Recently I was asked to define the one thing that’s most important to a business.  My answer is two words: competitive advantage.

Technology, Patents, and Secrets

There are a lot of people who mistakenly believe that proprietary technology, patents, or trade secrets are the hallmark of breakaway businesses.  This is only sometimes true.  Most of the time it’s only true for a little while.  Huge drug companies today are starting to panic because their drug patents are expiring and the competitive forces of the market are pushing their unsustainable returns back down to earth.  For a technology example, Google began its life as a quantum leap better in search than anyone else.  Today they're still better, but not in a different stratosphere.  MSN, Yahoo, even Ask are all catching up – because the algorithm gap between them is shrinking.  With enough time & smart people your technology, patent, or secret advantages will erode.

Comparative Advantage

There’s a great story where an economics skeptic asked famed Nobel laureate economist Paul Samuelson to defend his trade.  He asked Samuelson for a “meaningful and non-trivial” result that came out of economics.  Samuelson replied with “comparative advantage.”

Comparative advantage asks you to look internally at your own capability to produce a product or service.  You should always focus on whatever it is that’s most profitable for you to produce.  Even if you know you’re not the best in the world at it.  The law of comparative advantage says that you’re doing as well as you can if you spend your resources there.

Barriers to Entry

The next thing to examine are your barriers to entry.  How hard is it for a newcomer to become your competition?  Ever wonder why the field of real estate agents, stock brokers, and mortgage brokers never concentrates as it does in other fields?  It’s because there are very few barriers to entry.  New entrants come into the field every year when it’s profitable, and leave when it’s not.  To counter this, consider trying to raise the barriers to entry in your industry.  This is exactly what e-trade and other online brokers did.  They created a technological barrier to entry at first, but then converted this into an operating barrier to entry.  You can’t offer trading fees so low if you handle clients one-on-one.  You have to build a big website with automated systems to be profitable at $10 / trade.

Network Effects

And finally there’s network effects.  If you think about is, how much do you think the very first telephone was worth?  Nothing!  You had no one to call.  The second was worth more, assuming you wanted to talk to the first guy.  The third, fourth, and 1,000,000th telephones were each more valuable – because more and more people were involved in your little ecosystem and could be relied upon to be accessible via telephone.

This is why cell phone companies are willing to let you talk to anyone on that same carrier for free.  Each person who’s on that carrier increases the benefits of being on that carrier – which means they have a more compelling story for signing up new customers!

This same network effect manifests itself in various types of businesses.  Ebay (with its network of buyers and sellers), Microsoft (with its network of software developers for its operating system), FedEx & UPS (with its network of distribution hubs and distribution points).

Conclusion

Nothing benefits margins, growth, and sustained profitability than increasing your competitive advantage.  You want every day you’re in business to be creating distance between you and your competition.  If you focus on that, success is sure to follow.

About Chris Harris

For 13 years Chris Harris has been successfully developing technology solutions and creating winning business strategies for both start-up and brand-name companies.  Chris co-founded Inventure Global, a San Diego headquartered IT consulting firm with offices and programmers in India offering sophisticated IT and technology planning, design, and implementation services for new and growing businesses looking for experienced talent and intelligent support. Inventure Global also maintains the New Venture Outsourcing Blog.