Competitive Advantage

This is a brief supplemental analysis for one of my articles titled The Market for “Lemons” from my series on Business Lessons in Economics. Its purpose is to introduce a brief marketing synopsis to the problems resulting from the difficulty of distinguishing good quality products and services from bad, which is inherent in the business world, or perhaps more significantly, the failure of so many in business to recognise the costs.

In the first instance, competitive advantage is making sure your product or service is placed where it cannot be undermined and the Business Dictionary definition is:-

A superiority gained by an organization when it can provide the same value as its competitors but at a lower price [Comparative advantage], or can charge higher prices by providing greater value through differentiation [Differential advantage]. Competitive advantage results from matching core competencies to the opportunities. More…

A lot of people ask me whether there is a simple model for competitive advantage and my response is that, although it is often the greatest weakness or failure of many businesses, the answer is competent research and effective marketing. One of my first questions to any business is “What is your Marketing budget?” or “What percentage of your revenues do you spend on Marketing?” The ability to answer, is the answer to my question.

If you can provide the same product as your competitors at a lower price (Comparative advantage), then well done, but be warned because in most cases, it is only a matter of time before your advantage and margins are eroded. If you want sustainability and optimum profitability, then you are looking for Differential advantage, which is quite simple really.

Uncomplicated marketing

First you must understand the market place and your product or service’s place in that market place. Markets change constantly and there is no substitute for regular market research. “Who is going to do that?” I hear you ask. Well you will be surprised by how much you already know, you just need to open your mind and structure your analysis. When you have done your research, you are at liberty to use a bit of poetic licence but the golden rule is, do not describe your Mondeo as a Rolls Royce, they always find out the truth. It is imperative that you communicate ALL of the positive attributes of your product. In a competitive world, you might want to enhance those attributes with things like special warranties, which you can sometimes insure against, or periodic promotional activity. The list of options is almost endless. Engagement above and beyond the product or service is the key to success. Find cost effective communication channels and I do not mean traditional adverts. Never underestimate the value of PR. The list of enhancing attributes is only constrained by your imagination; your time, or the depth of your pockets. The Economist George Akerlof calls these activities ‘Counteracting Institutions’. I call them common sense and Marketing and they all compound to create that most powerful of business tools, The Brand, which even an Economist like Akerlof understood.

The Product

Before we say a few words about The Brand, let us just think about a product. Imagine a simple white coffee mug for sale on eBay. It looks quite nice, functional and you can buy it for £3.99. Now imagine another simple white coffee mug on Amazon. It is described as elegant with a special glaze that gives off a slight iridescence. The handle is ergonomically shaped and the lip is slightly curved to enhance the ease of use and experience. You can buy it for £5.99. Some people will realise that they are the same coffee mug and yet many more will be purchased from Amazon. This does happen. It is called commercial optimisation using marketing.

The Brand

When most people think of a brand they think of Coca-Cola or Kellogg’s or BP. Although there are some very sophisticated definitions of what a brand is, they basically represent products that people identify and feel comfortable with. Many years ago, I lived in a medium sized town and there was this tiny shop by the Fire Station called Khan’s. It was the only place open late and on a Sunday morning and it seemed you could buy anything there. It was rammed full with products and people and you did not know the price till you paid for it. Everyone seemed to know the name Khan’s. In a sense, it had all the prerequisites to be a brand. Brands do not have to be big or international, they just need to have a successful identity. This varies with the nature of the product but will only result from understanding the market, placing the product or service correctly and communicating effectively.

See Branding – https://www.entrepreneur.com/encyclopedia/branding

The content of this supplemental analysis is not definitive or exhaustive. That is your Marketing teams job.

The Summary

In the paper, The Market for “Lemons”, the Economist George Akerlof, demonstrates mathematically the net costs of asymmetrical information which is now universally acclaimed and earnt him a Nobel prize. Although he uses some specific examples such as used cars; employment; insurance and credit markets, the broader principles of the negative effects of information failure can be applied across almost any market. Although his paper was produced to demonstrate an economic principle, or perhaps to debunk some traditional economic principles, it raises a number of important issues relating to commerce, such as the difficulty of distinguishing good quality products and services from bad, which is inherent in the business world, or perhaps more significantly, the failure of so many in business to recognise the costs.

So the lesson is quite simple, in order to maximise revenues and returns from every product or service, they must not be undermined in any way. Are you happy that you are successfully communicating the true value of all of your products or services?

If you would like to get your head around Akerlof’s The Market for “Lemons” a bit more try this 2-minute visual representation on YouTube, Information gaps – asymmetry

Or for an excellent 2 page summary and interpretation try the Economist article, Secrets and Agents.

Or if you are really interested in the broader concepts you can download a copy of Akerlof’s paper Unless you are an economist, skip over the 2 pages of math. It is not a hard read for the average business person and can be very insightful.

Download a copy of this paper here or pdf copy here.

Or, download a full copy including The Market for Lemons original text here or pdf copy here

William David @business-economics

March 2017