How to Build Competitive Advantage That Actually Lasts | 007

Charles (: 00:22

everyone to the unsexy entrepreneurship podcast. today we've got a really fun.

topic, we're going to talk about understanding competitive forces and how that plays into starting a business and running your business or even acquiring one. So, Seth, why don't you take us at the high level academic term? What do we mean by understanding competitive forces?

Seth Jenson (: 00:40

Yeah, so this is the realm of strategy, right? Like every business person considers themselves the Napoleon of business, like what would it be, a strategician? I should know that, this is my field. Strategizer, a practicer of strategy, practitioner. But really, business has this important strategic component and competition is the name of the game.

Charles (: 00:52

You

Seth Jenson (: 01:04

Right? Now, from the very offset, I don't want anybody to think that business is completely zero sum, you know, it's not like if you win, everyone else loses. But what is true is that in any business, there are substitutes to what you're doing. And that means there's other options for your customers to go to if they don't love what you're doing, right? So you have to beat the competition to continue to earn your customers. So

You got to hold both of those things at once. You know, it's not necessarily zero sum, but there are people biting at your heels all the time, trying to steal your customers from you or drive down your prices. And the way the academic literature talks about this is in terms of this fancy term, which you only hear inside of academic journals, but they talk about strategic factor markets. And basically strategic factor markets are kind of what it sounds like. There's these factors that can give you a strategic advantage, but those are

in the market, means there's lots of people that can compete for those. And so again, the easy way to think about strategic factor markets is people are always trying to steal your advantage. Whatever is making you successful, people are trying to replicate it and do it for cheaper, faster, better. And so you've got to figure out how to get off of that kind of hamster wheel, so to speak, of always trying to stay ahead.

Charles (: 02:19

perspective, is this the same thing as differentiation? So if I was gonna differentiate myself against a competitor or another company, that's really what I'm marketing, that's what I'm talking about, saying this is I'm better than correct?

Seth Jenson (: 02:34

Exactly.

Yeah, so the question is how do you stay differentiated? Because you might have a really cool design for your apparel business and this great aesthetic to this kind of, you know, you're the next Burberry or whatever and people are like, ooh, like what a beautiful sweater. I want to buy Charles's sweaters. But next thing you know, there's 10 shops down the road that all have that same design that sure you created, but it's very hard to, you know,

legally protect the design of a sweater. And so all of a sudden, there's cheaper sweaters that look just like yours down the road. So yes, it's all about differentiation, but it's how do you stay differentiated? How do you stay somewhere that people will choose instead of the alternatives? So I like to, like, I think this is easiest to wrap our heads around if we really go deep in an example, right? So one that I like to share with my students a lot is like the most magical donut shop ever. And

You're like, I, my live and breathe donuts. Like this is going to be the Willy Wonka donut shop of the world. And people walk in and they just get our enveloped in these beautiful, you know, sense of donuts and no one's ever seen donuts like yours. The recipe is so cool. And you've just got a line around the block, wrapping around three times just to go inside your donut shop. but what's going to happen is as the time goes by, like I say, someone down the street,

they open up a donut shop. Maybe your donuts are us and now their donuts are we. It looks very similar to yours. They haven't nailed your recipe, but it's close enough. They're charging a little bit less than you do. And now your line is cut in half and you're having to split business there. And then you get a call from your landlord.

Charles (: 04:09

So,

how did this, I'm jumping in cause this is actually a really interesting example. Cause I think of Voodoo donuts, which we've all heard of. ⁓ they are differentiated because they're very unique in their marketing. them before. I'm probably going to make some enemies, but I didn't, I couldn't really tell that big of a difference between their donuts and they not been copied because.

Seth Jenson (: 04:18

Uh-huh.

huh.

Charles (: 04:33

they're just funny names, right? For the donuts and, Voodoo and this. type marketing ploy, but it seems like it'd be pretty easy to market that, but it really hasn't. around and see every donut shop like that.

Seth Jenson (: 04:41

Yeah.

