Successful Innovative Companies Exploit Complex Sources of Competitive Advantages

A company’s successful innovation outcome doesn’t necessarily result in successful commercialization. When the product progresses from idea generation to the development process into the marketplace is called innovation but can be an unsuccessful one. Kodak developed the Kodak Disc Camera, but it was not commercially successful. To generate profits from innovation your firm should be able to generate and sustain a competitive advantage first. And to identify opportunities to generate competitive advantage requires insights into the firm’s competitive environment. Therefore, a company can have difficulty in developing and successfully marketing a product if it fails to incorporate innovation as part of its strategic management process. The management of innovation and its commercialization are two main dimensions of a strategy.

In today’s dynamic, unpredictable, and highly competitive business environment competitive advantages are difficult to generate and sustain. Therefore, to become successful innovative companies should think of innovative ways to compete, including building multiple layers of competitive advantages.  Once the new product is introduced in the market the innovation diffuses on the supply side and is imitated by the competitors. The competitive advantage the company generates is not static and gets eroded by competition. This happens with most start-up companies. One such start-up company was Xytrans, Inc., an innovator which manufactured mm-wave point-to-point and point-to-multipoint radios in the U.S.  got knocked out by its direct competitor REMEC Broadband Wireless (also a start-up company) in its product introductory stage which also designed these types of radios in the U.S. but generated cost advantage by manufacturing these products offshore.  Additionally, due to a deficiency in strategic management expertise, small innovative companies fail to compete in the marketplace. Therefore, this fear of erosion of competitive advantage puts pressure on successful companies to explore new sources of competitive advantages.  Moreover, to sustain the competitive advantage firms must constantly innovate and build barriers to imitation. A key characteristic of some of the well-established companies such as 3M, Cannon, Samsung, and Apple is that they have maintained profitability and market share over many years by constantly building multiple layers of competitive advantages in the dimensions of strategy and operational effectiveness. Moreover, the competitive advantage built based on strategy will be long lasting than built on operational effectiveness.

The sources of competitive advantage can be found everywhere in the industry value chain. Competitive advantage can be generated internally, externally, or through both sources. Some important competitive advantages in the dimension of the strategy include innovation, low cost, differentiation, strategic alliances, responsiveness, branding, and knowledge management.

Here are few suggested approaches firms can use to generate multiple layers of competitive advantages:

Internal Sources of Competitive Advantage

Strategic Innovation

In addition to creating new products, services, and processes through innovation that uses new technology, an important source of competitive advantage is strategic innovation: which involves creating value from new approaches of doing business, such as developing new business models, using different methods of product delivery, and developing new innovative and marketing strategies. For example, IKEA  developed a completely new system of delivering goods that reconfigured its entire value chain. Nike followed an innovation strategy that totally redesigned the shoe industry’s traditional value chain in order to change the “rules of the game” – by concentrating on design and marketing, and outsourcing manufacturing, and organizing a vast network of producers, distributors, and retailers. And Dell designed an integrated system of ordering, assembling, and shipping PCs, that allowed customers to choose their configuration with speed in delivery.

Competing with Standards

In today’s digital-driven networked-based economy, markets are increasingly getting affected by standards. For innovative companies to establish a standard is crucial to gain and sustain a competitive advantage. By owning a standard, a firm has the potential to create an enormous amount of value that is superior to any other type of value creation we can think of to generate a competitive advantage.

Standards appear in the market because of network externalities. When the value of a product to a customer depends on the number of other users of the same product-is called network externality. Network externality also exists when different products are compatible with one another. For example, wireless telephone networks are compatible(because they allow connectivity), therefore, buying wireless service from any of the service providers such as AT&T, T-Mobile and Nextel will allow access to the network.  Network externalities create positive feedback: when the technology gains market leadership it attracts a growing number of new buyers. Therefore, by creating leadership and maximizing positive feedback, a firm can gain control over standards which can provide the basis to generate competitive advantage.

