7. Core Competencies and Competitive Advantage

Core Competency

     Your core competencies are the skills or other advantages your business has that other businesses don’t—or, at least, not to the same degree or in the same combination that you have them. Because you are better at those things than other businesses are, you have those advantages over other businesses.

     For example, two core competencies of FedEx® is that FedEx® can deliver packages faster and more reliably than anyone else. To give another example, the core competency of the hardware chain HQ is that it sells almost any hardware item you may need. You can make all your purchases in one place.

Competitive Advantage

     Competitive advantage is as the words suggest. You’re competing against other businesses, and you have an advantage over them.

     Your competitive advantage always comes from your core competencies. Whether your business is large or small, you must always protect your core competency.

     Many years ago, a young man watched a potter at work. As the potter removed her day’s work from the kiln (a structure or container where clay is heated to hardness), she separated the high-quality pottery from the ones with imperfections.

     The potter told the young man that she would smash the imperfect pottery. Surprised, the young man asked, “Why don’t you just sell them at a lower price?”

     The potter replied, “Because I want my name associated with high-quality pottery.”

     This potter had already decided that high quality—not low price—was her core competency and the source of her competitive advantage. Lower-quality pottery—even at a lower price—would have weakened her competitive advantage.

Discussion:

     Almost everyone knows that China’s core competencies—leading to competitive advantage—are cheap labor and an undervalued yuan.

     During the mid-1990’s, China’s labor force worked for an average of 30% less than the labor forces of other manufacturing companies. That led to a competitive advantage and a booming economy.

     As of 2009, their labor force was only 6% less than that of other countries, including India.

     Question: How safe from Indian competition is China’s competitive advantage?

     Answer: It’s safe for now but possibly not for long.

     Reason: As you will learn in Lesson 11 a good reputation can be a core competency leading to competitive advantage. China has a worldwide reputation for shoddy, unsafe, or counterfeit merchandise. India’s products, which have been subject to numerous recalls, have not yet gained a bad reputation. Because India doesn’t have as large a manufacturing base as China, fewer Indian products have been recalled.

     China’s cheaper labor force makes their products less than 3% cheaper than India’s. China’s reputation for poor quality, unsafe foods, and counterfeit goods may soon tip the scales in favor of India.

     News Item: At the height of the lead-tainted toys scandals and melamine scandals in 2008-2009, a Chinese official promised that “99% of all Chinese products are safe.”

     Question: If it’s true that 99% of all Chinese products are safe, how safe are we in using Chinese products?

     Answer: Not very safe. It means that, if we use Chinese products on more than 50 occasions, we’ll probably be harmed.

     Remember Social Exchange Theory:

1. Cost

2. Trust

3. Reward

     It’s the most important rule of marketing. We’ll further discuss gaining and keeping your customers’ trust in lessons 11 and 15.

Core Competencies and Boundary Conditions:

     Boundary conditions are conditions that must be met in order for you to successfully reach your goal. In this case, the goal is to establish your core competencies and turn them into competitive advantage.

     Suppose there are seven boundary conditions for this task. Suppose you can successfully meet six of these conditions but will fail to meet just one.  In that case, you must change your goal or abandon your goal altogether.

An Example of Boundary Conditions:

Suppose you wanted to market an all-natural, environmentally friendly health drink. You market only the drink—not the container. Your boundary conditions may be as follows:

1. Customers must realize that it’s healthy.

2. Customers must realize that it’s all natural.

3. It must be delicious.

4. Customers must understand the environmental need to limit the use of plastic bottles.

5. Customers must approve of the requirement that they provide their own containers.

6. It must be marketed where the target customer frequently goes.

7. The product must comply with all laws and regulations.

     If you label the drink as healthy, you’re legally required to list all of its known nutrients and how much of each nutrient is in each bottle. If you were marketing a drink with artificial nutrients—for example, putting ascorbic acid in it and calling it vitamin C—that would be no problem. You would know exactly how much ascorbic acid you had put in it.

     Nature, however, doesn’t work that way. Two oranges from the same tree don’t contain the same amount of vitamin C. By law, you’d have to list the minimum amount of vitamin C that your product would have. That would make your drink look less healthy than it really is. Then you would not have met the boundary condition of marketing an all-natural health drink that customers know is healthy.

     Question: How should you handle this problem?

     Possible Solution: Most people assume that, if a food product is all-natural, it must be healthier than processed foods. You can take advantage of that fact.

     In every possible way, your advertisements should stress that the drink is all natural. Illustrations in your ads should show healthy-looking people involved in healthy activities associated with the drink.

     In short, “Don’t TELL them that the drink is healthy for them; SHOW them that the drink is healthy for them.”  That’s one of the most basic rules of communication anyway.

     So, how does this become a core competency?

     If your health drink is the first such business to do away with environmentally unfriendly containers, your business will—for awhile, anyway—be the only business drawing customers who are seriously about avoiding environmental harm. Your customers will see your business as having the same social concerns that they have.

     These health-conscious, environmentally aware customers will be your niche market. Your niche market is the group of customers whose needs you’re satisfying when no one else is satisfying those needs—at least not in the same way. Because you’re—for the time being—the only one satisfying that set of customers, your ability to gain their loyalty and satisfy them is your competitive advantage.

     As your niche market grows, it will become known as your segment of the mass market.

The term mass market is easy to understand. When a niche market becomes very popular among a wider range of people, it’s no longer called a niche market. Instead, it’s simply part of the mass market; your target customers are your market segment. Your share as a percentage of the market is your market share.

Example #1:

     When the Duryea brothers invented the automobile during the 1880’s, it was called a “rich man’s toy.” Buyers of cars were a niche market consisting only of rich men who were willing to pay high prices for the amusement of driving an automobile.

     When Henry Ford began mass producing automobiles just over a century ago, cars became much less expensive. Even the middle class could own a car. Thus, car buyers—once a niche market—had become part of the mass market.

Example #2:

     During the late 1990’s two college students set up a social web site for friends at their college. A few people at one college were their niche market.

     Today, their web site is a worldwide phenomenon—definitely a part of the mass market. The name of their web site is Facebook.

     Be warned, though, that other businesses will try to copy your business model and draw your customers away from you. As part of your plan to capture a market segment and turn it to competitive advantage, you must do two other things: First, you must protect your competitive advantage by erecting barriers to entry. A barrier to entry is something that prevents others from manufacturing and marketing a product as well as you can. That’s how you turn a core competency into a competitive advantage.

Examples:

     Carrefour is capable of buying products in such large amounts that they can sell them much cheaper than a local mom-and-pop store. Thus, mom and pop must depend on the loyalty of long-time customers who know they’ll get friendly, personal service.

     Thus, Carrefour has erected a barrier—low cost—that prevents mom and pop from directly competing with them.

     Question: What barrier to entry have the mom and pop stores erected that would prevent you from competing with them?

     Answer: They have the reputation for friendly, personal, and capable service. This has gained them a degree of loyalty with which new businesses can’t compete.

     In fact, a lot of people prefer to shop at mom and pop stores when there’s only a small price difference between the small store and a hypermarket.

     Let us warn you once again that, if you design a successful business model, other businesses will try to copy your model and draw your customers away from you.

     Each year, Fortune magazine publishes the names of the 500 most successful businesses in America. It’s called the Fortune 500.

     Among the businesses on the Fortune 500 list in 1950, only half of them are still in business.

Success is often the mother of failure.

     To stay competitive, your business must always compete with itself and always find better ways of doing things. Otherwise, you will lose customers to those who innovate.