How does a company compete in the long run? I’m not talking about the day-to-day stuff. What sets your company apart? What gives it a place in your software or hardware market segment that allows it to survive and hopefully, thrive? There are a lot of different terms used to describe the ability to compete. Strategic advantage, differential advantage, competitive advantage, unique value proposition, unique selling proposition, etc. But all these terms mean essentially the same thing. What have you got that the market wants–that others don’t have?
Competitive or Strategic Advantage is the Core of Long-Term Success in the Tech IndustryDrinking the Kool-Aid
In my consulting practice, I have the opportunity to talk to a great many software and hardware company CEOs. Many of them are of the early stage variety. I’m taken aback that some of them don’t even understand the concept of strategic advantage. To start a company and not have thought about what is going to allow you to break into an existing market seems pretty strange to me. I even hear the classic “if we can only get 5% of this huge market” nonsense occasionally. Ignorance is bliss, I guess.
A far greater number of CEOs understand the concept of strategic advantage, of course. But they have a tendency to fall in love with their company’s sales pitch, also referred to as “drinking your own Kool-Aid”. This is natural but really unfortunate. A lack of realism about what your company brings to the table is not helpful in creating a company that will break through market noise to success. I would argue that realism, even deep skepticism about a company’s advantage is important to every successful tech CEO.
Don’t get me wrong. I don‘t mean to imply that a CEO should continuously cry out “woe is me, how will we ever make it”! But at least internally a CEO should be constantly questioning and testing whether their company’s advantage is real, and not fading. Tech markets move FAST. A bit of healthy paranoia can be very useful when it comes to optimizing strategic issues.
What is a Real Strategic Advantage?
So what does it take to have a real, sustainable competitive advantage? Let’s look at some of the things that are—and some that are not sustainable. The non-sustainable category is what I’ll call “mirages”.
REAL STRATEGIC ADVANTAGE
First Mover
The first mover strategic advantage has led to some of the great success stories in high tech. Apple in PCs, Cisco in Routers, IBM in Mainframes, Adobe in Document Standards, Intuit in Personal Financial Software, and SalesForce.com in SaaS CRM. Just to name a few. What is very important to mention here is that while the first-mover advantage is real, it isn’t necessarily sustainable for very long. First movers that don’t develop another more sustainable advantage often end up as road kill in the long term.
Critical Mass
Being big can be great—as long as its muscle mass and not fat (see the large company discussion below). Bigness can provide you with the resources to build a great brand and spread your fixed costs over a large number of unit sales. This provides a cost advantage and enables you to attract and pay very smart people. Yes, size can be an enormous advantage. This is particularly true in hardware/manufacturing market segments where scale is so important. As long as the company keeps its eye on the ball and uses its mass to its advantage, this can be one most sustainable strategic advantages.
Patents
I have very mixed feeling about this one. Patents can of course become a major strategic advantage over the very long period that the patent is enforceable. IF THEY ARE ENFORCEABLE. If you have a strong patent portfolio backing a product that has achieved market success—this is one of the most powerful, sustainable advantages available. But I believe that the pursuit of patents can often be “fool’s gold” for many young technology companies. First of all, they really aren’t that important, unless you have success in the market. (They are important in raising money and exits, but that’s a different article…). If you aren’t successful in the market maybe you can become a “patent troll”, suing others for infringing your patents. But that is truly a business plan of last resort.
In software markets, in particular, I’m of the belief that almost anything can be “coded around”. Also, there is a wide variety of stuff that you can patent these days. Couple this with great confusion about what is truly enforceable, it’s gotten harder to obtain a patent that you are certain you can count on. I’ve seen a lot of early-stage companies dump too many scarce dollars into the patent process. This scarce capital could have been very useful in that critical time window available to make a new product successful. I’m suggesting that balance is very important here. Using the patent system can have huge payoffs. But this should be balanced with the need to utilize scarce early capital in actually achieving market success.
Low-Cost Producer
This is another very significant strategic advantage if you can achieve it. It can allow you to essentially control how much profit is made by your entire market segment. It is easier to gain a material cost advantage in hardware than in software. Volumes matter GREATLY here, of course. But in these days of globalization with the constant emergence of lower-cost labor markets throughout the world, even current low-cost producers cannot allow complacency to set in. Years ago, if you achieved the low-cost producer position you might be set for a while. But not so much anymore.
Brand
This is the ultimate strategic advantage, in my opinion. Arguably, it is the one that is most sustainable in the very long term. Establish your company as the leading brand in your market segment and many benefits will accrue. You can charge higher prices, get away with somewhat higher costs, smooth over your slower decision-making, and much more. Not that you always SHOULD! But a great brand covers up many sins in the short run and gives you additional time to recover from your mistakes. Competitors with lesser brands won’t get this slack. In the very long run, brand advantage is practically everything. Extreme innovation is the only real potential disrupter.
