What’s the number-one attribute Warren Buffett, arguably one of the most successful investors in the world, looks for in a company? “Sustainable competitive advantage,” he told an interviewer.

Competitive Advantage is a set of factors or capabilities that allows firms to consistently outperform their rivals. (adapted from Roberts, 2002)

If competitive advantage is so valuable, how does a business acquire it? Competitive advantage can be found at many levels. It can come from a variety of competitive differentiators. At the business model level some companies, such as Ebay, have sustainable competitive advantage from network effects. The low-cost airlines have a business-model advantage – they actively avoid the additional costs associated with serving high-demand, package travel and long-distance customers. Some very lucky businesses have monopolies. Some have a cost advantage, perhaps from scale or some technological or process advantage, which allows them to make excess profits while competing on price. Some businesses focus on having the best customer service.

For it to be a competitive advantage only one company can be best at whatever it is. For it to be a sustainable competitive advantage there must be some structural reason that another business could not emulate or beat it.

At the individual level, competitive advantage should be a key focus of every salesperson – if the salesperson can help the customer quantify how their particular solution benefits the customer, or by changing the proposition move the advantage away from a key competitor, then price becomes far less of an issue in the sales process.

What tools are available to help create competitive advantage? Michael Porter’s revolutionary approach to competitive advantage is now over 30 years old. Developed around the same time as the personal computer and before the mobile phone, the internet and worldwide web, it is an industrial-era theory. It focuses on creating competitive advantage within value chains within a business- the processes that make the product. However, the internet and globalisation has fragmented value chains into value systems.

It takes not one, but hundreds of collaborating and competing companies to manufacture a smartphone, for instance. So competitive advantage has firstly to be understood in the context of complex and dynamic value systems.

Network effects were not a consideration 30 years ago, and are not even mentioned in Michael Porters Competitive Advantage, but are a major source of competitive advantage in the modern world for companies like Ebay, Amazon, Facebook and Skype. Network effects have created businesses with the fastest growth rates ever seen.

The theory of disruptive innovation was developed in the 1990’s. It is not a new phenomenon – the huge ice transportation industry which provided ice for icehouses built for the homes of the wealthy was disrupted by the development of the refrigerator in 1844, and Schumpeter published his ideas on creative destruction in capitalism in 1942 – but Christensens’ theory was the first that analysed the circumstances in which disruption happens and why market incumbents are powerless to protect themselves despite their resources. Disruption in markets is growing and the rate at which companies enter and leave the list of Fortune 1000 companies is constantly increasing as a result. The theory of disruptive innovation has some very useful tools for understanding all types of competitive strategy.

Using Porter’s ideas, these tools and others, I’ve developed an analytical methodology for identifying and creating competitive advantage which I call The New Competitive Advantage – follow this link for a presentation of the key ideas. It updates Michael Porters approach for the information age. It introduces ideas and concepts that were not developed 30 years ago and moulds them into an approach that can take a technology, a product or a business model and create competitive advantage.

When applied to a technology (in the example I apply it to a new fundamental technology, the recently-discovered room temperature maser), the process helps understand when the technology will be good enough for particular markets. It can be used to discover early new market or potentially disruptive uses of the new technology. When applied to products it helps create differentiated propositions. I have used it to help several startups to create a business model that creates a clear competitive advantage in their market. I hope it is of similar use to you.

The sales proposition is an essential part of both the product development process and the sale itself. With post-introduction product failure rates estimated to be more than 80%, it is worth investing some time to make sure that the proposition meets the needs of the market we are aiming for.

In a study of electronics manufacturers’ innovation failures by Stanford University that I mentioned in a previous post (Why Products Fail), 16% of executives cited marketing, 13% cited insufficient customer benefit and 7% cited difficulty of market development. None cited external reasons. This suggests that product failure rates can be reduced by improved innovation management. A study in Harvard Business Review found that only 86% were line enhancements and 14% of business launches were new market innovations. The line enhancements generated 62% of the total revenue and 39% of total profit in the study, while the new market innovations generated 38% of the revenue and 61% of the profit.

