ZACH DE GREGORIO, CPA
www.WolvesAndFinance.com

When you talk about business strategy, people talk a lot about competitive advantage. I feel this is a buzzword that people say a lot, but I wanted to dive deep into this idea and discuss what competitive advantage really means. This is an important concept to understand if you are making business decisions or understanding financial statements.
Competitive Advantage is an attribute that allows you to outperform competitors. What I want to emphasize is the financial element of competitive advantage. The whole point of studying this, is it shows up in your financial statements as profit. The goal here is to focus on the attributes in your business that enable you to earn a higher profit than your competition.
For example, imagine two companies that sell a similar type of product. Company A sells that product for $2, and company B sells that product for $1. Both companies can make that product for $0.50. So company A is making much more profit. Our job is to figure out, “what is the competitive advantage of company A versus company B?” Let us imagine the reason is that company A has a perception in the market for higher quality. We have all experienced situations like this. We might go into a store to purchase an item, and you see a line of similar items on a shelf. If one of those items has a reputation for better quality, you are going to be willing to pay a higher price for that item. In this example, quality is the competitive advantage.
What is so interesting about studying competitive advantage, is that there are so many different options. It can be almost anything that gives your business an edge. There are many of these, but I am going to list out just a few.
• Low cost leader
• High quality
• First mover status
• Unique technology
• Customer loyalty
• Economies of scale
• Vertical integration
• Government regulation
All of these are different reasons you might have a competitive advantage. I could talk for ages on each one of these, but I want to focus on the reason competitive advantage is so important. Whatever situation your business is in, if you have the awareness of your competitive advantage, it makes your business decisions so much easier. Every business out there only has so many resources. If you can take your resources and focus them on the area your business adds the most value to the market, you will make more profit.
That is the basics… but we are going to take this to another level. When you study business strategy, what you quickly realize is that competitive advantage is not enough. What you really want to achieve is “sustainable competitive advantage.” You want your profit to last for years. A term you will hear people say is “economic moat.” You can imagine your business is a castle in the Middle Ages. One of the defenses of castles was a moat that was full of water. Your business is just like a castle, where you have competitors who are trying to take over your market position. The larger your economic moat, the harder it will be for someone to impact your company profits.

Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.

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