When my wife attended Harvard Business School many years ago, Warren Buffet came on campus to speak.  I wasn’t going to miss this for the world. Although I probably wasn’t supposed to do this, I snuck into the auditorium to hear him speak.

Now, here’s one really big lesson I learned that day.

If you ask Warren Buffet, what he looks for in a business before he buys or invests in it, he routinely says “A business with a durable competitive advantage that even a moron could run… because sooner or later a moron will end up running it.”

So everyone has heard of this competitive advantage thing. Everyone knows you’re supposed to have one. And it is precisely a competitive advantage that’s required if you want to crush your competition for the simple its impossible to dominate without one.

• You don’t expect to win a sprinting competition, unless you have a speed advantage.
• You don’t expected to win a marathon, unless you have an endurance advantage
• You don’t expected to win a chess competition, unless you have an skill advantage
• To win you need SOME kind of competitive advantage to use to win.

So clearly, this competitive advantage thing is important. We all know it. It’s common sense.

But knowing vs. doing are two entirely different things.  Knowing is easy. Getting what you know done in the real world, well that’s an entirely different matter.

So despite the fact that having a competitive advantage is important, I find so few businesses actually have a intentionally cultivated competitive advantage.

Those that do often take it for granted that they aren’t even aware of the advantage.

Finally, even those companies that are consciously aware of their competitive advantage, most never fully exploit it.

In short, possessing and then exploiting a competitive advantage easily one of the most under-utilizied opportunities in many businesses of all sizes.

Example

Let me give you an example.

I dropped off my car at the mechanic today, and in talking to the mechanics I asked them what kind of cars do they personally like and drive. Their answers were – Toyotas and Subarus.

According to the guy I spoke to, he says they are very reliable. And because they are so reliable, they are easy and cheap to maintain.  I guess from a mechanic’s standpoint a cool car that doesn’t actually drive, isn’t as good as one that’s bulletproof reliable.

Quite coincidentally, while waiting for the main guy to get off the phone, I was flipping through this week’s copy of “The Week” — one of my all time favorite magazines. (It’s like cliff notes of 150 different newspapers across the world. Everything you need to know globally, in 30 minutes).

I saw an advertisement from Toyota for something new they are promoting called “Toyota Care”.

Basically when you buy a new Toyota, in addition to the usually warranties, Toyota will pay for ALL normal maintenance costs and 24 hour roadside service — free for 2 years.

This is very smart for several reasons.

Most automakers are obsesses with selling CARS.  But guess what? Consumers don’t really care about cars, we care about TRANSPORTATION… getting from point A to point B is the primary goal. How you get there is secondary – at least for most people.

Toyota has figured this out. They are basically selling you 2 years of extremely worry free transportation… and oh yeah, to get it you gotta buy a Toyota car.

Toyota is selling the outcome, while others are just selling the car.

The other reason this is smart for Toyota is because factually speaking, Toyota cars do have fewer breakdowns than cars from others manufacturers (recent accelerator recalls aside).

Because of this competitive advantage, when Toyota offers free 24 hour road side service, what does that actually cost Toyota?

Not much.

Certainly not as much compared to a manufacturer like Jaguar or Saab that routinely have the most problems of any manufacturer.

Toyota cars don’t break down that much especially in the first 2 years and especially if you do the proactive maintenance on time (and who wouldn’t under this program since it’s basically free).

So Toyota has taken a competitive advantage (reliable cars) and exploited it (2 years free maintenance and road side service) — others can copy the promotion, but can’t replicate the underlying profitable economics.

It reminds me of Domino’s Pizza in their hey day. The competitive advantage Dominos had in the 1973 was a network of 80 pizza delivery locations that were 1 – 2 stop lights closer to customers.

They exploited the structural difference in their company (vs competitors) by offering “Hot Fresh Pizza Delivered to Your Door in 30 Minutes or Less Guaranteed… or It’s Free!”

AFTER Dominos exploited their competitive advantage, they skyrocketed to 1,500 locations in the same time it took to build the first 80. The founder of Domino’s then sold the whole company for $1 billion.

A competitive advantage is nice to have, but it doesn’t pay that well until you full exploit it.

With that in mind, I have two questions for you today.

1) What is your company’s unique advantage in your marketplace?

2) Look at every product, every service, and every market segment you serve and explain what tangible, concrete and completely obvious customer benefit does your competitive advantage enable?

Toyota’s reliability edge, enables selling 2 years of worry free transportation.

Domino’s location proximity advantages, enables 30 minute delivery guarantees.

What is YOUR company’s advantage and what monster benefit does it enable for YOUR customers?

By the way, these are the kinds of provocative questions (and ultimately answers) that come up in the Extreme Market Differentiation workshops I lead for clients.