When reviewing the positioning of a new product, I look at many things:

  • The market. It’s always surprising to me how many products are aimed at markets that don’t really exist, to do jobs that don’t really need doing or could be done just as well another way. That doesn’t necessarily mean that the product is not viable, just that it needs better analysis. The ‘jobs-to-be-done’ segmentation approach produces the best results and has rescued many products from oblivion.
  • Differentiation. Every product needs something about its marketing that separates it from the competition and makes it attractive to a particular target market, otherwise all that is left is to be cheaper – and better customer service often beats a marginally cheaper product.
  • Scope and scale. I’ve looked at products that I call ‘boil the ocean’ products, which try to do too many things. They are usually a nightmare to sell, because they are not focussed on a particular job that needs to be done. Usually the customer is left to work it out for themselves – and unsurprisingly, they rarely bother. Enterprise products with wide capabilities can take a very long time to sell, because different departments can be required to make the decision, benefits accrue to other departments than are paying for the product, and decisions take significantly longer when consensus is required.  I can usually identify a number of (sometimes bigger) markets that value particular sets of those capabilities that solve a particular job-to-be-done – the rest of the capabilities can be addressed later.
  • Substitutes. Every product has substitutes, the biggest one being ‘do nothing’. The addressable market is then which potential customers would believe the product is better than the available substitutes. It’s never the whole identifiable market. In many cases it boils down to a very small real market.
  • The value system. The value system is the whole supply chain, including the customer. To get a product to market, every part of the value system – suppliers, distribution channels, partners and customers – has to be no worse off materially than they were before. For the customer and the user (they may be different) the product has to be cheaper than something else they are using or allow them to do something they could not do before. The product has to offer benefits for the market channel that make it worth the effort against everything else they could focus on. The product has to increase a suppliers’ market without threatening existing ones. If one player in a value system we are trying to introduce a new product into doesn’t want it, the product is disruptive and we have to create a new value system.
  • The direct competition. How our competition reacts to our presence in their market, and their ability to move markets, can determine  success or failure. Larger businesses will sit and let a new entrant get some success for a while, if it can. Then they will act, and they will either, in order:
    • Squash them. The easiest way to squash a new entrant is to copy their product features. There are many ways around patents, they are expensive to defend and the number of patents that ever justify their filing cost is in the very low per cent.
    • Move the goalposts. The incumbent uses its greater resources to move the basis of competition to something the new entrant cannot offer – for instance, specialist financing.
    • Buy them (reasonably rarely). Most small businesses getting bought by larger businesses get bought for their proven development capability, not their product. If the company is big enough, it will get bought for its customer base – even pre-revenue.  This is so rare as to always be a big news item.

In the case of network-based technologies which are natural monopolies, the incumbent usually doesn’t have to do anything at all – its protection is its user base. The product has to be truly different and solve a real need that the incumbent product cannot to win a decent user base.

  • Revenues. How the product makes money – who is expected to pay for what. The people that pay are our customers and the people that use it are users – they might be different. I some cases, particularly network-based technologies, we need users to acquire customers. We have to keep both sides happy.
  • Costs. What the product costs are, and how they scale with growth. It’s surprising how many businesses haven’t fully considered scaling implications, particularly when they are trying to do something where costs scale exponentially with user growth with an exponent greater than 1.
  • Customer Acquisition Strategy. How it is marketed, and how long customer acquisition will take. I’ve lost count of the number of businesses that have told me that everyone is going to rush to acquire their product and they don’t need marketing – they all disappear without trace. Everyone is too busy to pay attention to every new product that appears. Unless your product has something that hits everyone in the face as soon as they hear about it, that has everyone telling all of their friends about it WITHOUT having to be prompted or incentivised, it will be a struggle. Growth of new products always takes longer than you would think, particularly if you are an optimist.

Getting these things right from the start will greatly reduce the risk of new product failure.

When a new technology comes along it is often described as ‘disruptive’. The usually unasked question is, who exactly is it disrupting and why?

