Strategy4Startups: Building a sustainable competitive advantage
The success of any business is dependent on creating a sustainable competitive advantage or sometimes called a competitive edge. But what is a sustainable competitive advantage? Competitive advantage can have many definitions but I prefer a definition that takes two key stakeholders into account – the customer and your competitor. Competitive advantage is an advantage gained over your competitors by offering customers superior value either by offering lower prices or by providing greater benefits and services to justify a higher price. Sustainable competitive advantage is simply being able to maintain your competitive advantage over an indefinite period, and this is a major challenge.
Far too many information and communications technology (ICT) companies have business models without a competitive advantage. For example, there are so many companies doing website designing or portal development that it is almost impossible to develop competitive advantages and hence a successful business, yet every year more and more Technopreneurs join the bandwagon and waste their talent and effort on such businesses. Even in the telecommunications industry especially in voice over Internet protocol (VoIP) services, which provide low cost phone calls, it is also impossible to build any competitive advantage. In these examples anything you can do, your competitor can imitate and it is tough to offer a differentiated service to gain an advantage over the competitor.
Building a competitive advantage requires a clear focus on a differentiated product or service in which you can offer superior value that is not easily imitated by your competitor. It is vital to ensure that in your particular business the barriers to entry for new competitors is high and that you can build long term relationships with customers who will not or cannot switch suppliers easily.
You can build competitive advantages through several sources and these can be divided into internal and external sources. Internal sources of competitive advantage are based on the core competencies, creativity and innovative capability of your firm and human resources. For example, Dell has built a core competency in delivering products fast, custom built and of high quality to meet exacting customer needs. They have mastered the logistics aspect of receiving orders over the Internet or via the telephone; custom building each order to customer specifications, testing the final product to ensure high quality and ensuring the product is delivered within 48 hours. Even if you go to a shop and ask for a custom built computer or server it can take more than 48 hours to build and deliver the product and often there will be quality problems.
Despite its success Dell is still the only computer company to sell computers solely over the Internet and via the telephone. No other computer manufacturer has managed to copy the Dell model and some have avoided it because it will cannibalise their existing channels and relationships and this helps Dell maintain their edge. This gives Dell a unique competitive advantage that is inimitable thus enabling Dell to sustain an edge over rivals almost indefinitely.
The second source of competitive advantage is external and this is found in the process of change. Major changes happen in terms of changing customer demand or tastes, price changes, technological changes, changes in the environment and regulatory changes. Every one of these changes can have a significant impact on the business and hence on your competitive advantage. Unfortunately most companies are either unprepared for change or are unable to respond effectively to change. There are only three things in life that are certain: death, taxes and change. So change will happen and unless you are aware of the changes in your industry, in society and globally, you will not be able to maintain a sustainable competitive advantage.
The telecommunications industry for example is so fluid that it is almost impossible to predict what the industry will be in the next 3 years. However, you can be certain that there will be new products and services not even in existence today that will be the social norm by 2010. For example, the convergence of telecommunications and content will mean that in future there will be one single device that does the job of the mobile phone, the PDA, the iPod, a Blackberry and will also include a mobile TV and radio and even a global positioning system. What will that do to companies still making single devices or companies providing content for single devices? Many companies will fail but a few will be hugely successful if they are creative and innovative and can keep up with these new technologies. Can you build a competitive advantage despite these changes?
Change creates challenges but also opportunities and it can create new competitive advantages for innovative companies that have the ability to exploit these changes. One company that has done this successfully is Skype, the new darling of Internet telephony. Using the Internet as the backbone of its service, Skype offers users the opportunity of making free voice calls and now video conferencing using the computer. While Yahoo! and MSN also offered voice communications over the Internet and have done so for many years, Skype offered not just a better quality service but they also enabled users to call mobile and fixed line telephones for a small fee, something even Yahoo! and MSN could not do. Today it costs just 9 sen a minute to call anyone anywhere in the world and this has huge implications not just for Skype, which was sold for almost RM 12 billion to eBay, but for all global telecommunications firms. How does a telco sustain a competitive advantage in international phone call services with the advent of Skype and other copycat services?
This does not mean that it is not possible to maintain a competitive advantage in a changing world. It only means that all companies must be constantly on the alert and prepared for such revolutionary changes that will affect their industry and their business. Gary Hamel the London Business School academic and author of “Leading the Revolution” believes that we have now “entered the age of revolution where the value of incumbency is being eroded and those companies that embrace discontinuous change will be the winners”. To ensure long-term success, the company must not just have a sustainable competitive advantage but it must be ready and able to embrace change and build new sustainable competitive advantages.
