Tuesday, July 03, 2012

Sources Of Competitive Advantage On The Web

The question "What if Google or Facebook develops something similar?" will be answered very differently today than if it were asked 5 years ago. Today, it is not just Google or Facebook that can do something similar, but hundreds or thousands of other developers, startups, and companies can also pretty much make something exactly similar to what you are doing on the web. 

Sources of competitive advantage in the technology world (particularly web) have changed in the past few years, and, off course, the old sources are very different than the new ones. These changes are much more stark between the Web 1.0 and current web-based companies, and have been pioneered by modern online successes such as Fab, Pinterest, Foursquare and Twitter. Following is a brief of both, old and new, sources of these competitive advantages in the world of internet. 

OLD FACTORS
  • Technology - With the proliferation and adoption of open source technologies and cloud computing - unless you are a company like Google that has some kind of hard to replicate technical IP - technology is no longer a source of competitive advantage anymore. Almost every company has access to similar technologies and platforms, and most of the online initiatives do not require super complex algorithms. 
  • Business Model - Dell was able to get ahead of its established competitors because of its business model. It was revolutionary in its time, so much so that even Apple copied it later. While it worked then, it is rare nowadays for web-based companies to have a strikingly different business model that can be used as a competitive advantage. Pretty much all technology [web-based] companies are using existing business models, where they apply incremental improvements or exploit a niche. 
  • Suppliers and Partners - APIs have revolutionized the whole supplier/partner relationship model. While such relationships are still established and managed the old way for bigger ventures, APIs can allow you to put together a working (and probably scalable) project in order to get started. Some of the reasons for this change are the rising importance [and base] of user data and advancements in data-processing technologies, along with the rise of mashups and app economy. 

NEW FACTORS
  • Design / User Experience - One of the major changes in recent times has been the emergence of design as a key competitive advantage. User-centered design and user experience have been exploited by new companies to differentiate from the incumbents. This has not just led to emergence of beautiful but also powerful desktop-class web applications. Technological improvements in the field of browser technology, cloud computing and mobile computing have helped in design improvements, and players like AirBnB, Fab and Pinterest have leveraged them well. 
  • User Base / Network Effect - Most of the recently successful web companies exploit the social aspect of human nature and leverage the network effects. This has now become one of the most important and hard to replicate competitive advantage for web-based companies. In fact, it has become so important that it is now considered one of the primary factors for valuing early-stage stage and private web-based companies. 
  • Focused Approach - Just because Google or Facebook can develop something, does not mean that they will. And even if they do, that might not sit at the core of their business. And in addition to that, their existing baggage does not allow them to move fast enough as far as new decisions and changes are concerned. On the other hand, smaller companies are much more nimble and focused. Instead of focusing on 10 different things, they have only one thing to worry about, and a small number of people to get onboard for new ideas, which makes them much more nimble than the Googles of this world. 

These are some of the factors that came to my mind; I am sure there are others that have not been captured here. The bottom-line is that the factors that give competitive advantage to organizations on the web have changed drastically. And if you look closely enough, you will observe that these have turned towards softer aspects from their more hard predecessors. I believe these also reflect our growth as economy from manufacturing-oriented to services-oriented one to now a more experience-oriented one.

4 comments:

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  2. Some of the traditional Competitive advantages still stand. for example relationship with suppliers and scale of operations. Especially in consumer electronics for emerging markets a $5 difference in bill of materials is a huge source of competitive advantage. Its not only about $600 devices

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    1. yeah they sure do..but note that the focus of this article is on the Web. And there, at least to begin with (if the counterparty has exposed its API) you can get a head start instead of wasting time in negotiations. Having said that, even on the web bigger partnership still require you to go through the traditional route.

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