I studied disruptive innovation to find out whether I could use it to develop a potentially disruptive business, rather than just recognise one ex-ante. The key ideas I took from Christensen’s disruptive innovation work and which are applicable to the analysis of all sorts of innovation, are:

  • analysing the capabilities of an innovation against substitutes (not just direct competitors) using the Good-Enough/Not Good Enough approach, and mapping these to potential uses;
  • the Jobs to be Done segmentation approach to identify new market opportunities or product improvements, including unsatisfied or over-served users that could be satisfied by a cheaper solution as in my earlier blog on the business continuity solution;
  • the Resources, Processes and Values framework to identify whether a particular industry or target business can accept an innovation, or how a business can be designed so that industry incumbents cannot respond without hurting their revenues and their stakeholders short-term interests.

Thinking about disruption alongside other business concepts led to some other insights. Thinking about fragmentation of the value systems that make up a market led to the understanding that, for a new innovation (disruptive or not) to be adopted, every business that remains in the new value system must be better off or it won’t be adopted. I’ve seen this happen with a number of potentially-disruptive innovations – the developer cannot get into the market because it is not in the best interest of one of the parties that would be involved in getting  the product to the customer. This is usually because the innovator is looking for a high growth route to an existing customer base.

The value system is the flow of products and services that go to make up the entirety of a product or service to the end-user, which could be an individual or a business. In the early days of the industrial revolution, and particularly before the development of the computer, companies were usually vertically integrated – they designed and built all of the parts of the products they manufactured and either sold directly to the end-user or wholesale to retailers. The computer and global communications changed that. Now a complex product like a mobile phone is the result of the combined efforts of several hundred different competing and co-operating businesses that form a market value system. If it is a fully-competitive market (ie, there is no dominant brand, natural monopoly or other factor limiting competition) then the average price will be closely related to costs.

These thoughts led to game theory and the Nash equilibrium via a little-known but very interesting book, “The slow pace of fast change” by Bhaskhar Chakravorti. I realised that competitive markets settle into a metastable equilibrium in which everyone tries to do the best they can, given what everyone else is doing. Businesses in the market system compete and co-operate to minimise two main things – input costs and risk. Lots of individual businesses fail because of poor execution or wrong resources, but on the whole the market is stable – as measured by average product price. When a new market innovation comes along that removes significant cost from the value system there is a relatively quick step change in price (once the disrupted incumbents exit) and the product settles on a new, lower average price. This seems to have happened sequentially in the PC industry, for instance, where home desktop computers were initially in the £4000 region and have dropped in steps to a price of around £300-£400 today – and are likely to disappear from most homes completely.

So who is being disrupted depends on where in the market value system the innovation is introduced and what costs are being substituted. For a new market disruption, such as the transistor radio, Honda’s Cub motorbike or Ebay auctions, a whole new value system with new customers may have to be created. The disruption is then an underperforming (by the values of the existing market products) substitute to the main markets’ products, but one that is good enough for the unserved and overserved. The tools of disruptive innovation can help us to understand whether our innovation is new market or cost-reducing, who we should be bringing along with us from the existing value system (if any), and what our proposition to them should look like.

My interest is in competitive advantage and disruptive innovation. So here’s a disruptive look at the sales profession, and a new ‘selling’ model.

Most business executives will agree that >90% of the salespeople that they meet are too incompetent to express the advantages of their product as customer benefits in the customers’ terms, which puts the onus on the customer to work out whether the product applies to them or not.

Procurement is getting more sophisticated. Many salespeople end up merely responding to tenders, with little opportunity to influence the outcome.

Companies are slimming down. Their executives don’t have the time to meet with all of the salespeople they would like to, let alone those who would like to meet them. They particularly don’t have the time to find all of the innovations from small companies that could potentially give them a competitive advantage, so they are missing out.

As globalisation, supply chain fragmentation and product complexity has increased, so the number of products and services to select from has ballooned. Executives have to kiss an ever increasing number of sales frogs to find a sales prince with the right solution for their problem. This all results in a huge amount of wasted time and resource on the part of both buyers and vendors and they might still not find the optimum solution – a M executives * N salesmen problem.

So what if we broke the problem into two – an M*1 and a N*1 problem? Create vendor-free industry forums, probably split by function along the lines of Porters’ value chain, at which executives meet to discuss industry issues. The Forums provide vendor evaluation and comparison services and provide anonymised feedback on the industry issues to the vendors in return. The Forum also looks at and reports on innovations. They could also provide best-practice procurement support services.