So I, in my local downtown, there is one, not exactly like, you know, voodoo donuts, it's not necessarily a coal, but it's those donuts expanded, like it's, you know, the donuts to the max type, type recipes or whatever, right? Sometimes you've got donuts and then that's not even the majority of the dessert. It's like piles of things. So in some sense, you know, is there a first mover advantage if you're doing the

Charles (: 05:05

Hahaha

Seth Jenson (: 05:09

the thing that's unique and then you build brand clout around that. Does that stick? Yes. Like brands are one way that people try to beat markets. It's, I've got a relationship with a customer because when they were introduced to this type of product, it was through me and now there's some built-in loyalty, right? So people pay brand agencies a of money for exactly that reason. They're trying to have a relationship through brand that people are loyal, even if their products, you know, aren't special ⁓ or

Charles (: 05:17

Okay.

So I'm going to cut you

off again here because what I think is really interesting too is you're talking about like brand loyalty and advantage with the brand. are to get into trouble with Amazon, but are hints that they might be stealing or copying designs and other products, right? And then basically white labeling the product and then undercutting the current

Seth Jenson (: 05:53

for sure.

Charles (: 05:58

that's doing it suddenly the brand is going out of business. think is interesting that example and like Voodoo has a very following. They've really built their brand. It's really established.

if you're just starting out, it's really hard to make that your differentiator and you can daddy is a great example of this. Somehow they managed to get that brand through and maybe a little bit of help with shark tank and you know, other things like that. I think that is an important thing to talk about because yeah, brand I think is important, not fast enough and you're not enough,

Seth Jenson (: 06:11

Mm.

huh.

Charles (: 06:34

that it's still not enough.

Seth Jenson (: 06:34

Mm-hmm.

So exactly, that is the question, right? It's because you might maintain advantage for your first five years in business, but when there's enough competitors, someone has improved on your design a little bit, right? It's exhausting as a business to always try to stay ahead of the competition. So the question becomes like, how do we have strategies that help us maintain competitive advantage long-term? Like that is the big question in strategy. And.

And just kind of going back to strategic factor markets really, really quickly, the competition comes from places you don't always expect, right? So in the case of that donut shop, the landlord can be like, wow, this real estate is really good. So all of sudden I'm going to charge you higher rents because it turns out, you know, it's really not your donuts. It's the fact that your location is so good. And so I need a little bit more of that, that, that, value that it's creating. So they're gonna start charging your rents. There's a lot of different ways. ⁓

that your margins can slowly shrink and it's hard to maintain advantage, right? So I guess what I mean by that is it's a really any factor by which you could stay ahead of the competition. There's a market for it. People will catch up. It's got an expiration date with how long you can kind of ride that wave ahead of the competition. So the question becomes where does sustainable advantage come from, right? If I'm gonna invest money in buying a business,

Or if I'm to build a business from the ground up, I want to stave off the competition as long as possible. I don't want them to eat at my margins or steal my customer base. So this is a huge question. And we kind of come up with some answers. There's not a perfect answer for it, but there's some really great kind of lenses with which to look at this problem. The kind of classic idea is something called the resource-based view, which is just you've got something

You own something that is valuable, something that they can't imitate, that's rare, and that you can really take advantage of. You've got something that everyone else doesn't, essentially. So if you own the real estate in that donut shop, your competitor is going to have to choose real estate that's slightly worse than yours because you own it. You've got that corner spot, you get all the traffic, your curb cuts are great. So sure, they can copy your recipes.

but until they buy that land from you, they don't get that prime real estate, right? So that's an example of a resource that could help you stay ahead of the curve. IP is another example. If you've got a secret formula, right? The reason, what is it? Plankton is so bent on getting the crappy patty formula, right? It's because he couldn't compete until he had that IP or whatever, right? So that's one way.

And in the biotech industries, that's the name of the game, right? It's how long can you keep your IP for this particular drug so that you can charge, you know, prices that pay for the R &D that went into developing the drug, right? So IP is one answer, a resource. Sometimes people will kind of fit like fudge it and say, well, sometimes there's like a dynamic capability. Like you're really good at doing something that's just very hard for other people to do. And that's kind of your advantage.

trade secrets, you know.

Charles (: 09:35

Is it,

why a lot of companies have been vertically companies? Like Apple has acquired some of its manufacturers a significant investment in them basically so that they can kind of ensure that they get quality parts and prices, I guess.

