What is a Competitive Advantage and where does it come from?

Volume 13 Letter 12

Innovation is a very important word in most companies. Building a better mouse trap is at the core of many engineering driven companies and although new product innovations can create a competitive advantage they are not the only source of competitive advantage. Discovery in the lab is only the beginning and having a good product is just part of the battle. Think how Kodak created digital photography, but where did that get them in the long run? Competitive advantages are built from the ground up. The discovery is just the beginning – the rest is just as difficult and equally hard work. Take the case of Hyundai Corporation.

For Hyundai, the competitive advantage came, not from producing a better car, but rather from developing a keen understanding of the needs of their target consumers. In 2008 and 2009 the North American economy was in a deep dive and many people’s job prospects were shaky at best. As people worried about their financial future car sales plummeted to lows not seen since the 1960’s. GM and Chrysler applied for government bail outs and they did what all car companies do in economic crisis, they slashed their prices to move excess inventory.

Hyundai, who’s target market is the lower income working class, saw their sales drop 37%. Instead of reducing prices like their competitors were doing they asked customers a very simple question: “why aren’t you buying?” The equally simple response was “the risk of purchasing a new vehicle at a time when I might lose my job is simply too high”. So, rather than cutting prices, Hyundai reduced the risk of purchasing a new car. They offered a program where if you lost your job or income within one year of purchasing a new Hyundai they would let you return the vehicle with no damage to your credit rating.

The program was launched in January, 2009. In a month when car sales across the board shrank by 37%, Hyundai sales doubled. The program was so successful that with only one quarter of the dealership network Hyundai outsold Chrysler.

We often forget that value comes in many forms and not only from R&D and while we need engineers to keep innovating to improve our lives and give us products that deliver more value, the Hyundai return guarantee was just as innovative as a new, more fuel efficient engine. As author Niraj Dawar stated “Hyundai didn’t innovate to sell a better car…it innovated by selling cars better”. 1

Innovation can come from both upstream (R&D) and from downstream (sales and marketing) programs. One thing is always true about innovation – Competitive battles are won by offering innovations that bring superior value by reducing a customers’ costs or bringing more income without increasing cost over the lifecycle of the product.

Sales and marketing teams that wait for R&D to build a better mousetrap are nothing more than order takers. As we start a New Year, realize that Competitive Advantage doesn’t only come from R&D – it should be developed by every part of your organization!

1. Tilt: Shifting Your Strategy from Products to Customers Niraj Dawar Harvard Business Press Books Nov, 2013

Recent Posts