Financial service providers primarily operate in competitive markets, which contain two general categories of firms: a relatively short list of well-established and well-capitalized national/international firms and smaller, more regional firms. In aggregate, these firms offer a wide range of products and services to customers ranging from institutional to retail clients, thus providing an opportunity for firms of any size to carve out a niche market aligned with product attributes that the firm has an advantage in delivering. Small firms have a clear competitive advantage within a financial service ecosystem, particularly through referral sources, which ultimately drive new client growth.

I’ve spent years consulting and teaching continuing- education courses for CPAs and attorneys and over a decade teaching business strategy to MBA students. Here I offer some actionable steps for practitioners looking to develop their financial service ecosystems.

A competitive-advantage refresher

Competitive advantage is a foundational business strategy concept that captures the essence of business—outcompeting the firms in an industry to sell a product or service in the pursuit of profit. But what does it mean to outcompete your peers, and how do you do it? Academics and practitioners have been asking these questions for decades. The dominant logic in competitive- advantage literature suggests that firms beat their peers by offering something of worth that uniquely satisfies the needs of a target customer group. In short, you have an advantage when you provide something that competitors cannot copy. This concept seems easy, but the “how” can be complicated.

Firms should start with a strategic vision. Drawing on work in Michael E. Porter’s book The Competitive Advantage: Creating and Sustaining Superior Performance and research by many others, firms offer products and services as either a differentiator or a low-cost provider. Firms with a differentiation strategy charge premium prices because they offer one or many premium features. Examples of firms with this strategic orientation include Apple and Mercedes-Benz. Firms with low-cost strategies generally offer more basic features but for a lower cost than peers. Walmart is an obvious example of a low-cost strategy. It is important to note that firms with either strategic orientation can be wildly successful. However, long-term success is driven by competitive advantage produced by the underlying business model.

Once a strategic orientation is selected, firms must decide on the target customer who will consume the premium or low-cost goods and services. Porter’s work describes a second dimension of strategy, which highlights the firm’s decision to sell to a broad or focused group of customers. A common approach is to segment potential customer groups based on dimensions such as age, education, income, or location. Analysts can also conduct customer analysis on more nuanced dimensions of customer “jobs” that satisfy social and emotional customer needs. Individually or collectively, these frameworks refine the emphasis of a firm’s strategy so that investment, focus, and product/service features are aligned with the preferences of one’s target market. Firms choose the size of their target market by narrowing or widening products and services that their ideal target audience will likely consume. For example, if a firm sells custom yachts, its target customers are likely older, highly educated, and high-net-worth clients. Therefore, the firm has primarily eliminated younger, less-educated, and lower-income customers from its target market.

Understanding a firm’s general strategy gives a broad understanding of the foundation of competition. To identify sources of competitive advantage, we need to isolate resources and activities at the business model level. For this analysis, we define a business model as the summation of all business activities that are required to carry out a business strategy (i.e., a firm’s plan to compete).

A business model has two sides: the supply side, including the resources and activities that a firm uses to create a product or service, and the demand side, including the resources and activities related to the customers’ value proposition. A firm can develop an advantage over its peers from the business model’s supply side or demand side. For example, supply-side advantages can stem from resources or activities within the firm, such as better software or IT infrastructure, inventory control systems, or employee productivity. Supply-side efficiencies generally lead to a lower cost structure and, therefore, higher profit or more pricing flexibility than the competition. Demand-side advantages are customer-facing, often coming from premium features, customizable solutions, or superior customer service, which commonly accompanies premium pricing.

How to develop your ecosystem

Before we begin, I would like to refine our scope by defining our target audience. For this exercise, our target audience is an ecosystem full of other entities with common goals. More specifically, this ecosystem includes accountants, attorneys, financial advisors, and insurance and real estate agents, all of whom support one another on complex client engagements and through referral arrangements. It is important to note that we are trying to produce value for an “intermediate actor” and not the end consumer, but the same principles apply. In order to create a competitive advantage, we need to create a product or service that our peers cannot easily copy. Doing so will solidify ecosystem relationships and hopefully create value for all involved.

The ecosystem concept stems from the field of biology and characterizes a network of entities working together for some common purpose. Given this narrow view, we can direct our attention to how to create something unique for our target audience.

Again, accountants, attorneys, financial advisors, and insurance and real estate agents all support one another on complex client engagements and through referral arrangements. As a professional in any of these industries, it’s critical to build relationships with other industry leaders.

Here are five proven activities for building a supply-side competitive advantage in the financial services space.

Note that there is a significant difference between the members of your ecosystem and retail clients, particularly clients without advanced degrees and strong business acumen. As such, service providers must tailor resources and activities for ecosystem partners in their language, to their level of sophistication, and in communication channels tailored to them. If this is done, you create trust—a necessary ingredient for ecosystem development. If competitors cannot replicate your ecosystem, you can create competitive advantage in the long run.

1. Network smart

Focus on networking with groups that have a specialized emphasis. For example, avoid groups that cater to the general public and identify and network with groups that are composed of members in the service professions you seek. If you find targeted groups, you will potentially find like-minded individuals, which is an essential aspect of establishing an ecosystem.

2. Build branded thought leadership content

Build branded technical resources, including case studies and examples, to articulate where your technical expertise contributes to client engagements. This is important because thought leadership content and delivery should differ for each target audience. For example, if you complete tax returns for retail clients, you should avoid technical jargon and provide actionable advice on records retention or tax form submission guidance. However, experienced professionals need technical insights.

3. Deliver content in the optimal format

Technical content should be delivered in forums that provide the most credibility. While company newsletters or firm webinars can serve this purpose, you will have more credibility by having content in peer-reviewed magazines, journals, or speaking venues. This is because the sponsoring organization is providing a signal about your technical expertise by giving you a platform. You will be viewed as more of an authority figure than a salesperson. An additional benefit of this avenue is that it should allow easy access to sponsor organizations’ members and prospects.

4. Revisit print marketing options

Get tangible products, ideally bounded materials, in the hands of your ecosystem. Research shows that people hold on to printed materials for long periods. This is even better if the printed materials contain thought leadership content for future reference. Business professionals love reference materials for their offices.

5. Volunteer for leadership roles in outside organizations

Volunteer to be a specialty area expert for an organization like a specialty association. Again, this signals your expertise while giving free exposure to the association members and the public.

Competitive advantage comes in many forms. Here I have provided five activities tailored to develop a firm advantage from the supply side of a financial service business model. Integrating these activities makes the source of advantage even more unique. While this source of advantage is not as apparent as customer-facing features or attributes, it offers a powerful opportunity for service firms to outcompete industry peers.

 

*Suggestion for further reading:
Porter, Michael. E. The Competitive Advantage: Creating and Sustaining Superior Performance. NY: Free Press, 1985. (Republished with a new introduction, 1998.)