In business, it is critical to build a sustainable competitive advantage. Many new businesses develop competitive advantages that aren’t sustainable. This limits their future growth, unless they are able to continuously out-innovate the competition. To create a sustainable business strategy, you must erect barriers for the competitors. These range from barriers to entry (for an unsaturated market) to barriers against existing players.
One of the most common business strategies is to create ways to lock in strategic partners and/or customers. For instance, if the company is a manufacturer, it can try to create long-term contracts with the industry’s major buyers. These long term contracts not only provide financial security for the company itself, but they also ensure that competing manufacturers need to find new customers (i.e. grow the market) instead of fighting for the existing customers. Another example would be offering programs that increase customers’ switching costs. Great examples of these business strategies are hotel companies and airlines. These travel companies tend to use points or mileage systems and tiered membership (e.g. Gold, Platinum member status) systems to increase customer loyalty. As a customer earns more and more points with a particular provider, it becomes less inclined to use the services of other similar service providers.
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There are some industries with interesting barriers that naturally put them in a very desirable competitive situation. These can be regulatory barriers placed by the government or environmental barriers. For instance, most telecommunication and energy companies are local monopolies. Ever wonder why you can only by utilities from a single company? This is due to regulatory restrictions that only allow a certain company to serve a specific area in the United States.
Other companies may be geographically or environmentally positioned to allow them a lower cost structure than competitors. This deters other companies from competing with them, because the competitors know they are at a disadvantage. An example of this could be mineral mining companies that own a controlling number of mines for a specific mineral.
When a business doesn’t have a sustainable competitive advantage, its business strategy must be altered so that it obtains a sustainable advantage. If a business never successfully develops a sustainable advantage, it is only be a matter of time before the company gets squeezed out of the market. A business can leverage its existing intellectual property and core competencies to pivot off its existing business into a neighboring one — where it obtains a competitive advantage.
Tags: business strategies, business strategy, market analysis, marketing strategy
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