Understanding Your Competitive Advantage
Written by Doug and Polly White
Every business owner must be able to answer one very basic question, “Why should a prospective customer buy my product or service rather than a competitor’s?” If the owner cannot answer this question, he or she should probably cut his or her losses and seek alternative employment. Fortunately, this isn’t a complex question. At its core, there are only two possible answers; either the product or service is being offered at a lower price or the offering must be differentiated from the competition’s.
Companies such as Walmart have been extremely successful pursuing a low cost strategy. Walmart uses its massive volume to negotiate purchase prices that are well below what smaller competitors pay. Consequently, the retail giant can make very good margins selling brand name products at lower prices than competitors can offer. As a practical matter, small businesses will generally not have the volumes to pursue this type of strategy.
Very small businesses can sometimes offer lower prices than their larger competitors because they have much lower overhead. For example, consider a residential cleaning service run by two friends out of their homes. The two friends are the only employees. There is little to no overhead. Such an operation can offer its services at prices below those that a company such as Merry Maids would have to charge, because Merry Maids does have significant overhead. However, this strategy is inherently limiting. If the two friends were to attempt to significantly grow their enterprise, they would discover that they would need to add overhead similar to their larger competitors.
Most small businesses that want to grow beyond a few employees will find that a low cost strategy is difficult to pursue successfully. Therefore, such enterprises are left with the need to differentiate their products or services―give their customers a reason to buy that isn’t based on price.
It’s great to create a differentiated product/service package. Unfortunately, that, by itself, is not enough. In addition, the differentiated product/service package must be more desirable to a specific segment of the market than any alternative. Also, the size of this segment must be large enough to be attractive. For example, you could market a skunk-flavored Popsicle. This would be a differentiated product; nothing remotely resembling such an offering is available in your local supermarket. However, it is highly unlikely that this product would be attractive to a large enough segment of the market to make it an economically viable offering. This is a silly example, but it makes the point that differentiation alone isn’t sufficient. You must target the differentiated product/service package to a sufficiently large segment of the market, which values the unique characteristics of the offering.
So, what makes a market segmentation that will allow companies to target their products and services profitably to customers who will pay a premium for them? There are two criteria for a segmentation to deliver significant value. First, members of the segment must make the buying decision like each other and differently from those not in the segment. Second, members of the segment must be externally identifiable or they must be willing to self-identify.
The key to effectively segmenting a market is to understand how customers make the buying decision. What characteristics of the product/service package are most important to each group of customers? For example, automobile manufacturers must target specific segments. Some people are looking for basic transportation with a low cost of operation (i.e., good gas mileage and low maintenance costs). Other car buyers are interested in a sporty looking, high performance automobile. Still others are interested in luxury and prestige. More recently, a segment has emerged that is primarily interested in a car that is environmentally friendly. One product cannot possibly satisfy all segments. Product design and advertising are specifically intended to position the manufacturer’s offerings closer to the wants and needs of a given segment than those of the competition.
Assuming that the product/service package can be targeted to uniquely meet the needs of a sufficiently sized group, the customers in each segment must be externally identifiable. Marketers need to know how to reach the specific segments. Should the company advertise in Sports Illustrated or Cosmopolitan? Alternatively, the members of a particular segment may be self-identifying. For example, if a man intends to buy a suit, those who walk into Sears, The Men’s Warehouse, JoS., a bank or Brooks Brothers are fairly clearly members of different market segments.
To be successful, every business owner must be able to explain why a prospective customer would buy his or her product or service rather than a competitor’s. The answer will be based either on lower price or a differentiated product or service. If the answer is based on differentiation, the product or service will have to be the most attractive alternative for a segment of the market that is large enough to sustain the business. Although this may sound straight forward, our experience is that sorting this out can be complex and the business owner may need to reach out for expert advice. But, the rewards are worth the effort.
About the Authors: Doug and Polly White are Principals at Whitestone Partners; a management-consulting firm that helps small businesses build the infrastructure they need to grow profitably. They are also coauthors of the groundbreaking new book, Let Go to GROW; why some businesses thrive and others fail to reach their potential (Palari Publishing 2011). The book explains how entrepreneurs can avoid the most common pitfalls as their businesses grow and is available at www.WhitestonePartnersInc.com
Six issues at the top of tax and finance leaders’ agenda
New Deloitte research reveals that tax leaders are under increasing pressure to add strategic value as companies accelerate business model transformation, from undergoing digital transformations to rethinking their supply chains or investing in green initiatives.
