The history of competitive advantage -- why it matters today

August 29, 2016 | By Paul Latham
Financial Advisors Accountants

Today we are going to go through a short history lesson -- the history of competitive advantage. This lesson will lead us to what is important today -- and what that means for the 21st Century CPA looking to become the most relevant advisor.

Once upon a time, (mid 19th Century) -- location really mattered. If your pub was located in the middle of the Klondike then it did really well. If it was located 50 miles away, it did really badly. Today location is of low importance to your business competitive advantage.

By the late 19th Century we were in a period of rapid innovation. If you were Thomas Edison and invented the light bulb, then your business did really well. Today we are all 'innovators' (which is another way of saying few businesses are truly innovative).

By the early 20th Century we were in the era of mechanization. If you were Henry Ford and were able to knock out X vehicles/day relatively cheaply, then your business did very well. Today, being mechanized is not a competitive advantage.

By the mid-20th Century businesses were really focused on leveraging people/management structures. If you were IBM you gained a strong competitive advantage from leveraging vast armies of people through effective deployment of the organizational chart. Today that approach does not offer a competitive advantage. In fact, probably quite the reverse.

By the 1980's (when I was first entering the workplace) we seemed to be in an era of management fads. In those days lots of new ideas were starting to be heard -- 'just-in-time', 'total quality management', 'management by walking about' (a personal favorite :-). The winner was quality.

By the late 1980's / early 1990's quality was a clear area of competitive advantage. The likes of Japanese car manufacturers were building things that actually worked (and lasted). Previous to that, whilst you were annoyed when your car didn't start in the morning, it was hardly a shock.

Today, quality is no longer a competitive advantage. Quality is expected. You won't sell anything by saying 'buy this -- it's built with quality and works well!'. It is obviously important -- but it is just an expect not a value item (and you would be really unhappy if your car didn't start in the morning).

Today we have left the Industrial Era and moved into the early stages of the Knowledge Era. Your competitive advantage will almost certainly be built around something 'intangible'. Words like - 'creativity', 'design', 'brand', 'knowledge', 'solutions', 'systems', 'technology' are used a lot. They all have one thing in common -- they are very difficult to touch.

However, there are 3 types of business intangibles:

- Gases -- when the intangible idea is just in your head.

- Fluids -- when you use intangibles to solve individual problems -- 'one at a time'. These 'fluids' generally create revenue but not capital value.

- Solids -- when your intangibles become more real and 'replicable' -- e.g. a strong brand or replicable process embedded in the business fabric. 'Solid' intangibles create long-term capital value for the business owner.

If you are a 21st Century CPA and want to maximize your potential, you need to recognize 2 key things:

You need to ensure that your competitive advantage (value promise) is positioned for the 21st Century and is not still rooted in the words of the late 20th Century.

You need to work on 'solidifying your intangibles' if you are to build a firm with long-term capital value.