Understanding competitive advantage

What's the No. 1 attribute Warren Buffet, arguably one of the most successful investors in the world, looks for in a company? "Sustainable competitive advantage," he told an interviewer. If one of the most successful businessmen of today puts this at the top of his list, you should too.

Not only is competitive advantage, as a term, widely overused, it is also widely misunderstood. You are not alone if you have ever wondered what a competitive advantage really is and what you do with it. So what is it exactly? And if Buffet examined your company, would he find what he's looking for? Let's find out.

Here's the 30-second challenge to determine if you know your competitive advantage. Ready? Go. I meet you at one of the numerous local networking events and you introduce yourself "Hi, I'm Bob Jones with ABC Company." "Hi Bob. Nice to meet you. Tell me a little about your company. What is your company best at?"

... 29, 30. Time's up! Could you answer my question in less than 30 seconds, succinctly with clarity? If yes, skip this column. If not, don't worry, you are in good company. The majority of businesses are also trying to figure out what they are best at. Honestly this question is hard to answer. You have to narrow your focus more than you are comfortable with. By the end of this column, you will be able to share your competitive advantage with confidence.

Often, starting with what something is not is the easiest approach. Your competitive advantage is not a list of your strengths. Not to downplay strengths as these are important too. But if your competitive advantage(s) list is only comprised of strengths it is not a "competitive" advantage. Key word competitive. If you don't have a competitive advantage comprised of more than strengths, you don't compete. You exist.

The management team from a mid-sized financial services group reported that its competitive advantages were:

* Good reputation in the community

* Skilled staff

* Outstanding team and well-respected leader

* Knowledgeable

* Strong client list and loyalty

*Flexible and responsive

Blah, blah, blah. Right? You've heard all this before and so have I. Couldn't you say this about most any professional service firm? This is what a competitive advantage is not. This is a list of strengths.

A competitive advantage is something you do that is unique. The key here is to compete, you have to have a unique advantage. Looking at the list from the financial services firm above, you can see that this is not a list of unique stuff. Basically anyone in business today needs to achieve that level of competency just to be in the game.

Think of your competitive advantage as your organization's DNA - a collection of genes or assets that makes you unique. When you are true to your DNA, you are healthy, fit, and successful. When you compromise your DNA, you feel uncomfortable, slow and are exerting more effort than you should.

Your competitive advantage is what you, your company or your department does better than anyone else. The sustainable part refers to your ability to continue to do those things over a long period of time. And yes, you can have more than one advantage and you can develop advantages as well. You don't have to possess them all now.

The easiest way to find you competitive advantage is to answer these questions:

1. What is my company best at in my market?

2. Why?

By answering these questions, the financial services firm discovered the following are really its competitive advantages:

* Ranked in top 10 percent of money managers who beat S&P nationally

* Fastest-growing American Funds money manager in '00, '01, '02

* Only firm ever featured by American Funds in its advisory newsletter

Wow. Doesn't that say a lot more than a good reputation and a skilled staff? This is the transition you need to make when explaining the competitive advantage of your organization or department. Here are a few more examples from businesspeople who answered the question "What is my company best at?"

* Sandy, an interior designer, determined she was best at increasing developers' sales ratio by 35 percent and was the only design team chosen by the top 10 luxury developers in the state.

* A clothing manufacturer named Joe said he was the best at wearable clothing because "Our clothes fly off the racks."

*The emergency service division of a county in Washington is the best at providing disaster management, response and recovery efforts for all agencies within its service territory because of its skilled people and emergency response equipment.

Let's go back to the fictitious networking event from the beginning. I said you needed to be able to answer the question "What is your company best at" within 30 seconds. It's time to try it again using the formula below.

* Honda is best at developing precision engines and power trains

because its products are the leaders in reliability and technological advancement

* Google is best at optimizing searches for any type of information because it continues to innovate and push technology past what was thought possible

Now that you have figured it out, what do you do with it? When you really have it nailed down, it will help you and your staff know:

*Which opportunities to pursue and which to pass by

* Where to allocate resources and where to cut back

*How to do what you already do well, better

* Know the difference between an opportunity versus a distraction

* When to outsource (to another department or externally) and when to keep it in house

You can run your business without a clear understanding of your competitive advantage, but it will be for naught. Why? Because mission, vision, goals, and objectives tend to change and shift over time. Your competitive advantages, when you have identified them, will endure and grow stronger. You may choose to use them in different ways, which is why the other elements of your plan tend to morph. But what makes your company unique will stay constant.

The leading organizations in this world have a razor sharp understanding of their competitive advantage. Everything they do builds and nurtures their DNA. You don't have to be a Fortune 100 company to be that effective and that good. Running your business on the basis of your competitive advantages is the most important thing you can do as a leader of your organization or department. (It's especially important if Buffet stops by.)

Erica Olsen is a principal of M3 Planning, a strategic planning firm in Reno that also runs MyStrategicPlan.com. Contact her at Erica@m3planning.com.