How do you protect your business from competition?

“In capitalism, people are going to try to take that castle from you so you want a moat around it and you want a knight in that castle who is pretty darn good at warding off marauders.” – Warren Buffett

While we can protect our business in many ways there are three basic ways to build a moat around our business.  Creating barriers to entry, being a cost-leader or differentiating yourself from your competitors.

So how do we create barriers to entry?  For a lot of industries government regulation can prevent easy entry e.g. requiring some form of government licence, achieving economies that make it very expensive for a person to enter the industry.  So, if you are looking to set up a small business look at how hard or easy it is for a competitor to set up business against you or conversely what business/s already exist in the location that you are going to set up your business against and what can they do to prevent you from succeeding.

The easier it is to enter an industry the more unlikely that you will earn above average profit.

The second option is to be a cost-leader, i.e. run your business where your costs are lower than your competitors. Examples to achieve this is to run the business from home to remove costs of renting or only carrying sufficient stock to meet client needs.  Interesting that Woolworths just recently declined to stock another variety of Coke- A-Cola on the basis that shoppers already had sufficient choice. If you produce what you sell what can you do to reduce manufacturing cost compared to your competitors.  Outsource where you can provided the outsourcing does not reduce quality or reduce your control over the process.  Spend what time you have doing the things you are good at rather than endless hours dong things you hate e.g. bookkeeping.  How many more sales would you need to make to meet the cost of outsource your bookkeeping. If you have five spare hours a week spend it on sales or marketing something that will drive revenue rather than wasting inefficiently on something you are not great and does not generate revenue.

Lastly, something that small businesses often overlook!  How can I differentiate my business from my competitors?  Remember it is significantly harder for a store like Bunnings to provide anywhere near the personal service that a small family run business can provide.  Bunnings looks to sell high volumes which means that it is unlikely to want to compete in speciality items with low volumes e.g. paint used for vehicle spraying.

Another area where I personally have seen small businesses differentiate themselves is through the patents or IP that they have developed through trial and error.  Quite often they do not realise the advantage that these give their business over competitors particularly in terms of costs savings and developing barriers to make it more difficult for new business to enter your market and compete.

Find your niche and work extremely hard at maintaining it, as often for small business this is one of the best ways of making your moat deeper and more difficult to penetrate.

David Balwin Tax Accounting CFO Business Advice