What is a competitive advantage?
Discussions About Building A Sustainable Competitive Advantage
What is needed and quite often ignored by entrepreneurs is a business strategy. The business strategy defines a reason for competing and a reason for organizing. It is the tight integration of these two reasons that lays the foundation for your superiority over rivals serving a particular market.
Winning business strategies are grounded in a sustainable competitive advantage. A new business venture has a competitive advantage whenever it has an edge over rivals in attracting customers, attracting investors, and defending against competitive forces and industry risks. With a competitive advantage a new business venture has good prospects for above-average survivability, long-term profitability, and success in the industry. Without one, a venture risks being out-competed by strong rivals and locked into poor, to at best, average performance.
A competitive advantage is not only your venture’s ability to perform in ways that other ventures can, but more importantly something unique that other ventures in your space do not have, and cannot get. Your competitive advantage comes from an internal analysis of your vision and core competencies. It is matched with your external analysis of the opportunity and industry risks. As an intangible, it only exists from focused efforts. A tangible has physical existence and substantial form. It is capable of being touched and seen. On the other hand, intangibles have no value of their own. They have no physical existence and depend on expected future benefits for most of their value.
We have found that entrepreneurs fall into one of two problem categories when it comes to their competitive advantage. Some believe they have a “first-mover” competitive advantage. This is based on the Civil War-era maxim, “Battles are won by who gets there first with the most.” As we saw in our discussion of the Perfect Storm, this first-mover advantage does not work. The second problem is when a venture team, in its business plan, lists five, seven, or even ten different items that represent the venture’s “competitive advantage.”
In our research we found only six competitive advantages that have been successful for professional entrepreneurs leading early stage, high growth-potential ventures:
1. Branded-CEO
2. Code
3. Connections
4. Content
5. Commerce
6. Cash
When reviewing these advantages, consider what Pat Riley, one of the NBA’s most successful basketball coaches, told us, “Excel at only one thing.”
Competitive Advantage: Branded-CEO
In General Montgomery’s World War II desert campaign in North Africa, the most important strategic decision was not one of Montgomery’s field decisions, but rather Winston Churchill’s selection of Montgomery. All subsequent successes in the battlefield flowed from this fundamentally important decision. Branded-CEOs bring domain expertise, and professional and personal connections. They know that success comes from finding people smarter, better, more skillful than they are. Examples are: John Sculley with Apple, James Barksdale with Netscape, Meg Whitman with eBay, Eric Schmidt with Google, Ray Ozzie with Groove Networks, Charles Betty with Earthlink, Jeff Hawkins and Donna Dubinsky with Handspring, and Steve Wynn with his Belagio Resorts in Las Vegas. If a branded-CEO is not immediately available, a competitive advantage could be based on other human capital-related exclusives.
Competitive Advantage: Code
Entrepreneurs can become quite successful by first establishing some type of monopoly control over their intellectual property (IP) that prevents competitors from entering a market and then using this control to increase their economic return. Intellectual property is a set of intangible assets that includes patents, trademarks, copyrights, and trade secrets.
Dr. Paul Jacobs shared how Qualcomm became a leader in the wireless industry developing wireless voice and data solutions. Qualcomm is best known as the company that pioneered Code Division Multiple Access (CDMA) technology, which is now used in wireless networks and mobile phones all over the world. By making very efficient use of radio frequency spectrum, CDMA allows wireless carriers to accommodate much more traffic on their networks than they can with other technologies. In other words, CDMA allows more people to share the airwaves at the same time without crosstalk, static, or interference. Although licenses on its 731 CDMA patents provided just 30 percent of the company’s $2.7 billion in revenues in 2002, they made up 60 percent of its $942 million in pro forma operating income.
Competitive Advantage: Connections
Michael Porter calls connections “advantaged relationships.” Les Wexner, founder of Victoria’s Secret, the chain of fashion stores for women’s lingerie, called them a key element to his success. Wexner was well connected with Alfred A. Taubman, a real-estate developer who specialized in large urban shopping malls. Recall from that Microsoft’s first competitive advantage was not “code” in software programming, but their “connection” with IBM.
