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What Is an Unfair Competitive Advantage?

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What is unfair competitive advantage? originally appeared on Quora - the knowledge sharing network where compelling questions are answered by people with unique insights.

Answer by Peter Baskerville, teacher, entrepreneur, father of 3, on Quora:

While the term unfair competitive advantage may be used in other contexts, it is specifically used to define what smart entrepreneurs, venture capitalists, and startup consultants look for as a key ingredient in the formation of a new venture.

So just what is a competitive advantage? A competitive advantage is the set of conditions and attributes that allows a business to offer its consumers greater value than its competitors. The greater value is provided either by selling products at a lower price or by providing greater benefits and service. For the customer, this justifies paying a higher price than the competitors are charging. The conditions and attributes that provide the competitive advantage ensure that the business can outperform its competitors by generating more sales or by achieving superior margins than its competitors.

This advantage becomes unfair when the identified competitive advantage of a startup is one that cannot easily be copied or bought by competitors because the advantage is not based on the principles of equality, where all benefits are meant to be distributed evenly. You see, the startup founder has acquired this significant advantage for the new venture almost by default, without necessarily having specifically gone out of the way to secure it.

For example, an unfair competitive advantage might occur for a startup via:

  • Insider knowledge due to the insider information or market intelligence that a startup founder may have gained from working in the industry where the startup intends to operate. The founder, by virtue of working in the industry, understands the problems and workable solutions far better than an outsider ever would. If you have worked in strategic positions in the industry, you have an unfair competitive advantage when starting a business in that industry.
  • Existing alliances due to the startup founder's existing strategic alliances with key players by virtue of long-term friendships or even family connections, giving the startup much-needed early traction in a market, and which is not available to others. If your father owns a jewelry-manufacturing business, you have an unfair competitive advantage in the jewelry market.
  • Access to lists of customers, suppliers, or business support creates another unfair competitive advantage because it is not available to all competitors. These lists may have been acquired over time while operating the idea as a hobby or may have been created from relationships forged while employed within a particular industry. If you have acquired lists of these key stakeholders, then you have an unfair competitive advantage over other startups in your field.
  • Ethnicity. Speaking the language, understanding the culture, and having extended family in the supply chain of the industry that you want to enter or trade with or from gives you an unfair competitive advantage over other businesses whose founders weren't born in that country or don't share the same ethnicity.
  • A gift that the startup founder is born with that just happens to be the key ingredient required for success in the new venture. It may be intellectual (problem solving), creative (thinking outside the box), social (empathy), perceptual (insight), or physical (endurance).
  • Other unfair competitive advantages may come from your ability to attract a dream team, get exclusive access to distribution channels based on your previously forged relationships, or to secure endorsements and support from recognized experts.

The concept of developing an unfair and sustainable competitive advantage comes from the work of Jay Barney (1991), where he developed the VRIN (Valuable, Rare, Inimitable, Nonsubstitutable) framework in relation to resources under the startup's control. Central to this view is the concept of causal ambiguity, where the interaction of these resources creates an advantage that is not completely understood by the business itself, making it almost impossible to copy.

Resources may be: physical (infrastructure, location, vehicles, buildings, equipment), intellectual/technological (patents, trademarks, brands, lists, software), human (skills, expertise, knowledge, attitude, reputation, advisers), financial (internal funders, external funders, access to funds), reputation (of the product, person, or organization), and organizational (structure, systems, processes).

Lastly, remember that even though we are calling these advantages unfair, it doesn't mean that you're doing anything wrong. The same opportunities are not available to everyone; that's part of life. And life isn't fair.

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