In most of cases, when a startup or an innovation team at an stablished company present a new venture, they will be asked a crucial question: “Where is your competitive advantage?” The answers may not always be neither clear or specially convincing. The term “competitive advantage” is used and abused by entrepreneurs at startups when defending their business idea in front of investors on a daily basis. The same can be said about innovation teams at established companies.
In fact, there are only six types of competitive advantage that I judge credible beyond deciding whether a company should build on differentiation, cost leadership or focus. It is crucial for innovators to precisely identify which of those they are intending to create in order to build a lasting business.
The six types of competitive advantage that I assess in front of a new or established venture are: Proprietary technology, privileged access to resources, switching cost, economies of scale, economies of scope and regulatory influence.
This post will cover the first three. The next and final three types are covered in this post.
Proprietary technology: A company or startup that has developed a superior proprietary technology can enjoy market dominance for a long time. Google is an excellent example of this. When Google appeared, its proprietary PageRank algorithm was vastly superior to any of the competitors in the market. From Altavista to the Norwegian player Sesam, all competitors had to surrender eventually. Today, Google has 90% of the desktop internet search market. On another level, today we see a frenetic race among technology giants like Apple or Amazon in order to acquire much smaller companies with superior products within Artificial Intelligence. Their purpose is of course to secure the best possible AI technology to embed in their current and future offerings. Is your new product or service backed by a superior technology vs. your competitors, and how long do you think that superiority can last? Based on what? If not, which technology should you develop or acquire?
Privileged access to resources: When some resources are scarce and/ or vital for an industry, the player that controls them enjoys a tremendous and lasting advantage. A resource can be physical assets (like raw materials or factories), intellectual (like customer data), human or financial. A key resource to examine in detail is distribution, physical or virtual. For instance, the IBM personal computer was not necessarily the best of its breed when it first was launched. However, the most attractive market for PCs was the enterprise market and IBM had a total dominance in it through its sales channel. The rest is history. Another critical resource is customer base. A dominant customer base makes the company a much attractive player for partnerships and acquisitions because of market access. When it comes to social media, the customer base, measured in MAUs (Monthly Active Unsers) or DAUs (Daily Active Unsers), is one of the most significant drivers of the enterprise value. Which are the resources that your enterprise controls? Are they relevant enough to secure a durable competitive advantage? Are they valuable, rare and/ or difficult to imitate?
Switching cost: It refers to the cost a current customer or user incurs when trying to replace your product with another one from a competitor. It is probably one of the most powerful competitive advantages, specially when it comes to platform-based businesses. It is very difficult for a business customer that has invested significant amounts of money and resources in a given platform to abandon it. There are not only financial reasons behind this. Installed systems talk to each other thanks to previous integrations between them that are difficult to remove or suspend because they may be business critical. Banks have suffered under this reality for decades. In some cases, they only decide to revisit their IT systems (and thus their vendors) when the employees in charge of maintaining them retire or simply die. Switching cost is also essentially what makes Facebook so difficult to defeat: For a user, to move into another similar social medial platform implies the cost of building up a new “friends” base without any guarantees that his or her friends will do the same. The Google+ debacle is a powerful reminder of how resilient switching cost may be, even for the giant of Mountain View. Is your product or service built around a switching cost? How can you quantify that switching cost? Is it greater than the one from your competitors?
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