These connections as based on solid legal agreements and contracts that leverage business partnerships, special alliances, strategic partners, suppliers, buyers, buying groups, exclusive marketing relationships with market leaders, and exclusive access to sales channels. In the battle for dominance in the VCR technology platform, the industry experts recognized that the Betamax system developed by Sony was of higher quality and technically superior to the VHS technology developed by Matsushita. But because of superior sales channel alliances with distributors and other sales companies—in particular with those outside of Japan—it became impossible for Sony to sustain its competitive battle. So connections can beat out code.
Competitive Advantage: Content
Content relates to management, ownership, searching, storage, redistribution, re-purposing, or any combination of the exclusives. For example, MapQuest.com spun out of R.R. Donnelly & Sons and now serves up more than 10 million maps per day. And Hoovers.com, with information on more than 12 million public and private companies, provides rich data to the financial world. They have assembled and created proprietary content, which is the lifeblood of financial traders, researchers, and reporters around the world.
The use of the Internet for distributing all sorts of content—from text and photographs, to digital music and video, to clip-rights of sports broadcasting and video on-demand movies—is expected to grow once the digital rights management (DRM) systems become more robust. The Meta Group estimates that by 2004 $100 billion worth of content will be available over the Internet, which is about one-third of all electronic content available for distribution. CNN Technology expects to have available as much as 240 terabytes of data every year from its news footage.
The amounts of content employees generate and store is on the rise. It will not be long before executives figure how to create revenues from their huge silos of unstructured corporate documents, which are quickly becoming a significant asset in most companies today. Wal-Mart now has the largest enterprise content management system (ECM) in the corporate world, with 200 terabytes. Proctor & Gamble and seven other manufacturers have started using Chicago-based Transora as a central clearinghouse, which collects 230 attributes per product sold in supermarkets and converts everything into XML, a Web-based software language. Some are predicting that the ECM market will be worth about $10 billion by 2004.
As we move toward terabyte storage becoming a commodity, we shall see uses of content that will go beyond the most creative imagination today. At the confluence of biology and information technology are experts called “bioinformaticians,” who scour reams of data looking for the next secret combination of biomedical research and corporate capability. At the Lion Bioinformatics Research Institute (LBRI) in Cambridge, Massachusetts, bioinformaticians are scouring LBRI’s proprietary database, which contains information from 480 public databases, looking for such clues as how to take years off the time needed to bring new drugs to market.
Competitive Advantage: Commerce
This competitive advantage is based on marketing traction and momentum related to a disruptive technology or a cluster of innovations that are leading a technological change. “Platform leaders” like Intel, Microsoft, and Cisco are controllers of products or services that become “the foundation on which other companies build their products or offer their services.”
For example, in the early days of the PC, consumers were introduced to Hayes modems as they came installed on millions of computers shipped. Hayes was able to leverage this early competitive advantage of marketing momentum when it came to upgrading end-users to faster modems as they became available. A competitive advantage could also be having the right product at the right time, a complementary product to a disruptive product that is headed toward commoditization. For example, as the HP Inkjet and Laser printers were driven to commodities, the demand for high-quality printer cables increased, as did the price of the cables as they were repositioned and repackaged as critical accessories to high-quality printing.
Competitive Advantage: Cash
Cash flow is seen as the “Good Housekeeping Seal of Approval” by the investment community. Cash flow “on-its-way” is the next best thing. It could be coming from the winning of research grants from the government, universities, and strategic partners. We also found that a little cash and the goodwill associated with the “bench-strength” from branded investors bring in more cash. In the Eye of the Perfect Storm, the start-ups that Vinod Khosla had launched were worth some $150 billion in the public markets. His “mere involvement” in any new such start-up instantly attracted tens of millions of dollars from other investors.