As a rule of thumb, if you have difficulty answering that last question, it’s possible your competitive advantage is being delivered to a market segment that doesn’t value it.

It often pays to consider going to market in a different way… in a way that plays to your company’ competitive for a target customers where that edge provides meaningful value.

In short, stop fighting wars you can’t win.

Conserve your resources to fight what I call the “winnable war” — one where your competitive advantage can be fully exploited by you and appreciated by customers.

If that’s not what’s happening right now in your company, why not?

If it IS happening in your company, are you totally maxing out the opportunity? Are you taking a moderate level of differentiation, and making it an extreme point of differentiation? One that’s blatantly obvious to your market?

That’s my thought of the day…

I was watching a PBS special of Warren Buffet and Bill Gates sharing the stage while speaking to a group of college students – possibly the only time the two richest people in the world shared the advice giving stage at the same time.

There were two stories that I’d like to share with you today.

One of the students asked Bill Gates to recall the biggest mistakes of his career-which I thought was a great question.

Gates said one of the big mistakes was realizing the importance of the Internet very late in the game.

As you may recall, the growth of the Internet in the mid 1990′s was NOT powered by Microsoft. It was being driven by Marc Andreesen, the inventor of the first web browser, and his company Netscape.

I remember the time very well.

Gates had one of his infamous “Think Weeks” where we locked himself in a retreat for 1 – 2 weeks — no telephone calls, no email – with nothing but time to think.

He realized he totally missed the Internet opportunity.

The next day, he issued a company wide memo that pretty much said EVERY project and product in Microsoft had to incorporate the Internet.

Overnight, tends of thousands of Microsoft employees and tens of billions of dollars in R&D (the corporate equivalent of acquiring new skills) was now ear marked towards the Internet.

He spent billions acquiring third party companies with skills and assets Microsoft did not have. Early on this included paying $400 million for Hotmail which formed the basis for MSN Hotmail.

Within 24 months, Microsoft pretty much terminated Netscape (not to mention got a whole bunch of anti-trust lawsuits in the process).

The lesson is this.

When you’re chasing a new opportunity, especially one that you were ignoring previously, it’s impossible to succeed without acquiring the new skills needed to succeed with that opportunity.

This is exactly what’s going on with many entrepreneurs today. The recession has taken away opportunities that many business owners have grown accustomed to.

It is also creating NEW opportunities that many entrepreneurs are flat out overlooking and stubbornly insist on ignoring.

The problem is many entrepreneurs simply lack the skills to notice and take advantage of these opportunities.

This leads me to my second story.

On the same PBS special, Warren Buffet was asked what advice he would give to a new college graduate in terms of building a business or career.

His answer was very revealing:

INVEST IN YOURSELF

In his words, investing in yourself has an incredibly high return on investment.

Do you know where Warren Buffet learned to invest?

He learned from his college professor and mentor Benjamin Graham. After graduating from college, he begged and pleaded to work with Graham.

He interview for the job, got the job, accepted the job and never once asked for what the job paid. It wasn’t until he got his first paycheck that he saw the amount.

But Buffet KNEW that this guy Graham could teach him how to be a better investor.

Truth be told, he would have paid Graham to allow him to work under him just to have the opportunity to acquiring better investing skills.

Considering Warren Buffet today has a net worth of $40 billion or so, I’d say that Buffet got a pretty good deal.

Invest in yourself – advice from the 2nd richest man in the world… advice worth listening to.

If you have been reading between the lines of what Bill Gates and Warren Buffet do and advise, you see the vital role that acquiring new skills plays in being successful at the highest levels.

This is frankly an approach I firmly believe in and practice myself.

Over the past 5 years, I’ve invested over $200,000 in building my own skills. I go to seminars, conferences, speeches, and workshops. I invest in mentors and coaches. I invest in tons of books, home study programs, audio/video programs and more.

I have tons of bookshelves to house all this information. I rent storage facilities to store these skill building materials that don’t fit on the shelf.

Keep in mind this does NOT include the investment I made in my wife’s Harvard MBA. It also does not include any of the education costs incurred when I attended Stanford.

It is my investment in myself in continuing education — not because I’m required to – but because I personally find it easy to win in a competitive marketplace.

Early on in my career, this investment was not easy to pull off financially. I made a number of tradeoffs.

I only buy and drive used cars (can’t stand a 10% depreciation loss on day #1 of owning a new car).

I wear a $19 watch with a plastic wrist band (it keeps better time than a $10k Rolex… and has a nightlight which is handy for checking in on the little ones when they’re sleeping.. and I can hold my 2 year old with the wrist band scratching her).

I buy a lot of my personal clothing at Costco (though I do buy most my work related clothing from Nordstroms)

I own a 10 year old Sony television (NOT a flat screen) – (If I had a flat screen, I’d be tempted to watch tv more.)

