Archive

Monthly Archives: September 2012

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.

Advertisements

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.