anticipate the response

An advantage is relative, so every move to build one invites a reply. Before the move, ask what each competitor's economics make it likely to do. Will it follow a price rise or hold to take share? Will it match a service investment or concede the segment? Does it have the balance sheet to add capacity, or the shareholders to tolerate a price war?

Competitors' incentives usually show in their results and their positions. Their behaviour is more predictable than most strategies assume. A move that only works if the competitor does nothing is not a move.

The five stages of naming an advantage

Whether the source of advantage is named is one of the practices in the advantage dimension of a Stages of Excellence strategy assessment. The five stages read:

• Lagging: Asked why customers choose you, the answer is 'service and relationships' like everyone else.
• Basic: Claimed advantages exist but no evidence distinguishes them from industry table stakes.
• Competent: The advantage is named and supported by evidence: share, margins, retention or win rates prove it.
• Advanced: The economics of the advantage are understood: what it's worth, what sustains it, what would erode it.
• Leading: Whatever keeps the advantage alive is the first thing funded in every budget, ahead of anything discretionary.

Most businesses are at the first or second stage. The move to the third starts with a dozen customer conversations and a win-loss review, before any strategy offsite.

Frequently asked questions

Can a small business have a real competitive advantage? Yes, and usually a sharper one than a large business, because it can be specific about the segment. An advantage in one region, one channel or one customer type is still an advantage. The where-to-play choice has to be drawn to match it.

Is being cheaper an advantage? Only if the cost is lower. A low price without a lower cost is a subsidy paid by the shareholders. It lasts until the cash does.

What if we cannot find one? Then the how-to-win line is blank, and finding an advantage becomes the strategy. That beats a page that claims one. The business will put its money into building an advantage, where a claimed one only gets defended.

Does the advantage have to last forever? No. It has to last long enough to earn back what it cost to build, and the business has to see its erosion coming. The businesses that stay ahead renew their advantage before the numbers force them to. None of them relies on it being permanent.

• Could a competitor say the same sentence? Take the check.
• The Stages of Excellence in strategy
• Creating a good strategy on a page