As leaders, we usually believe that profits result from the sales of the company’s products and/or services, but this is not the case, according to Elliot Trexler on Forbes, who states that profits result from competitive advantages. How is this so? First, we must understand what a competitive advantage is.
As explained, a competitive advantage is a structural aspect of a business that makes it possible for the business to guard its profits from competitors. This structural aspect of the business must be durable because once removed the business will cease to be profitable. A competitive advantage may be either corporate or consumer-related, with numerous types of advantages within each of these two groups. Examples of corporate competitive advantages are patents, economies of scale, and technology. Consumer competitive advantages are many and inherently cause consumers to act contrary to what they would otherwise do in terms of buying the company’s products or services. A company’s competitive advantage may be its brand, but each company’s competitive advantage must be unique to the company.
In addition to guarding profits, competitive advantages also enable companies to grow their profits, which, according to Trexler, is where the real magic of compounding capital happens. This is done through reinvestments into, for example, opening more stores and/or developing new products, etc. Reinvestments can increase profits, which will enable more reinvestments, and the cycle goes on. As the cycle of profit increases and reinvestments continues, the company’s corporate and consumer competitive advantages are strengthened. The stronger a company’s competitive advantages are, the more the company will be able to undertake strategies to maintain them.
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