Analysis of IT news

Tuesday, June 20, 2006

General Theory: Competitive Advantage

A key concept in business is competitive advantage. That is, providing something that differentiate you from the competition. Something that your competitors cannot copy, and that customers really care about.

When a given market has not much competitive advantage, customers mostly based on price. This leads to razor thin margins as the only way to stay alive is to keep the lowest price possible.

Coming up with a competitive advantage is not easy. But coming up with a sustainable competitive advantage is even more difficult. Something that gives you an edge in the long run.

One area where competitive advantage is so scarce is the Internet. Just as it's possible to create your website and get heavy traffic overnight, it's possible for other people to create their competing website. Sure, you can come up with a great new feature. But it's very easy for your rivals to copy that feature.'s 1-click purchase idea was stolen by rival Barnes & Noble despite being patended. There are however a few:
  • Features difficult to implement (so difficult to copy): Google's powerful web search is not only about software, it's also about a very difficult optimization. Amazon's feature allowing customers to read a few pages of a book or search for books is hard to copy, as it meant dealing with a lot of publishing companies to get this content. If this can protect a Website against small competitors, it can hardly make against a 500 lb gorilla like Microsoft who has decided to attack your market.
  • Brand name: and eBay are now household names. This is a huge competitive advantage. Another website can have lower prices, customers will still think Amazon when they want to purchase.
  • Customer base: when a Website is about connecting its customers (eBay, Craigslist,, the size of its customer base matters. This is probably the most powerful competitive advantage one can have on the Web. A new guy on the block can come up with the best auction Website around, but it would be extremely difficult to overthrow eBay because of the typical catch-22: no seller so no bidder, no bidder so no seller. The only exception would be when the value of the Website is mostly due to hipness or coolness. That's indeed how MySpace was able to overthrow Friendster as the cool networking site.


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