I am told that I’m very extreme in my habits. I suppose I am. But it is all driven by a very simple philosophy.

I will invest incredibly aggressively in anything that helps me win… which is very different than spending money on things that give me the appearance of winning without actually making a difference.

Everything else doesn’t matter to me.

I figure if it works for Warren Buffet and worked for the late Sam Walton (founder of Wal-Mart), it works for me.

This type of philosophy seems to be coming back in vogue these days… and I predict will continue for some time.

But it has not always been easy to practice day to day. When I go workout at the gym, I always end up parking next to the guy with the Ferrari (I must admit it’s a pretty sweet ride). I pull up in my 13 year old Toyota.

If someone ever broke into my home, they would be seriously disappointed. There isn’t anything to steal – other than books that line 125 linear feet of book shelves.

My most valuable financial asset has always been my brain… in other words my skills.

It is those skills that pay the bills. It is those skills that provide the financial future for my family. Everything in my life as an entrepreneur revolves around and is built on the foundation of those skills.

It is the same skills that has given me (and by proxy my clients and even readers of this newsletter) perspective over the recession.

When others are in a state of massive panic, the people who work with me or follow my work benefit from a sense of calm based on a factual understanding of economic reality…. and yes, all of this at the end of the day comes from skills.

Based on these skills, I’ve found that the path to a better business for most entrepreneurs is fairly simple. The mistakes entrepreneurs are making in this recession are very common and unfortunately for many will be fatal.

It doesn’t have to be this way, but most stubbornly insist on continuing to do what is NOT working.

Look the environment has changed.

The rules of the game have changed.

If you are not winning in this environment, then you are losing. There is very little middle ground.

If you don’t have the skills needed to win, then go get them or quit. But whatever you do, don’t just sit there doing nothing. That’s the worst thing to do.

In a few weeks, I’ll be introducing a new program to help entrepreneurs like you acquire the skills, confidence, and direction needed to build a growing and profitable business in a tough economic environment.

(Incidentally if you think the recession has been rough, wait till you see the “flat” recovery or the “double-dip” back-to-back recession.)

Certain business practices don’t work in this kind of environment. Sloppily run business get killed in this environment. Don’t be one of them.

Here are a few additional thoughts on the durable competitive advantage.

In today’s news, Starbucks announced it was firing its CEO and putting Howard Shultz (founder) back in as CEO.

One of the interesting tid bits of news that was mentioned was plans for McDonald’s to put  coffee bars with Barista’s inside every McDonald’s.

Clearly, McDonald’s is tired of seeing a customer spend $2 on breakfast at McDonald’s and walk across the street to spend $4 on coffee. 

So if McDonald’s actually follows through, will it work?

Let’s think about this from a competitive advantage standpoint and, in particular, the durability of such an advantage.

Starbucks has numerous advantages – high quality product, surprisingly polite and competent staff, an ability to deliver a personalized experience to every customer, and a well-placed real estate network (e.g., they have a Starbucks nearly everywhere).

Well, if McDonald’s decides to really go at Starbucks, will they win?

My prediction:  It’ll hurt Starbucks, but it won’t be fatal.

First, the minute McDonald’s rolls this out, the Starbucks real estate advantage is basically neutralized overnight. It’s not much more of an advantage given McDonald’s entire network of high-traffic locations.  In other words, to get to your local Starbucks, there’s a good chance you had to drive past a McDonald’s to get to it.  If a customer can now stop at McDonald’s and get something close to a Starbucks coffee, some (but not all) customers will.

Why won’t such a move be a death blow to Starbucks?  Because of the remaining advantages that Starbucks currently possesses.

1) Starbucks knows how to deliver a high quality, premium product.  McDonald’s doesn’t.  They’re good at cheap and fast, not good and slow.  Can they do both?

2) Starbucks knows how to employ competent employees that smile a lot and are polite. McDonald’s has cornered the market on minimum-wage employees with attitude.  Do I really want to get a venti, non-fat, latte, with a double shot from someone who wants to give me a hard time about it? 

Anyhow, it’s useful to look at your own business and others through the lens of your competitive advantage and its durability.

I just finished watching a one-hour special on CNBC on Warren Buffett.  In a nutshell, it was a one-hour lesson on the importance of a durable competitive advantage.

I’ve heard Buffet speak in person on previous occassions, but to hear him mention the importance of the durability of a competitive advantage was eye-opening, to say the least.

A competitive advantage is the reason why a customer prefers to buy from you vs. a competitor (or any other option available to the customer).

A durable one is one that does not diminish over time.

This is one of the major topics in my book Extreme Revenue Growth where I site Amazon.com as a company that REALLY pays attention to this concept.  You can’t just be operating your business, you must constantly be thinking about the magnitude of your competitive advantage and work on ways to extend it’s durability.

See Durable Competitive Advantage – Part 2