Seth Jenson (: 09:53

Right, right. So yeah, if they don't want to be beholden to their manufacturers, if the manufacturers start charging more. Now, if you're Apple, that's a very complicated strategic area because... ⁓

Charles (: 10:02

Yeah, we could argue a few

different strategies there. ⁓

Seth Jenson (: 10:06

because you have so much power in the marketplace that there's usually a lot of manufacturers that are willing to realign their manufacturing process just to suit you as a customer. Because if they're building widgets for Apple, that's their entire business. But you're absolutely hitting on a, it's called a risk of holdup is what that's specifically called. Where if a manufacturer has...

go specialized in something that's hard to reproduce for your company, right? Like there's a very specific way you want your chips manufactured or very specific wiring process, or you like the aluminum on your phone speed X instead of Y, and they're really doing that really well, then they're like, hey, Apple, we're the only game in town, so we're starting to charge more. So in some cases, that absolutely could be the reason that Apple's like, you know what? It's less risky if we just own the supply chain down the line.

And so that is one way they can try to maintain. So there's pros and cons to that, right? Because competition can sometimes drive down those prices and if they own it, then they might not be benefiting from the competitive forces that could make that input cheaper. So yeah, lots of pros and cons and Apple by heavens, it's extremely complicated.

Charles (: 11:09

yeah, there's a lot more

that goes into that one,

Seth Jenson (: 11:12

But you're right, it's all these same forces that are leading to these types of decisions. It's true on the mom and pop business you're looking to buy. It's true at the Apple level. This is a universal of entrepreneurship and running a business. These competitive forces are gonna run your life and so you've gotta decide how you're gonna manage them.

Charles (: 11:28

I guess that was my next question, right? Cause about what's differentiating us in the market. love our auto shop owners. I can't tell the difference between the other. I take my car in, it gets fixed or it doesn't. Right. And so unless I have a bad experience to me, it's hard to differentiate. how

Seth Jenson (: 11:48

Mm-hmm.

Charles (: 11:50

like a normal service business really differentiate themselves for lasting impact.

Seth Jenson (: 11:55

Yeah. Again, it's, it's, it's the big question. So if they don't have a resource, right? Like we talked about that resource based, you know, uh, strategy. If they don't have great location, um, or, uh, then, then. They've got a few cups. They've got a couple more options, so they're not completely lost. So the most exhausting way is to just always try to stay ahead of the competition, always be adding that feature or that benefit. Um, basically.

understand your customers a little bit better and always be doing the next new thing. So, you know, stay ahead by always innovating essentially. And again, that's exhausting. It's hard to, it's hard to maintain that kind of trajectory. Another way is through your networks, right? So sure, there's a bunch of, you know, auto shops, but maybe you've got a connection to someone with a fleet of, you know, 500 vehicles.

Charles (: 12:34

Yeah.

Seth Jenson (: 12:48

And because you know them and they trust you, you've got that connection and your competitors don't. And so you've got that stable business paying all your bills and everything else is just a bonus after that, right? So we've talked about social capital being so critical in a business. Social capital and networks can be a source of competitive advantage, right? And it's, I've met some really amazing companies recently that are in very competitive spaces. And that's literally what they've built their business on where there's thousands of competitors.

Charles (: 12:59

Got it.

Seth Jenson (: 13:16

One I'm thinking of in the AI customer service space. Man, there's like 10 more of those every minute, an AI driven customer service platform. But this company has been able to maintain what they're doing by having great relationships and investing in those relationships such that their core business doesn't want to look elsewhere. And it's really that social side of business. Now, there's one other way

Charles (: 13:23

yeah.

Seth Jenson (: 13:40

that's a little bit philosophical, ⁓ but I think very powerful. know, networks, we call it kind of this searching paradigm, always finding that next opportunity before the competition. And then there's the resource-based view. These are kind of the core answers to this stay ahead of the competition question. But the bleeding edge of the science behind this has a lot to do with...

Charles (: 13:43

boy.

