Mistake Number 1: Misreading Industry Attractiveness

Entrepreneurs have a tendency to think the most attractive industries are those that are growing the fastest. Or those that involve the latest technology. Or those that are the most glamorous. Of course, it’s not so.

The most attractive businesses are those that have high barriers to entry and the fewest substitute products or services. In other words, it’s hard for others to get into the business and customers don’t have too many choices of similar products. The more high-tech or high-glamor a business is, the more likely a lot of new competitors will enter and make it unprofitable.

Mistake Number 2: Possessing No Real Competitive Edge

For many companies, strategy means imitating their rivals, which is easy to do and gives managers a sense of security. But copycats have no competitive advantage. They’re stuck in the middle of the pack. To succeed, they need to find different ways of doing business. That is both risky and hard.

Mistake Number 3: Pursuing an Unsustainable Advantage

A lot of firms succeed initially because they discover a hot new product or service — for example, a new piece of software. But they’re so busy getting off the ground and finding buyers for their products that they forget what will happen if they succeed. A successful software program is usually imitated in a matter of months. So the advantage it alone gives cannot be sustained. Real competitive benefits in software come from servicing and supporting buyers by providing regular upgrades and getting a company on line with customers so it depends on your organization. That provides barriers to entry.

Sometimes, small companies simply cannot sustain an advantage against rivals. In this case, it would be wise to regard your business as an investment rather than an ongoing institution. Get in, grow, and then sell out.

Mistake Number 4: Compromising to Grow Faster

Remember People Express Airlines? The company discovered a price-sensitive market in the Northeast Corridor and developed an artful strategy for delivering no-frills air travel at rock-bottom prices. It started making a lot of money.

But then the company’s founder wanted to turn it into a major airline. People Express expanded nationwide and began adding services, including first-class seats. Pretty soon, the major airlines started paying attention and offered blocks of incredibly low-fare seats on each flight. People Express was unable to match them and was eventually blown away by the competition. Perhaps if the no-frills airline had kept its focus, it would still be profitable today.

Mistake Number 5: Not Communicating Your Strategy

In a lot of entrepreneurial companies, the CEO thinks up a strategy and never tells anyone else. But without an explicit strategy, how can you test the assumptions on which it rests? How can you modify it over time?

To develop an explicit strategy, you don’t need a planning staff or even a formal planning process. All you need to do is write it down and talk about it with your key managers, directors or close counselors.

One of the fundamental benefits of communicating a strategy is that it creates unity, or consistency of action, throughout your company. Every department works toward the same objectives.

The key to running a profitable business is to find your competitive advantage. Once you find it, hang onto your edge by avoiding these mistakes.