The recent outcry over Mylan's decision to raise the price of its life-saving EpiPen injector brings up issues of corporate social responsibility, but also of establishing and maintaining competitive advantage that can lead to market monopoly.
- that you make something completely different than anything in existence today,
- that there is a customer who cares about your product with a budget to spent,
- that you can establish and maintain a competitive advantage, and--
- that you can make money from it (and so can they).
Often you can hear those questions on Shark Tank episodes. This article focuses on the third requirement: building and maintaining a competitive advantage. The investment put into your company can disappear in a heartbeat if highly motivated, fast-following competitors can easily copy your product, while you have no ability to depend against it. As a result, when you pitch your business plan to investors, you would need to explain your competitive advantage strategy. We don't want to invest in your business if somebody else would benefit from it. While write-offs are tax-deductive, we don't enjoy them...
Here is something else you need to know--we've already heard it all. We heard the "I'll be first to market," and we heard that "this takes more than two man in a garage for a year to build." We even heard the "nobody else knows how to do this."
Here are five real sources for competitive advantage, how they work, and when they don't.
Rocket Science and Secret Sauce
The classic example of maintaining a secret sauce advantage is Coca Cola. Introduced in 1886, never patented, simply because patents expire, opening the secret to the public. Coca Cola continues to maintain a competitive advantage simply because they can keep a secret, and their competitors can't decipher their secret formula. There are three tests to determine whether "secret sauce" can be maintained as a competitive advantage: (1) Can you (and your employees and partners) keep a secret? (2) Can it be reverse-engineered by competitors? (3) Is it rocket science? Are you one of a handful of people in the world who understand this?
Patents are granted by a patent office (such as the USPTO) if they meet 3 tests: they represent something novel, useful, and feasible. You must prove all three. The problem with a patent is that it can also be considered a "user manual" of how to build your product. They offer legal protection for 20 years and prevent competitors from making, selling, or using your invention in the countries in which you filed. Filing for patent protection in the US is not cheap, but filing in other countries, typically through the patent cooperation treaty (PCT) can be exponentially more expensive. Once the patent expired--everyone can copy it. This is less important in consumer electronics products that have life cycles much shorter than 20 years. However, it is very important in the pharmaceutical industry. Hundreds of millions (if not billions) are invested in drug development. On the day the patents expire, they become generic and for everyone to copy. Unless the patent covers the delivery method, such as EpiPen. Patents can be used to protect your invention, but also to defend against a competitor claiming that you are infringing on their patents. One of the companies I invested in had filed a patent infringement suit against Microsoft. Can't wait to see the end of this one.
When claiming man-years as the competitive advantage, be realistic. How long did it really take to develop it? Remember that your development had a lot of trial-and-error in it, whereas someone copying your product already knows what needs to be done and can save time. Unlike having a baby, large company can apply nine developers and deliver the product in one month.
Always ask: what would happen if Google decided to copy my product? Also ask--if I have a two-year advantage over Google, what would happen in two years once they catch up? Is it "game over" for me? Finally, be careful from using know-how and intellectual property developed at the previous company you worked for. You may claim that knowledge, but that company may claim the rights to it.
First Mover Advantage
You can certainly be the first mover with a new product or service. The question is not whether you are first or not. Maintaining a first mover advantage is the tricky part, and it depends on the rate of technology evolution and market adoption in that market. Only markets with slow adoption rate and slow rate of technological evolution (e.g., vacuum cleaners) would allow the first mover to maintain its advantage over the long term. It is virtually impossible to maintain first mover advantage in markets characterized by fast adoption rate and high rate of technological evolution (such as consumer electronics). The only way to maintain advantage in markets where the technology evolution and/or market penetration are rapid is to identify and maintain a consistent vector of differentiation that would leave your competitors in catchup mode.
Exclusive Access to Market or Resources
In order for a company to grow revenue it can (1) benefit from overall market growth, (2) grow share in that market, or (3) diversify. In order to diversify, your company could (1) sell the same products to more customers, or (2) sell new product to the same customers. Having a large number of customers can prevent a competitor from gaining access to that market because the customers are already using your product, serving a relatively similar need. As of the second quarter of 2016, Facebook had over 1.7 billion subscribers. For another social media service to take over, they would need to overcome the resistance of Facebook customers to switching. The fact that customers can communicate with one another compounds the power of that loyalty. Having access to market could also include exclusive channel relationships, and the like.
Having access to resources could be a competitive advantage, although it is more rare. An example could be having access to a natural resource in demand, such as oil or Lithium, on your own property.
This article was adapted from my online class: Business Plans through Investor's Eyes.