Seth Jenson (: 14:03

you as an individual business owner. Because what I find a little depressing about those previous answers are the search paradigm one's exhausting. Always staying ahead of the competition is just like always out innovating. That's just exhausting. The resource is like you either have it or you don't. Like if you don't have it, are you screwed? Because that's depressing. The networks are available to everybody, but it's still, it's an imperfect solution, right?

Charles (: 14:24

Some are better than others.

seen of the business owners I've seen with the most success have really strong networks. And it's not a ⁓ one to one thing, but in smaller service-based businesses and industries, I think a huge advantage to have a good network.

Seth Jenson (: 14:31

Yeah, absolutely.

Absolutely. But so those three options, they help some and they don't. What I like about this, direction the strategy field's going is it's much more accessible to everyone. And it's the kind of main idea behind it is called the theory-based view. And it's basically saying, look, yes, there's competitors all over the place. Like if we imagine ourselves in a room, all competing to find the cheese and through this labyrinth.

Yes, there's you know 50 other people all competing to find the cheese But each of us have a very different perspective and if you know how to use your unique perspective To unlock value. It's hard for them to recreate that if it's if you're really leaning into your expertise so one example of this principle is Steve Jobs when asked what the most important class he took in college any guesses what his like most influential class was

Charles (: 15:31

I feel like.

Seth Jenson (: 15:32

I would make lot of sense.

It was actually calligraphy, which is random, right? Like how many tech executives ever took a calligraphy class? But it makes some sense too. Like when you think about Apple's ethos, their design mentality, even the obsession they put into their typefaces in their version of the word processor, like that design ethos is baked in to this day, even decades after

Charles (: 15:38

Yeah.

Seth Jenson (: 15:56

in the inception of the company and even after Steve is long gone, you can still see that baked into the company. And that unique perspective that Steve developed in that calligraphy class and throughout his experience at Pixar and all these other experiences, Bill Gates could not reproduce that. Bill Gates came from a very different world and that different world Bill Gates came in had different opportunities than the one Steve Jobs did.

And that's a really encouraging message because you and I are very different and the way you see the world is very different the way I see the world. But there are ways that you can unlock value that I just won't be as good at, essentially, and vice versa. And so if you're, as a strategy maker, know how to tap into those unique, valuable beliefs, it's really our belief system.

And you know how to experiment to make sure they're good beliefs. Cause sometimes you're just wrong. Right? Like I might be like, you know, you know, the Ferris wheels are the future. Every city needs a Ferris wheel. But if I'm the only one person that feels like that, that's a bad, that might be unique to my perspective, but it might not be valuable in the, in the marketplace. So you kind of, you've established what your unique beliefs are and then you, you test them in the, in the, in the real world. Right? You conduct little experiments.

Charles (: 16:50

Ha ha.

You

Mm-hmm.

Seth Jenson (: 17:04

and you let those experiments inform what you're investing in, what you're leaning into. And you basically build out a strategy that your competitors might discredit, right? They might be like, ⁓ that seems stupid or dumb, but you've got that unique perspective and you've done the work to validate it. Now I know this sounds kind of loosey goosey and woo woo to some degree. ⁓

Charles (: 17:22

No, I'm going to bring it down

to practical because this makes perfect sense to me. at this point, everyone knows I run a small CPA firm. I do. I work with small businesses all across the country, just helping them bookkeeping strategize financial plan, do tax planning, tax preparation. hundreds, if not thousands of CPA businesses and CPAs.

Seth Jenson (: 17:26

Yeah.

for sure.

Charles (: 17:43

that there's a huge need for it still. aren't enough. I think is really, really interesting is we all it differently. all very different, even though we're all the same.

Seth Jenson (: 17:55

Yeah, you'd think filling out bookkeeping and taxes would be the most standardized process.

Charles (: 17:57

no, it's so different.

so different. how I even talk with my clients, right? Like some CPAs I have heard and get these gurus who will tell you to never take a client email, never take a client phone call. needs to be done by your staff and like you shouldn't be any of it. one day that's where I'll get to.

clients would not be working with me today if that was the case. Instead, I respond to emails and I'm very attentive. working behind the scenes too, but I kind of view myself as a, as a client manager or, or salesman. you, guess, if you will, a salesman, think client success manager would be the right term for what I consider myself.