Far too many information and communications technology (ICT) companies have business models without a competitive advantage. For example, there are so many companies doing website designing or portal development that it is almost impossible to develop competitive advantages and hence a successful business, yet every year more and more Technopreneurs join the bandwagon and waste their talent and effort on such businesses. Even in the telecommunications industry especially in voice over Internet protocol (VoIP) services, which provide low cost phone calls, it is also impossible to build any competitive advantage. In these examples anything you can do, your competitor can imitate and it is tough to offer a differentiated service to gain an advantage over the competitor.
Building a competitive advantage requires a clear focus on a differentiated product or service in which you can offer superior value that is not easily imitated by your competitor. It is vital to ensure that in your particular business the barriers to entry for new competitors is high and that you can build long term relationships with customers who will not or cannot switch suppliers easily.
You can build competitive advantages through several sources and these can be divided into internal and external sources. Internal sources of competitive advantage are based on the core competencies, creativity and innovative capability of your firm and human resources. For example, Dell has built a core competency in delivering products fast, custom built and of high quality to meet exacting customer needs. They have mastered the logistics aspect of receiving orders over the Internet or via the telephone; custom building each order to customer specifications, testing the final product to ensure high quality and ensuring the product is delivered within 48 hours. Even if you go to a shop and ask for a custom built computer or server it can take more than 48 hours to build and deliver the product and often there will be quality problems.
Despite its success Dell is still the only computer company to sell computers solely over the Internet and via the telephone. No other computer manufacturer has managed to copy the Dell model and some have avoided it because it will cannibalise their existing channels and relationships and this helps Dell maintain their edge. This gives Dell a unique competitive advantage that is inimitable thus enabling Dell to sustain an edge over rivals almost indefinitely.
The second source of competitive advantage is external and this is found in the process of change. Major changes happen in terms of changing customer demand or tastes, price changes, technological changes, changes in the environment and regulatory changes. Every one of these changes can have a significant impact on the business and hence on your competitive advantage. Unfortunately most companies are either unprepared for change or are unable to respond effectively to change. There are only three things in life that are certain: death, taxes and change. So change will happen and unless you are aware of the changes in your industry, in society and globally, you will not be able to maintain a sustainable competitive advantage.
The telecommunications industry for example is so fluid that it is almost impossible to predict what the industry will be in the next 3 years. However, you can be certain that there will be new products and services not even in existence today that will be the social norm by 2010. For example, the convergence of telecommunications and content will mean that in future there will be one single device that does the job of the mobile phone, the PDA, the iPod, a Blackberry and will also include a mobile TV and radio and even a global positioning system. What will that do to companies still making single devices or companies providing content for single devices? Many companies will fail but a few will be hugely successful if they are creative and innovative and can keep up with these new technologies. Can you build a competitive advantage despite these changes?
Change creates challenges but also opportunities and it can create new competitive advantages for innovative companies that have the ability to exploit these changes. One company that has done this successfully is Skype, the new darling of Internet telephony. Using the Internet as the backbone of its service, Skype offers users the opportunity of making free voice calls and now video conferencing using the computer. While Yahoo! and MSN also offered voice communications over the Internet and have done so for many years, Skype offered not just a better quality service but they also enabled users to call mobile and fixed line telephones for a small fee, something even Yahoo! and MSN could not do. Today it costs just 9 sen a minute to call anyone anywhere in the world and this has huge implications not just for Skype, which was sold for almost RM 12 billion to eBay, but for all global telecommunications firms. How does a telco sustain a competitive advantage in international phone call services with the advent of Skype and other copycat services?
This does not mean that it is not possible to maintain a competitive advantage in a changing world. It only means that all companies must be constantly on the alert and prepared for such revolutionary changes that will affect their industry and their business. Gary Hamel the London Business School academic and author of “Leading the Revolution” believes that we have now “entered the age of revolution where the value of incumbency is being eroded and those companies that embrace discontinuous change will be the winners”. To ensure long-term success, the company must not just have a sustainable competitive advantage but it must be ready and able to embrace change and build new sustainable competitive advantages.
10 April 2006
posted by Dr. Siva at 10:46 PM
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