CorporateViews - Entrepreneurship

Building a Sustainable Competitive Edge / Advantage

As mentioned in the Principles of Economics, market competition can be
generally be classified into 4 main groups namely Monopoly, Monopolistic
Competition, Oligopoly and Perfect Competition

When a new startup introduces a novel innovation to the marketplace, the
company will begins its journey as a monopoly, offering its unique
product/service to the targeted market segment.

However, as the company grows its markets and expands in size, profits will
motivate competitors to enter your market segment. To help gain a share of
the pie for themselves in the market, competitors will at this stage introduce
slightly differentiated product/service to compete for market share and profits.
This results in either the monopolistic competition or oligopoly models being
formed.

Depending on the nature of your product/service, market competition may
develop into the prefect competition model if a sustainable competitive
advantage cannot be established to defend your market position. If such
situation arises, it will be very difficult for your company to grow your market
reach and profit margins without coming up with further product/service
innovation.

For example, if we look at the Overnight Courier Service industry, Federal
Express was the innovator who started introducing such services to the
market in 1973. However, when profits grew tremenduously at Fedex,
competitors such as UPS and DHL started to enter its market segment to
compete for the market share and profits. As the market matures, smaller
local players began to emerge to serve various market niches in the same
market segment across different countries, leading the industry near to
perfect competition.

Thus, to help prevent your startup from falling into the hands of its
competitors, the company will have to introduce measures to ensure that it
has a sustainable competitive advantage in the marketplace.

1. Intellectual Property Protection (IP Protection)

Coming to the 21st century, as the world becomes more developed and
moves towards a knowledge-based economy, it is inevitable that one of the
best way to protect an innovation is to file intellectual property protection for
it.

By protecting your innovation through Patents, Copyrights, Trademarks and
Registered Design, you can prevent unauthorised usage of your innovation by
your competitors.

Moreover, filing IP Protection for your innovation provides you with greater
flexibility for your business model. You may choose whether to develop your
innovative product/service on your own or license it to other external parties
to expedite market expansion/dominance.

2. Entry Barriers

Besides IP Protection, it is essential for startups to establish entry barriers
for their product/service. This will help acts as barriers of entry to competitors
and hinder the pace of competition.

Some examples of effective entry barriers include securing critical
complementary assets (such as obtaining exclusive raw material sources),
tying partnership deals, building alliances, introducing lock-in effect (which
creates high switching costs), etc.

3.Network Effects

Network effect refers to the situation in which if a company captures one new
customer, this action will help generate another new customer(s) for the
company.

By ultilizing this highly effective method of market expansion, many social
networking websites (e.g. FaceBook, MySpace) have managed to gain a very
large customer base within a short period of time. As the membership grows
exponentially at these companies, more and more people will be enticed to
sign up as new members as they would also like to be connected to their
friends on these platforms.

Hence, it will be a big boost to a startup if the company is able to implement
Network Effects as part of its business strategy.

4. Network Externalities

Network Externalities has often been confused with Network Effects.
For clarity, in short, Network Externalities can be considered to be a
consequence of network effects, where additional benefits arise when more
and more member consumes a particular product/service (i.e. as the number
of customers increase).

For instance, Microsoft created network externalities such as the Xbox Live
platform so as to help promote its Xbox business in 2002. By offering it as an
additional benefit (of downloading content) to the Xbox/Xbox 360 owners,
Microsoft is able to enhance the appeal of Xbox/Xbox 360 to its targeted
customers. As the number of customers increases, the appeal of the Xbox
Live online multiplayer gaming grows, this helps attract more people to buy
Xbox/Xbox 360 systems to join in the fun.

This strategy of using Network Externalities to increase the desirability of a
product/service is a good way to boost demand. The success of the iPod can
also be attributed partly to the network externalities introduced by Apple to
generate addtitional consumer demand (e.g. setting up the iTunes Store as a
network externality).