Seth Jenson (: 18:24

Yeah.

Right.

Charles (: 18:43

very different than a lot of other CPAs. there are hundreds of different softwares, different things, like we can use number of variety firms. And hard part is actually finding the right clients for you, not necessarily finding clients, because some are not gonna, they're gonna bounce off my style. That's okay. I'm not offended by that. There are plenty of good CPAs,

Seth Jenson (: 18:45

I love that example.

Mm-hmm.

Mm-hmm.

So let me, can I actually break down that example you gave because I think it's a great one, right? So, and cause you might be asking yourself, how do I identify my unique beliefs or whatever? And the phrase I like to use is, while my competitors believe X, I believe Y. And you, you'd said that just in your example, you're like, well, my competitors believe that answering emails and client communication is the work of their underlings.

Charles (: 19:07

It's totally different. Yeah, let's do it.

Seth Jenson (: 19:30

I believe I can unlock value for my customers by being personal and involved in their, you know, being with them in this process. And again, I believe that, you know, and yeah. But that's a way you can unlock value in a way your competitors won't, right? So that's literally just a perfect example. everybody has these beliefs. They don't have to be sexy. They don't have to be

Charles (: 19:39

Both are right. Both are right. It depends. ⁓

Seth Jenson (: 19:54

revolutionary, they just need to unlock value more than your competition, right? Just be a little bit more true to who you are and increase the pie for your customers, so to speak. And client communication is a great way to do it. It could be about your systems. It could be about some feature in your product. It could be the way you build community around your product. It could be in the, you know,

Values unit there's literally any number of facets of your business where you can identify ways that you believe things different than the status quo Because the status quo is right for disruption. They're like you can if as you start questioning the assumptions built into your industry Things are the way they are because that's how people have always done them not because they're most efficient not because they're the most valuable So really take time

and start questioning those assumptions and find those places where you disagree with the status quo, that is where that strategic opportunity happens. And if it's coming from within your own experience, your competition is gonna be very slow to see it and try to, you know.

in that that way.

Charles (: 20:55

Well, what I think is interesting is I can quickly come up with a million examples in my space of, the CPA world. think kind of going back podcasts ago, and we talked about the expert. have to know your industry. You have to know it because I can't tell you a lawn care service from another one.

Seth Jenson (: 21:09

Exactly.

Preach.

Charles (: 21:17

when one starts working with me and I dislike them, then I know what the difference is, at least in that point. in a lot of ways you have to know your industry really, really well in order to differentiate yourself too.

Seth Jenson (: 21:21

Yeah.

you exactly, I could not have said it better myself. Like expertise and the beauty is expertise is available to anyone. as you're passionate about your industry, as you go deep, as you do the work of trying to create value in that space, develop products, services, whatever it is, you will become an expert by virtue of the time and effort and passion you put into it. And that means you should really.

plumb the depths of that expertise, use it, actualize it into your strategy. You don't have to be the smartest person in the world. You don't have to be the most experienced. If you're really putting the time in to go deep in your industry, these opportunities will reveal themselves to you. And I think that's what's comforting about this particular line of strategy making is one example people come up with is when you decide to buy a certain type of car,

all of a sudden you see that car everywhere, everywhere you look. Like before you would drive down the road and you weren't thinking about, I don't know, Ford Broncos. And so you didn't see the Ford Broncos, you know, driving around you. But if you put that question in your mind of, should I buy a Ford Bronco? All over the world, you will see Broncos everywhere. And that's true of this thing. So as soon as you start asking yourself, you know, where do I differ from my competition in...

Charles (: 22:19

Yeah.

Seth Jenson (: 22:43

and what about my industry have I always thought needs to be fixed, just by asking yourself those questions, the answers will reveal themselves to you because now you're looking for it, now it's salient. ⁓

Charles (: 22:54

Yeah.

more than that too, right? Like don't know enough about your industry yet, it's required if you're asking the right questions to the right people. And going back, I know we, talked about Airbnb before, but I think that's a perfect example again of, I don't know what differentiates us. We think it's can get a random stranger to sleep on your couch, but really in New York city, it's it's so-and-so, right? And so

Seth Jenson (: 23:04

Go get the answers, yeah.

