What is sustainable competitive advantage?
One of the most common questions VC’s ask entrepreneurs is "what is your sustainable competitive advantage?" In the case of technology entrepreneurs, they often mistake sustainable competitive advantage for some unique technical capability of their product. I have to admit, as a technology geek, this one had me baffled for the longest time, for exactly that reason. I thought investors were asking about our technology. However, technology is not a sustainable advantage. Technology is, at best, an ephemeral advantage.
Sustainable competitive advantage is achieved by continuously developing existing and new resources and capabilities in response to changing market conditions. The opportunity for companies to sustain competitive advantage is created by capabilities of two kinds – distinctive capabilities, and reproducible capabilities – and the unique combination of those capabilities which they can create. Distinctive capabilities, which are the basis of sustainable competitive advantage, are the characteristics of the company which cannot be replicated by competitors, or which can only be replicated with great difficulty. For instance, distinctive capabilities might include patents, exclusive licenses, strong brands, leadership, teamwork, or tacit knowledge. Reproducible capabilities are those that can be bought, or created by your competitors and thus by themselves cannot be a source of competitive advantage.
The error technologists make when they point to technology as the source of their competitive advantage, is in not acknowledging that technology is reproducible. Remember Netscape? They appeared to have a lock on the internet browser market until Microsoft duplicated the technology, and used its superiority in brand, channel relationships, PC industry know-how, and partnering skills to make Netscape a footnote in the history books.
To build a great company takes execution on many fronts, not just technology. If you’re a technology company, you should eat, breathe and sleep technology… and how your customers will use that technology. Technology is what you sell, after all! But you also must develop other core competencies and sources of sustainable competitive advantage, which might include:
Cross functional excellence: the know-how to transform stand-alone technologies, products and services into a value-rich solution.
Stakeholder focus: the understanding of stakeholder needs — customers, employees, suppliers, shareholders, society. Most technology companies get a C grade on this one.
Sustainable business models: the ability to "zig and zag" in response to market requirements, while preserving revenue a stream. The greatest zig in recent memory was Microsoft’s turnabout on the importance of the Internet.
Corporate culture: an innovation adept culture of commitment where employees passionately pursue the organizations cause and mission. Do your employees wait for you to tell them what to do, or do they step up and "do the right thing"?
People: the firms repository of knowledge, and the skill base that makes you competitive. When you hire, do you hire the best?
Why write this now? Well, Firefox has been in the news a lot recently, and I’ve been discussing it with a number of people, including a public discussion over on the CEO Bloggers Club. Firefox is a great piece of technology, which I use myself. However, despite the breathless hype from the press, this David can’t beat Goliath (Microsoft). Firefox is a piece of technology, with no discernable sustainable competitive advantage.
Nothing has changed since the last browser war. Microsoft still has the upper hand.