The Importance of Strategic Advantage

How does a company compete in the long run? I'm not talking about day to day stuff—but what sets your company apart, and gives it a place in the marketplace 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, etc. But all these terms mean essentially the same thing—what have you got that the market wants, that other don't?

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—what I'll call "mirages".

REAL ADVANTAGES

FIRST MOVER
The first mover 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, SalesForce.com in Hosted CRM—just to name a few. What is 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 the mass is muscle—not fat (see the large company discussion below). Being big can allow you the resources to build a great brand, spread your fixed costs over a large number of unit sales to provide a cost advantage, and enable you to attract and pay very smart people. Yes, size can be an enormous advantage, particularly in 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 of the strongest, most sustainable strategic advantages.

PATENTS
I have 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 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. If you aren't successful in the market, sometimes you can become "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, with the wide variety of stuff available for patent these days, coupled 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, which could have been very useful in that critical time window available to make a new product successful. I'm suggesting a balance here. Using the patent system can have huge payoffs, but this should be balanced with the need for capital in achieving market success.

LOW COST PRODUCER
This is another major strategic advantage if you can achieve it. It can allow you to essentially control how much profit is made by an entire market segment. It is a lot more realistic to gain a significant cost advantage in hardware than in software. But with rapid globalization and 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 were probably set for a while. But not anymore.

BRAND
This is the ultimate strategic advantage, and arguably, the only one that is sustainable in the very long term. If you establish your company as the leading brand in your market segment, it will allow you to charge higher prices, get away with somewhat higher costs, smooth over your slower decision-making, and much more. A great brand covers up many sins in the short run, and gives you additional time to recover from your mistakes, which competitors with lesser brands won't get. In the long run, brand is practically everything.

MIRAGES

FIRST MOVER
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, even Apple in PCs (they're up now, but haven't always been)—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 if that position isn't quickly backed by some more sustainable advantage—ultimately the company may serve as a case study for some fast follower to "go to school", and ultimately "eat their lunch".

TECHNOLOGICAL SUPERIORITY
This is one 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 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 be 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 due to the wiz-bang technology inside.

MARKET LEADERSHIP
This is similar to the "First Mover" discussion above. Market leadership, by itself, is not a true competitive advantage. Your company may be in the lead at the moment, but why, 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. In High Tech markets, leadership can be very fleeting—unless there is some substantial, sustainable competitive advantage behind it.

LARGE 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. Having critical mass can be great—but not if you implode under your own fat.

So that's my opinion on competitive advantage. I'm sure that you may be able to come up with many more "Real Advantages and "Mirages". Or you may disagree with the points I've made. Either way—let's talk!