Charles (: 23:20

asking the right people, think we can kind of gain that understanding and that knowledge too.

Seth Jenson (: 23:24

Exactly. Any like, if you don't have all the answers, if you're not confident in your expertise, get it. It's going to be a prerequisite of success in your business. So you might as well start down that path now and develop it. There's really no industry space product service that can't be significantly improved and done so in ways that give you sustainable advantage in the long term.

The biggest risk you can have to your business is trying to do exactly the same thing as all of your competitors, right? That is the epitome of risk. It sounds like the safe option just to do it, but at the end of the day, it means you're having to fight for the same customers. And again, your margins are going to decrease. Now that there is a caveat here, there are industries that are so undersupplied where you can be just the worst version of that product or service and still get plenty of clients and or sell plenty of widgets. So

If you're in just a really high demand industry, then strategy might not be on your mind so much as just operations and getting, you know, meeting the demand and bless you if you're in that industry. That sounds like a great place to be.

Charles (: 24:27

Yeah, help me find those industries.

Those are the best.

Seth Jenson (: 24:29

Although it's only a matter of time before the markets react and all of a sudden your competition starts showing up on your right and on your left. So even that's not a long-term strategy, but it's certainly nice while it lasts for sure.

Charles (: 24:44

And mean, I think in a lot of ways I'm taking that path. demand. easy. just say I have a CPA and people are like, Hey, can you please help me? ⁓ the way I look at it is long-term. That's not sustainable don't know what that means. So we'll find out, but, mind, at least I imagine it is for most people in that position. Cause they, have to know.

Seth Jenson (: 24:54

Yeah.

Yep.

Charles (: 25:08

you have to know when you're in those industries.

Seth Jenson (: 25:10

And I think it's worth investing in this kind of strategy making process, period, for everyone, because maybe you're really happy with where things are now, but the future is always uncertain for any business owner or entrepreneur, right? Is AI going to disrupt your industry? Is global forces going to change the shift of labor? Is, in your case, the tax code going to rewrite itself for the thousandth millionth time?

Charles (: 25:34

Just did.

Seth Jenson (: 25:36

Yeah, so

by knowing and articulating your strategy for yourself, you're able to know what is core to your value. And so when you have to make choices about what to do and what not to do, who to hire, who not to hire, where to invest, where not to invest, you've got a guiding light. Your strategy will help you make those questions easy. Whereas if you don't understand your unique value, what makes you different from your competitors?

how you provide value above and beyond for your customers, then every step, every question that arises, every future trend that shifts feels like your boat is rocking and it's hard to, it's really disorienting. It's hard to know what to do. So even if you feel like you're beating the competition and feeling good, do the work of articulating your strategy. What makes your product better and what values you embody in your organization and in your products.

It'll save you heartache and sleepless nights in the future for sure.

Charles (: 26:35

talking about who to I went through a bunch of interviews today a bookkeeper interesting. Like I have and it's funny how much that impacted process. interviewing and she's really smart, capable of doing the job. She'd be awesome.

with about four clients bigger companies and

personal with her clients. it's more of a normal job, which is fine. I don't, don't, said, I think she would have been, she'd be great at the role, but her compared to the others because the others talked about with a lot of different small clients and really caring and understanding those clients and working with the owners. Right. And it was just a very much, different And so was kind of interesting.

Seth Jenson (: 27:21

I feel like that should be in the podcast. That's a perfect example of your strategy embodied in your decision making.

No,

really, should record you explaining that because that's that's literally that's exactly what what it means. You've got this belief that it's about that person will touch that and that informed who you bring on your organization. That's a huge strategic decision. Right. And and it was and it's even counterintuitive. Right. That's the key. Right. So the big firms that you're competing with would hire her probably. Right. And

Charles (: 27:40

the owner and making, yeah.

Yeah, 100%.

Seth Jenson (: 27:56

But you've got this other thing that you think is going to give you advantage, and you're making your actions, your strategy based on those decisions. So that's literally a perfect case study in what we just talked about.