Thursday, August 25, 2011

Are Your Advantages Expired?

Unfortunately, competitive advantages do not come in the prescription bottles with clearly displayed expiration dates. But advantages do expire: Competitors adopt them so it is no more a differentiation, the capability becomes too commonplace that it simply becomes a basic expectation, it gets commoditized and loses its value. Understanding that the competitive advantages have a window-of-opportunity can help corporations better prioritize their capital investments targeted at creating new capabilities. 

As an industry matures, some of its functional capabilities become commonplace and lose their ability to provide any competitive advantage. These functional capabilities might have produced the competitive advantages for the first movers in the industry, but when almost everybody in the industry achieves parity on a functional capability, such a capability simply becomes a prerequisite to compete in that segment without any ability to create competitive advantages. image
The figure clarifies this concept: Capability A has a big initial competitive advantage, but this advantage disappears with time as the capability becomes commonplace and everyone in the industry achieves parity. Ability to accept and process payments electronically is an example of a business capability that has progressed from being a differentiator to becoming a prerequisite for all types and sizes of businesses. Another example will be self checkout counters that are fast gaining parity among large retailers and will soon lose their ability to provide any differentiation.
Once a business capability has become standard fare in an industry segment, all firms are expected to have that capability. Presence of the capability then does not produce any competitive advantage, though its absence will produce disadvantages due to the general consumer expectation. This is the process of capability commoditization. However, innovative enhancements to such capabilities will open up the opportunities for creating advantages and the cycle can continue. The impact of such enhancements generally depends on whether they are just incremental or epochal.
However, even epochal changes changes are eventually adopted by a large number of firms and may not remain differentiators. Take the case of online retail, which would have been an epochal change 20 years ago, but cannot really be seen seen as a differentiator any more. More recently, Amazon’s introduction of Kindle is another major shift in terms of established models for selling and delivery of content. Competition from Barnes and Noble’s Nook, Google’s eBooks, Sony and others is already on its way, but Amazon is still realizing a definite first-mover advantage that shows up in their market-share.
Sometimes, the opportunity may not be clear at the onset of a new competitive business capability. This is especially true when a newcomer in an industry breaks away from the conventional model of doing business and changes the paradigm. If the new business capability succeeds, it can provide the new firm with a huge competitive advantage. Such changes can be devastating for the incumbents, though evaluating all such shifts and addressing them proactively is also a risky venture. When Dell started their business based on its custom-built laptops for the consumers, this principle was on play, the rest, as they say is history.
Therefore, companies must continuously evaluate their competitive advantages to ascertain whether they are still providing them the differentiation that their business strategy depends on to survive and grow.
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© Vivek Sehgal, 2011, All Rights Reserved.

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