Chapter

Building competitive
advantage

McGraw-Hill/Irwin
Entrepreneurship, 7/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.
 Competitive Advantage

• Competitive advantage refers to factors that

allow a company to produce goods or services
better or more cheaply than its rivals. These
factors allow the productive entity to generate
more sales or superior margins compared to
its market rivals.
• Competitive advantages are attributed to a
variety of factors including cost structure,
branding, the quality of product offerings,
the distribution network, intellectual
property, and customer service.
Understanding Competitive Advantage

• Competitive advantages generate greater value for a firm and its

shareholders because of certain strengths or conditions. The more sustainable
the competitive advantage, the more difficult it is for competitors to neutralize
the advantage. The two main types of competitive advantages are comparative
advantage and differential advantage.

• A differential advantage is when a firm's products or services differ from its

competitors' offerings and are seen as superior. Advanced technology, patent-
protected products or processes, superior personnel, and strong brand identity
are all drivers of differential advantage. These factors support wide margins and
large market shares.
How To Build a Competitive Advantage

• To build a competitive advantage, a company can use one of three

main methods:
• Cost: Provide offerings at the lowest price
• Differentiation: Provide offerings that are superior in quality, service,
or features
• Specialization: Provide offerings narrowly tailored to a focused
market1
• Competing on price can be effective, but if you slash prices too much
you risk decreasing profit margins to an untenable level. Many firms
opt instead to differentiate themselves in other ways, which helps
preserve or expand their profit margin.
Strategies to Build a Competitive
Advantage
• Research the market:
• Market research helps a company identify and define its target
market, which can guide it in developing the most effective
advantage.
• Identify strengths:
A company can find its unique strengths, especially relative to
competitors, by reviewing products, services, features, positioning,
and branding.
• Evaluate finances:
Companies can take a close look at their financial performance to
spot profit centers and areas of stability, using financial
statements and ratios.
• Review operations:
How efficient is a company's operations? Where is it effective, and
where is there room for improvement? Consider customer service
as well as production and supply chain management.
• Consider human resources:
The talent a company can attract as employees and leadership can
make an important difference in the success of the business.
Evaluating company culture, hiring, and staffing practices can
help.
Components of Competitive Advantage
Analysis
• Value proposition:
A company must clearly identify the features or services that make
it attractive to customers. It must offer real value in order to
generate interest.
• Target market:
A company must establish its target market to further engrain best
practices that will maintain competitiveness.
• Competitors:
A company must define competitors in the marketplace, and
research the value they offer; this includes both traditional as well
as non-traditional, emerging competition
Marketing Research
for the New Venture )
• Gathering information from primary sources
• Data collection procedures: Observation, networking, interviewing, focus
groups, and experimentation.
• Data collection instrument: Questionnaire.

• Analyzing and interpreting the results

• Can be hand-tabulated or entered on a computer.
• Results should be evaluated and interpreted in response to the research
objectives
• Data can be cross-tabulated in order to provide more focused results.
The Marketing System

External
Environment
Economy
Culture
Technology
Demand
Legal considerations
Raw materials
Competition
Market- Marketing Purchase
Entrepreneur
planning strategies decisions
decisions directed to of
customers customers
Internal
environment
Financial resources
Suppliers
Goals and objectives
Management team
The Marketing Mix

• Combination of product, price, promotion, and distribution and

other marketing activities needed to meet marketing objectives.

Marketing Mix Variable Critical Decisions

Quality of components or materials, style, features, options,
Product brand name, packaging, sizes, service availability, and
warranties.
Quality image, list price, quantity, discounts, allowances for
Price quick payment, credit terms, and payment period.

Use of wholesalers and/or retailers, type of wholesalers or

Channels of distribution retailers, how many, length of channel, geographic coverage,
inventory, and transportation.

Media alternatives, message, media budget, role of personal

Promotion selling, sales promotion (displays, coupons, etc.), and media
interest in publicity.
Steps in Preparing the Marketing Plan

• Define the business situation.

• Define the target market: opportunities and threats.
• Consider strengths and weaknesses.
• Establish goals and objectives.
• Define marketing strategy and action programs.
Defining the Target Market

• Target market: specific group of potential customers toward which

venture aims its marketing plan.
• Knowledge of this provides a basis for determining the
appropriate marketing action strategy.

• Market segmentation: process of dividing a market into definable

and measurable groups for purposes of targeting marketing
strategy.
• Allows the entrepreneur to more effectively respond to the
needs of more homogeneous consumers.
Process of Segmenting and Targeting (1 of 2)
• Decide on general market or industry to pursue.
• Divide market into smaller groups based on:
• Characteristics of the customer
• Geographic
• Demographic
• Psychographic
• Buying situation
• Desired benefits (e.g., product features)
• Usage (e.g., rate of use)
• Buying conditions
• Awareness of buying intention
Process of Segmenting and Targeting (2 of 2)
• Select segment or segments to target.

• Develop a marketing plan integrating product,

price, distribution, and promotion.
Establishing Goals and Objectives

• Establish realistic and specific goals and objectives.

• Marketing goals and objectives respond to the question:
“Where do we want to go?”.
• Not all goals are quantifiable.
• Number of goals or objectives can be limited to between six and
eight.
• Goals should represent key areas to ensure marketing success.
Defining Marketing Strategy and Action
Programs (1 of 2)
• Specific activities outlined to meet the venture’s business plan goals and
objectives.

• Product or service
• May consider more than the physical characteristics.
• Packaging, brand name, price, warranty, image, service, delivery time, features, style,
and even the Web site.
• Pricing
• Costs
• Margins or markups
• Competition
Defining Marketing Strategy and Action
Programs (2 of 2)
• Distribution
• Provides utility to the consumer.
• Must also be consistent with other marketing mix variables.

• Promotion
• Entrepreneur needs to inform potential consumers about the product’s availability or
to educate the consumer
• Methods include: print, radio, or television, Internet, direct mail, trade magazines, or
newspapers.
Marketing Strategy: Consumer versus Business-
to-Business Markets
• Business-to-business markets
• Selling of products or services to another business.
• Usually aims at selling a large volume in one transaction.
• Involves a more direct channel of distribution
• Use trade magazine advertising, direct sales, and trade shows.
• Consumer markets
• Involve sales to households for personal consumption.
• Marketing mix for both is the same.
• Techniques and strategies within the mix of these factors vary significantly.
Monitoring the Progress of
Marketing Actions (1 of 2)
• Involves tracking specific results of the marketing effort.
• Depends on specific goals and objectives outlined in the marketing plan.

• Entrepreneur should be prepared for contingencies.

• Minor adjustments in the plan occur normally.
• Significant changes indicate a poorly prepared plan.
Monitoring the Progress of
Marketing Actions (2 of 2)
• Weaknesses in market planning due to:

• Poor analysis of the market and competitive strategy.

• Unrealistic goals and objectives.
• Poor implementation of the outlined plan actions.
• Unforeseen hazards like weather or war.
.

The End