How to produce defensible competitive advantage?
October 3, 2011 Editor 0
How to produce defensible competitive advantage?
Many companies tend to focus their strategic innovation efforts on product development which are often incremental and bring little new value. Other companies have their innovation efforts concentrated in R&D departments which can be a source of radical innovations. However, if a radical idea doesn’t produce defensible competitive advantage it may not cover the costs of its expensive R&D program. Of course intellectual property rights make barriers to imitation but these are often too limited and costly to guarantee a net profit from the R&D program. It may also be high indirect costs connected to being secretive and move in “stealth” for new companies. As a result, product managers may turn to unethical behavior or desperate marketing to cover huge R&D expenses. This may hurt the reputation of the company or long term sales. Another common feature of innovation is that number two to market ends up with the largest proportion market share. But how can a company produce defensible competitive advantage?
According to Gary Hamel, companies that are too focused on the product innovation neglect opportunities located elsewhere in the company’s resources, culture and network. By just launching a new product it might eat some market share, but is vulnerable to competitor’s response. By creating a new business model for the product, the company can avoid diminishing returns from hyper-competition. The more a company succeeds to integrate their unique features into their product, production and marketing, the more strategic the innovation will be. A defensible competitive advantage increases the valuation of the company. For experienced innovators, this article may just describe the obvious, for everyone else it is a useful checklist for innovation add-ons.
In his book “Leading the revolution” Hamel mentions four main areas that should be baked into the business model of the innovation to avoid hyper-competition. The first is the core strategy; how the firm will compete. The core strategy should include business mission with main objectives such as value proposition and strategic intent. You should use the strength of your already existing strategy, or adopt a new one. For example, Moods of Norway’s slogan is to design “happy clothes for happy people” mixed with a touch of Norwegian history, culture and traditions. In four years their income has increased from 50.000 Euro to more than 3.5 million Euro. How can anyone imitate that without ending up number two in the market? Core strategy should focus on market or where the firm competes, defining customers, geography and segment. To be strategic, the core strategy needs to be different from competitors’ and build on the company’s strengths and characteristics.
Also, the company needs to look at its strategic resources. The core competencies of a company should measure what the company knows that is unique, valuable to customers and transferable to new opportunities. It might even highlight some areas of improvement and reorganization of existing staff. You might need to bring in new competence. One should also be aware of the current assets of the company such as brands, patents and infrastructure. These are often expensive to imitate as they tend to have huge sunk costs and would scare off competition. They may also bridge markets. For example, the Virgin brand has been elemental in gaining the company a foothold in a both the music, airline and insurance market. A third element is to map the processes in the company and use its strengths to improve the innovation.
A third area that a company should bake into their innovation is the customer interface, where the innovation meets the market. The company needs to identify type of channels, support and services it controls or are involved with that are available to enhance the value of the product. Also, the company must use its customer insight and use every opportunity both to increase market understanding and the market’s understanding of the company. To understand the information needs of key customers as well as their dynamic interaction with the company or product are crucial to strategic innovation. It is also a range of pricing strategies that you should consider as a new product might be able to change industry practices (think about how internet has changed the music industry!).
The final area that must be considered is the company’s value network, both up and down the value chain. Often a company gets a first mover momentum where it can attract more finances and better partnerships than its competitors. You can read more about that in Rob Day’s reflections here. The type of interaction a company has with its suppliers for example impacts opportunities for rapid changes, quality and price of a product. A company also has partners which can supply critical components and solutions to the product, or create symmetries or synergies to enhance sale. If innovation costs are high, companies might choose a coalition, even with a competitor, to radically change the market.
Dream the future
The good thing about using the framework of a meta-innovation is that it challenges you to think beyond product features, processes or market. Also, the innovation does not have to be a high cost, R&D intensive product, but can also be a simple dream or idea. Again, look at Virgin, they did not invent something radical, they just did it in a new way, adding some humor, innovation and hard work. When baking as many as possible of all the features mentioned above into your product, it may be an inimitable, radical and disruptive cash cow. If you want to read the full chapter about business concept generation that goes more into details about meta-innovation, you can find Hamel’s book on Amazon here.
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