What about established markets that are dominated by entrenched competitors?Keep in mind that new ventures can almost never compete on price. A new market entrant simply can’t tackle an entrenched competitor head on. If there is a strategic position that your venture can occupy that allows you to compete indirectly with existing market players, then the opportunity might not be a bad one.
Should I be looking for “disruptive” opportunities?“Disruption” is a buzzword that is popular in tech startups from Silicon Valley. The term originated from Harvard Business School professor Clayton Christensen in the late ’90s.3 He defined the concept of “disruptive innovation” as a principle whereby entrenched market players could be unseated by smaller rivals who offered simpler or less costly solutions. The popularity of the term’s use to sell Silicon Valley tech startups to investors has eroded the meaning of the term to the point that it is irrelevant to entrepreneurs at large. Don’t get me wrong—disruptive technologies are a real thing and have a profound effect on shaping industries over the long term. However, disruption is not a strategy, and it shouldn’t be a major consideration when assessing an opportunity.
The Nature of Competitive Advantage
Competitive advantage is the sum of conditions that put one business in a superior or favorable position over another. Competitive advantage is something of a law of the jungle for the business world. If an opportunity cannot be strategically executed in a space where you can maintain competitive advantage over rivals, then the opportunity is not a good one. In his often-cited 1991 paper in the Journal of Management, economist and professor Jay Barney laid out a comprehensive look at competitive advantage by examining how it is formed, how it is sustained, and how it is exploited by firms. Competitive advantage stems from resources, competencies, or capabilities possessed by your company that have the following attributes:
Valuable to the customerValue is the name of the game. It is critical that what you do better than your rivals also provide value to your customers (otherwise it doesn’t produce much of an advantage).
Rare, or hard to come byThe rarer your sources of competitive advantage, the more difficult they are to duplicate and the more differentiated your business will be from competitors.
Not easily imitatedA source of competitive advantage that is easily imitated isn’t very robust. The rarer and more unique your sources of competitive advantage, the better.
Not easily substitutedIf a competitor can overcome your competitive advantage by doing something else that they are good at, your advantage is not sustainable.
Q: Where does competitive advantage come from?
Answer: The biggest source of competitive advantage is generated by what are known as distinctive competencies, which are a combination of best practices and technical skills that come together in a valuable and creative way that is difficult to beat by your competitors. For some organizations, distinctive competencies can be less tangible aspects of their business, such as their culture. An organization’s culture is the culmination of its vision, way of doing things, and perspective, or worldview. For others, superior execution that allows them to provide overwhelming value to the customer is their source of distinctive advantage. Ideally, as many organizational aspects as possible come together as distinctive competencies.
For new ventures, competitive advantage rarely stems from a narrow skill set or intellectual property such as a patent. New ventures do have a few tricks up their sleeves, however, when it comes to distinctive competencies:
AgilityStartups can—and often must—change direction completely at the drop of a hat. This is an inherent advantage over larger, more established businesses that must respond to changes in a much slower way. Is there a new customer segment that can be targeted? A startup can jump on top of openings like that very quickly. The same goes for emerging trends or new technology. Startups are speedboats compared to the ocean liners that are their established competition.
Specialized KnowledgeAs we have discussed, every entrepreneur has their own unique thumbprint of skills, knowledge, experience, and perspective. These are often an initial source of competitive advantage.
Team CohesionStartups are made up of smaller teams than their larger competitors, out of necessity. Often, team members are cross-trained or take an active role in multiple areas of the business, meaning that each is very familiar with many aspects of the business. Additionally, working in smaller groups means that the team is often very close-knit and can respond faster to challenges.
Less BureaucracyRed tape and “formal business practices” are a necessity of running larger, established businesses, but the size and agility of startups means that critical decisions can be made faster, and with less back-and-forth.
Distinctive competencies come together to form the competitive advantages that allow new ventures to compete. For example, if a firm competes on price, that’s a competitive advantage. That advantage is made possible through distinctive competencies such as superior execution or improved processing techniques. But remember, new ventures can almost never compete on price!
Quick Case: To find a clear example of fierce competition and the need to maintain a sustainable competitive edge, one need not look further than their own internet browser. In August of 1995, computer services company Netscape launched what was, at the time, one of the largest IPOs on Wall Street. Netscape’s decision to go public was buoyed by the popularity of their flagship internet browser, Navigator. Netscape’s entrance into the public market caught the attention of competitor Microsoft. Microsoft didn’t have a strong internet browser at the time, but they did have a robust operating system in the form of the Windows suite. They also had massive reserves of cash.
Microsoft released a competing product called Internet Explorer. Both Navigator and Internet Explorer were free products, but the key difference (and overwhelming advantage for Microsoft) was that Internet Explorer came bundled with the popular Windows operating system suite. To compete, Netscape infused their browser with newer and better features. A veritable features arms race ensued, and when the dust cleared Microsoft emerged the victor.
Given a second chance, could things have gone differently for Netscape? We will never know, but a clue can be found in today’s iteration of the browser wars of the early 2000s. Internet Explorer’s successor Edge is duking it out with Chrome, Firefox, and others who have managed to survive (and thrive) using Netscape’s own tactic of relying on features to produce competencies in the areas of browsing speed, privacy, compatibility, and functionality.
Chapter Recap
Ideas do not have inherent value until they are developed into opportunities. Opportunities are actionable, and they have the potential to provide value both to customers and to you.
Opportunities are cultivated from a number of sources including active search, different or new information, change, and the process of effectuation.
Opportunities that are executable, that are not obvious to others, and that solve problems for customers—regardless of whether or not the customer was aware of the problem—have the potential to be great opportunities.
If an opportunity can be executed in a strategic space that isn’t too crowded and where your entrepreneurial thumbprint and competitive advantage converge, you may have