You probably do not have a competitive advantage, What should you do so you do have it?

For-profit companies are endlessly chasing the holy grail – competitiveness. Reaching a situation in which they are able to tilt customers preference to their products or services in comparison to those offered by their competitors. These efforts, sometimes are successful, however – seldomly. Why do I claim it is seldom?

How would one evaluate if a company has, or does not have a competitive advantage. Have you ever wondered how is it that it is possible to define a PE ratio for a whole industry? The key enabler is the fact, that almost all players in a given industry have almost identical business performance, when evaluating long enough horizon of time. In what parameters are all the same? Clearly not in their performance itself, rather in the behavior of their performance. If you evaluate the rate of top-line growth as well as the rate of profitability of competitors in a given industry for a long enough time (10 years or more) you will immediately notice that they all behave the same. When the market grows they all grow, and at the same rate and when it falls they all fall, and in the same rate. Deming said – “Without data, you are just one more person with opinion“. In their book – “The machine that changed the world” James P. Womack, Daniel T. Jones, and Daniel Roos, are presenting this graph:

In this graph it is very visible, how does it look when a company does have a competitive advantage.

Of course, when you dive into a much smaller time frame, you will find differences. Still, valuation is a key measure of performance and if you can be evaluated with the same PE as everyone else in your industry, if your performance over time is similar to your competitors in terms of rate of growth and rate of profitability, it is a clear indicator you do not have a competitive advantage.

Why is it that most companies are not successful in creating a lasting competitive advantage? One possible explanation is – it is not possible. If you evaluate for example the car industry you will immediately see this is not true. The Japanese car producers were able to create and sustain an impressive competitive advantage for more than 60 years. And, possible they still have it?

Another answer might be – Our efforts for improving our competitiveness are not directed to the area that can realize the desired outcome. Again, if you evaluate the Japanese car industry, they have reached the state of market leaders by focusing on product flow. It is interesting isn’t it? Not product innovation, not comfort, not design, not price. Taichi Ohno in his book “The Toyota Production System” writes – “All we are doing is looking at the time that passes from the minute a customer places an order to the time we collect the money for supplying it and working to continuously reduce it”.

Companies keep getting the same results as others in their industry because they keep doing the same things. If you do the same things everyone else is doing, how can you expect to get different results?

You cannot break out from the industry norm level of performance only if you are a monopoly, or if you are doing what everyone else is doing. So, if you are not a monopoly and you want to become really competitive, you must start doing something meaningfully different than your competitors. They all do – new product development, cost cutting, service improvement, IT replacement, innovation etc. If you do the same, well you know, you will (at best) get the same. To be different, you need to identify a key measure that is of meaningful importance to your customers, and make yourself the best in this performance area (without becoming worse than competition in others) and you will be able to grow at the pace of your choice and experience profitability that is far better than your competitors. Than you know – you have a competitive advantage. And then you cannot be valuated using the standard PE ratio, your PE ratio will be substantially higher than the standard one.

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