STRATEGIC ADVANTAGE MIRAGES
First Mover Strategic Advantage
Wait—“First Mover” already appeared in the “Real Advantage” column above! That’s right, it did. I think of being a First Mover as an advantage, but one that can quickly turn into a mirage and often does. Think of VisiCalc in Spreadsheets, Ashton-Tate in databases, 3Com in networking hardware, Novell in network operating systems, Digital Research in microcomputer operating Systems, MySpace in social media, and even Apple in PCs (they’re back up now but still really a niche player in terms of PC volume).
The list could go on and on. Many of you may not know the names of some of these companies, but they were all industry pioneers and at one time dominant in their market segments. The message here is that being a first mover is a means to an end. It can assist you greatly in establishing a position in the market. But that position must be quickly backed by a more sustainable advantage. Otherwise, the company may serve as a case study for fast followers to “go to school” and ultimately “eat their lunch”.
Technological Superiority
This is one that may surprise you. I hear all the time from technically-oriented CEOs, talking about why their startup will win vs. the 50 other startups and 5 established market leaders in their segment. First of all, they are usually kidding themselves—it s often not really true. They just have their head in the sand or just don’t know what’s in their competitor’s labs. And even if they do have unusually smart engineers or a great technology platform, that in itself isn’t enough to guarantee initial success, let alone sustain it. The technology must somehow be protected either via patents or trade secrets and it must still be translated into an easy-to-use product that can demonstrate productivity benefits of some sort to the target customer. Except for early adopters, no one buys products strictly due to the wiz-bang technology inside.
Market Leadership
This is similar to the “First Mover” discussion above. Market leadership is by itself not a true competitive advantage. Your company may be in the lead at the moment, but why is that, and for how long? Maybe there is a technological innovation in a competitor’s lab that will soon make your solution obsolete from a performance or cost perspective. Or a bigger fish from another larger pond with a mammoth brand moves in on your market segment. In High Tech markets leadership can be very fleeting. That’s true unless there is some substantial, sustainable competitive advantage driving that leadership.
Largest Company
This one kills many good companies. Senior management gets complacent thinking they are one of the giants of the industry. Who could possibly challenge them? This complacency is often accompanied by bloated cost structures, slow decision-making, lack of “smart” risk-taking, and political/bureaucratic business processes. All of these things allow the nimble innovator in a high-tech market to outflank the slow-moving large company. Reaching scale and having critical mass can be great, but not if you suffocate under your own weight.
That’s my opinion on competitive and strategic advantage in technology markets. I’m sure that you can come up with many more “Real Advantages” and “Mirages”. Or you may disagree with the points I’ve made. Either way—let’s talk! Post a comment to further the discussion.
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Market leadership is only valid as a strategic advantage, if the company controls an open, but proprietary standard, and is not a complementor.
In all other cases, market leadership is the result of this week’s promo spend.
A market-based standard is a paradigm, so any technological change that supplants it will itself be a paradigm change, as in cultural change. The customers/users would have to change their practices. That is hard to do. Most technological change is black boxable and is transparent to users/customers.
A standard generated by a standards body is a non-competive standard. Vendors race to meet or bend the standard. A market-based standard my result from meeting the standard, but standards emerge from practice, so the market leads the standard, rather than follows the standard. So a standards body standard will not provide strategic advantage.
The real threat to a market-based standard’s market leadership is open source software.
Two other things that fit into this:
1. Team: One of the only truly unique things about any company are the people involved and their related skill-sets and experience. Beyond great engineers, the right combination of marketing, sales, support, investors, advisors etc. can be very hard for competition to duplicate and therefore be a sustainable advantage (assuming they execute!)
2. Partnership agreements: The right agreements can be effective at blocking out competition. Whether those agreements are distribution, co-marketing, manufacturing or otherwise, when structured right, it can make it much harder for competition to enter the space.
Thanks, Adam. Great additions to the discussion.
I think that most of the strategic advantages can turn out to be disadvantages if the company is not attentive to it’s market. It needs to constantly evolve to succeed in the long term.
What seems to be a driver for investment these days is the reward of early profitability – it doesn’t matter if the business is sustainable – the “who cares about sustainability” argument. Why, mainly because by the time a company that once had sustainability starts to lose it everybody at the top has earned enough money by that point or sold it onto another company – Bebo to Yahoo is a good example. They can then go and invest it in something else that can gain early competitive advantage and excite investors enough to take their money and allow the company to degrade – rinse and repeat. Our disposable society has bled into the running of businesses.
Joe, very good points. I agree this attitude is fairly common in tech startups.