What is a sustainable competitive advantage?
A sustainable competitive advantage is an edge your company holds over your business rivals that can be sustained, possibly indefinitely. These types of advantages differ from traditional competitive advantages in the fact that they can be maintained for long periods of time, sometimes centuries.
Sustainable competitive advantages are usually discussed using physical products and manufacturing companies as examples, but how do these principles apply to software and digital companies? Can software companies even achieve a sustainable competitive advantage in their market? In this post, we will explore these questions and try to find a way to adapt this old business language to our new information-driven digital economy.
What isn’t a sustainable competitive advantage?
Sometimes it’s easier to talk about what something is by first talking about what it isn’t. Competitive advantages exist all over the marketplace. Let’s preface by saying that unsustainable advantages are a necessary part of any good business strategy. In fact, almost every company out there will have at least one or two unsustainable or contestable advantages with their competition. Advantages are unsustainable when they are readily imitated. Why would a new company come up with an original idea when it’s cheaper and easier just to emulate yours? Imitation is a huge problem in the software/digital industry, but it’s something that we have to deal with.
The three most common types of unsustainable competitive advantages:
1. Product innovation
As soon as you develop new software, service, or app, people are trying to copy what you have done. The digital world is notorious for this, and any advantage you gain by having something that’s “new” will be gone before you know it. You can think of this as a constant “arms race” that you are having with your competition. Each side will make innovations that the other will eventually copy or perfect.
2. Process innovation
Let’s say you figure out a way to distribute or deliver your digital products cheaper than anyone else. Sure you’ll enjoy a short time in the sun, but it won’t take long for your competition to discover your methods. Even if you have a high rate of employee retention, somebody will leave, and the first thing they’ll try to leverage to get a new job is the information they have about your company. You can wave non-disclosure agreements around all you like, but in the end, your secrets are not safe. If your process is profitable, your competitors will figure it out and try to copy it.
While you can gain a massive edge over your competition with a grand marketing strategy and mix, your competition can always do the same. These types of advantages are still unsustainable because any company can achieve the same results as yours given enough time and resources. The only way you can sustain a marketing advantage is with a fierce investment of time and money. It’s probably possible to maintain a power position in one area of marketing or another, but a comprehensive advantage is near impossible. For example, you could spend a lot of your marketing budget and dominate adwords, but you will end up having to take funds away from other marketing efforts like inbound content creation. Check out the budgeting section of our Inbound Marketing Guide For SaaS Companies for more on this.
So which tactics tend to be sustainable and why? Furthermore, can you apply any of these tactics within your own business? Unfortunately, there aren’t any studies on sustainable competitive advantage strictly for companies with primarily intangible assets, like software. This being said, there are several lessons that we can gain from the studies of traditional businesses which can be adapted to the digital world.
1. Size in the market:
This is the exploitation of the fact that our market has a finite amount of supply and demand. Sustainability is reached when one company in the market decides to get so big that its competitors cannot risk matching size with them. This type of type of sustainable advantage works in market conditions that cannot support two super-sized companies. The digital example of this would be Google and its parent company Alphabet. While there are other search engines like Bing and Yahoo, they all pale in comparison the size of Google. Other companies cannot compete with Google on Google’s level now because the investment required to achieve a similar size would cost not only billions of dollars but also take decades. Deciding to organize the world’s information was a great business move on Google’s account because it is a feat that simply cannot be copied sufficiently.
While it’s true that this strategy can yield you a very stable advantage, it may also be unattainable for many companies. Don’t let this fact hinder you using size to your advantage. The digital marketplace is vast, and opportunities abound. While achieving a size advantage on a scale like Google’s might be unattainable, finding a niche to grow in is entirely within your reach. Take Hubspot for example. Hubspot put a name to Inbound Marketing Software and then grew itself in the marketplace to the point where it might not be smart for an inbound marketing software company to compete with them on the same scale. Some companies like Marketo and Eloqua try, but it is clear that Hubspot has a sustainable advantage that will be hard to break.
2. Resource/customer access:
Controlling access to either market resources or customers is another way to gain a maintainable advantage. Sustainability is reached when one company has exclusive rights to sell a product or exclusive rights to sell to a specific group of customers. This advantage can be achieved by a company regardless of its size, that being said, we are going to be using big companies as examples. Take Facebook; the company has created a marketing platform which allows them to sell target ads to their users based on demographic information which Facebook has exclusive rights to. So, if a company needs to advertise to college-educated single mothers between the ages of 25-40 living in New York City, Facebook is their only option. Facebook built this exclusivity themselves, but there are other ways to win exclusive rights to resources or customers.
In the digital world, gaining exclusive access to a group of users can grant you a huge competitive advantage. By controlling the varied method that their users receive information, many companies like Facebook, Twitter, and Linkedin have won a sustainable competitive advantage that will endure for the foreseeable future.
3. Competitor restrictions:
This is a tricky advantage to gain. A company would attain this advantage by using restrictions on their competitors as opportunities to surpass them. By using the law as your tool, you can sustain an advantage through copyrights, trademarks, and patents of your ideas. You can then use the law to fight at your side to maintain your advantage. The second another company tries to imitate you, your lawyer’s can get to work. While this strategy is far from foolproof, it has been used successfully since the invention of business.
Another great way to win a sustainable advantage is by being more nimble in policy adoption than your competitors. If you can be the first to adapt to changing marketing trends you can win an advantage. You keep that advantage by maintaining that adaptability and staying ahead of the competition. Amazon is a great example of a company that has won this type of advantage in the market. By becoming relentless about innovation, Amazon has set a pace in market adaptation that simply cannot be matched by other companies. By the time another company has copied what Amazon is doing, Amazon is already moving onto another way to make money.
These are the tactics that have historically lead companies to sustainable competitive advantages in their markets. Even though we live in a world that seems far removed from the economic realities of the past, these truths can still guide our actions today. Do you feel like your company is on the right track sustainability? If you have a feeling that what you are currently doing could be done better, please feel free to contact us, we are here to help.