Our top-performing salespeople, who are really vendor-provided change agents, swap sides and work for procurement. Their skills are used to find efficiencies and competitive advantages for their employers, with a wide range of pre-assessed products and services to choose from with the assistance of the forums.

Disruption like this only works if every party that remains in the new value system is better off. The buyers will be finding better solutions faster, improving their competitive edge. The vendors can fire their under-performing sales teams and their product teams will be plugged directly into the needs of the industry. Innovators have only one place to go to to find out if there is a market for their ideas and to get advice on what they need to be accepted. The top salespeople get a more fulfilling and business-oriented role doing what they do best.

This structure does what good disruptive innovation always does – take a significant amount of cost out of the system.

Thoughts? And for those who think this will never happen – it’s already started. Although most of the players are still feeling their way towards the solution.

I recently found some interesting research on why products fail, carried out by Stanford University by Modesto A. Maidique Billie Jo Zirger and reported as “Towards an Evolutionary Model of the Product Development Process”. The study investigated 224 product innovations at 100 electronics companies with sales averaging $20M and interviewed managers involved in the process to get their ideas on why the innovation failed.

The key conclusion for me was that all causes of failure are amenable to improved management practices. The usual external excuses – the economy, globalisation – are not cited as the reason the products failed. 16% cited marketing as the cause of failure, 13% said that there was too small a benefit/cost ratio for the customer and 7% cited the difficulty of market development.

There are various innovation approaches that help create completely new high-growth opportunities. Not all of these are disruptive, but they can all be a shock to the market incumbents. Over the next few days I will publish some techniques that I have used to help create new opportunities.

1. Change the basis of competition

Changing the basis on which an industry competes is a powerful technique for taking a major share, or even control, of the industry away from the incumbents. It shifts a market from the area in which the incumbents have all of the skills needed to where the innovator has the skills and competitive advantage.

Apple has brought us great innovation again and again, from the Mac user interface through the iMac, iTunes and iPod to the iPhone, iPad and now iCloud. The common theme to all of these is that Apple has changed the basis of competition in the target market to competing through an improved user experience. These products are also designed to work well together, exploiting one of the basic principles of disruptive innovation – when there is a performance gap (in this case, the integrated user experience across all consumer devices is poor to non-existent) then an interdependent architecture developed by a single integrated company will outcompete a modular  architecture developed by many players. So Apple can be expected to maintain a competitive advantage – only Samsung, another integrated manufacturer, has a chance of competing in the near term.

As industries evolve, so the basis of competition changes. In the mobile industry the first mobile phones were very expensive and used car batteries, so the basis of competition was cost and portability. Once integrated batteries became common the basis of competition changed to coverage for the mobile operators and battery life for the handset developers. As coverage and battery life improved so the basis of competition changed to price and service bundles for the operators, with design and branding the main differentiator for the handset manufacturers. Now data coverage and throughput is becoming an issue for the mobile operators and the range of applications and user experience is the basis of competition for the handset manufacturers. What is the next basis of competition for mobile networks and handset manufacturers – maybe integrated home coverage and social collaboration?

2. Find the unserved or over-served.

Disruptive innovation is a powerful technique for creating value. Disruption is also about business models – it is quite possible to use the same technology to create both disruptive and non-disruptive businesses, as the low-cost airlines demonstrate. How can we bias our innovation efforts towards identifying more disruptive businesses?

New market disruptive innovations serve those that can’t afford to use the dominant market technology, or can’t access it. Low-end disruptive innovations target those that would be happy to have a less-featured solution at a lower price, who are usually also the less-profitable customers for the incumbent. Many innovations are a mix of both. Looking for unserved or over-served customers is a good  start in identifying new growth businesses.

For instance, many people are not served by the online travel or package holiday industry. Package holidays rely on availability data on rooms and flights, which is collected by the global distribution services like SABRE and Galileo. These run big central messaging systems for the travel industry and charge high prices to companies providing market availability information like the airlines, hotels and resorts. This means that the low-cost airlines, smaller hotels etc cannot afford to participate, which pushes up the cost of package holidays. You will not find a low-cost airline in a package holiday or on a travel website like Expedia. So is it possible to create a disruptive low-cost online travel service to put together cheaper package holidays using, for instance, social networking?