According to Phil Mills, Deloitte Global Tax & Legal Leader, to “truly deliver value to the business, the tax function needs to rethink its resourcing model and transform its technology infrastructure to create capacity and control costs”.
And the good news, according to Mills, is that tax and business leaders have more options at their disposal to achieve this.
Reflecting the insights of global tax and finance executives at global companies, Deloitte’s Tax Operations in Focus study reveals the six issues at the top of tax and finance leaders’ agenda.
Trend 1: Businesses seek more strategic counsel from tax
Companies are being pushed to develop new digital products and distribution channels and accelerate sustainable transformation and this is taking them into uncharted tax territory. Tax leaders say their teams must have the resources and skills to give deeper advisory support on digital business models (65%), supply chain restructuring (49%) and sustainability (48%) over the next two years. This means redrawing the boundaries of what tax professionals focus on, and accelerating adoption of advanced technologies and lower-cost resourcing models to meet compliance requirements and free up time.
According to Joanne Walker, Group Tax Director, BT Group PLC, "There’s still a heavy compliance load today, but the vision for the future would be that much of that falls away, and tax people become subject matter experts who help program the machine, ensure quality control, and redirect their time to advisory activity.”
Trend 2: Tipping point for resourcing models
Business partnering demands in the tax department are on the rise, but 93% of tax leaders say their department’s budget is remaining flat or falling. To ensure that the tax function can redefine itself as a strategic function at the pace that is required, leaders are choosing to move increasing amounts of compliance and reporting to a combination of shared service centers, finance departments, and outsourcing providers that have invested in best-in-class technology.
Trend 3: Digital tax administration is moving faster than expected
in addition to the rising focus of the corporate tax department partnering with their business counterparts, transformative changes to the way companies share tax information with revenue authorities is also creating an imperative to modernize operations at a faster pace. Nine in 10 (92%) respondents say that shifting revenue authority demands on digital tax administration will have a moderate or high impact on tax operations and resources over the next five years—and several heads of tax said the trend is moving faster than expected.
"It’s really stepped up in the last couple of years," says Anna Elphick, VP Tax, Unilever. "Tax authorities don't just want a faster turnaround for compliance but access into a company’s systems. It's not unreasonable to think that in a much shorter time than we expect, compliance will be about companies reviewing a return that's been drafted by the tax authorities."
Trend 4: Data simplification and lower-cost resourcing are top priorities
Tax leaders said that simplifying data management (53%) and moving to lower-cost resourcing models (51%) must be prioritized if tax is to become more proactive at delivering strategic insights to the business. Many tax teams are ensuring that they have a seat at the table as ERP systems are overhauled, which is paying dividends: 56% of those that have introduced NextGen ERP systems are now highly effective at supporting the business with scenario-modeling insights. Only 35% of those with moderate to low use of NextGen ERP systems said the same.
At Stryker, “we automated the source P&L process for transfer pricing which took a huge burden off of the divisions," says David Furgason, Vice President Tax. "Then we created a transfer price database to deposit and retrieve data so we have limited impact on the divisions. We are moving to a single ERP platform which will help us make take the next step with robotics.”
Trend 5: Skillsets are shifting
Embedding a new data infrastructure and redesigning processes are critical for the future tax vision. Tax leaders are aligned — data skills (45%) and technology process experience (43%) are ‘must have’ skills in a tax department of the future, but more traditional tax specialist knowledge also remains key (40%). The trick to success will be in tax leaders facilitating the way these professionals, with their different backgrounds, can work together collectively to unlock lasting value.
Take Infineon Technologies, which formed a VAT technology and governance group "that has the right knowledge about how to change the system to ensure it generates the right reports", according to Matthias Schubert, Global Head of Tax. "Involving them early was key as we took a greenfield approach, so we could think about what the optimal processes would look like and how more intelligent systems could make an impact
Trend 6: 2020 brought productivity improvements
Improved productivity (50%) and accelerating shifts to remote working (48%) were cited as the biggest operational benefits to emerge from COVID-19-driven disruption. But, as 78% of leaders now plan to embed either hybrid or fully remote models in the tax function long term, 34% say maintaining productivity benefits is a top concern. And, as leaders think about building their talent pipeline and strengthening advisory skill sets, 47% say they must prioritize new approaches to talent recognition and career development over the next two years, while 36% say new processes for involving tax in business strategy decisions must be established.