External Sources of Competitive Advantage

External Environment of the firm

Any change in the firm’s external environment including technological change can erode the competitive advantage of established firms and at the same time create opportunities for new firms to generate new competitive advantages. The competitive advantage that is generated through external change also depends on the firm’s ability to respond fast to the change. Responding to external change can involve the following capabilities:

Preempting External Change

This capability depends on a firm’s ability to anticipate change in its external environment. IBM demonstrated a remarkable ability to renew its lost competitive advantage in its mainframe business through anticipating and then transforming itself into the IT Business.

Time-Based Competition

As today’s markets have become more unpredictable, turbulent, and intensely competitive, generating quick response capability has become a business necessity and a source of new competitive advantage. Quick responses (responding with speed) require short cycle times in product design, manufacturing, and delivery of products. Zara, a retail clothing chain part of Spanish company Inditex, grew rapidly due to its quick response capability in the design and retail delivery of clothing.

Strategic Alliances

Strategic alliance, which is a component of cooperative strategy can also be used to gain a competitive advantage over rivals by collaborating with other firms. A strategic alliance is a collaborative partnership between two or more companies to achieve strategically important goals for mutual benefits. Alliances are formed for many specific reasons, but in most instances, they are meant to access partner’s resources and capabilities to gain a competitive advantage over rivals: other than partnership members. For example, an alliance between Intel and DreamWorks Animation to develop 3-D films. Alliances offer flexibility in making investment decisions and allow a firm with limited capability to exploit new specific opportunities that require a wider range of capabilities. Strategic alliances also permit innovative companies to grow externally. Top innovative companies such as Google, Apple, 3M, and others have achieved external growth faster through strategic alliances.

Small innovative companies face difficulties to bring new products to the market and expand which require complementary resources: a diverse set of resources and capabilities to finance, manufacture and market innovative products. These resources can be accessed through strategic alliances with other firms. For example, biotechnology firms form alliances with established pharmaceutical companies for clinical trials, manufacturing, and marketing.

Today’s technology-based products are more complex in their design and performance requirements, and therefore incorporate multiple technologies that must be integrated to achieve full functionality and performance. Thus, to gain and sustain competitive advantage a firm must have access to multiple capabilities and the capability to integrate those technologies.

International Alliances

As part of the horizontal growth strategy, an innovative company can expand internationally through strategic alliances to get access to specific foreign markets. The innovative company can license the right to manufacture and market its products to other similar foreign companies. For example, Qualcomm has licensed its patented CDMA portfolio to hundreds of digital wireless telecommunications manufacturers worldwide. Its CDMA portfolio has grown steadily over the years and the company made more than $6 billion in profits in 2017 mostly from licensing agreements.

Competitive Tactics

As it becomes increasingly difficult for a company to sustain a competitive advantage for very long, a company should constantly work to improve its competitive advantage. Thus, a company must find new ways to reduce cost and improve performance to add value to the products and services it provides.

Competitive tactics aim not only to increase competitive advantage but also make the advantage more sustainable to ensure long-term profitability. But the decision to implement competitive strategies, through competitive tactics requires a thorough understanding of the competitive environment the company faces. The two well-known tactics to implement the competitive strategies are timing tactics: when to compete and market location tactics: where to compete? For example, Texas Instruments used an offensive market location tactic called “flanking maneuver” to compete with Intel in which it avoided head-to-head competition–by developing microprocessors for consumer electronics, cell phones, and medical devices and ignored the computers market where Texas Instrument held a dominant position. Flanking maneuver tactic aims to attack a part of the market where the competitor is weak instead of directly attacking the competitor.

 References and Further Reading

1. R. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2013), Chapters 7, 8, 9 and 16.
2. Paul Trott, Innovation Management and New Product Development (United Kingdom: Pearson Education Ltd., 2017), Chapter 1.
3. T. L. Wheelen & J. D. Hunger, Strategic Management & Business Policy (NJ: Prentice-Hall, 2000), Chapter 5.
4. T. L. Wheelen, J. D. Hunger, Alan N. Hoffman, and Charles E. Bamford, Strategic Management & Business Policy (United Kingdom: Pearson Education Ltd., 2018), Chapter 10.
5. Gary Hamel & C. K. Prahalad, Strategic Intent (Boston: Harvard Business Review Press, 2010).