When the tail is bigger than the dog - Creating a competitive edge

When building a start-up or good marketing plan even for a mature company it is important to ask "what separates you from the herd?" 

It is true, and I will be the first to admit it that when a company is a small fish in a big pond, this question does not really matter since the pool is big enough for many fish. However, if you want to become a big fish and you have no real advantage over your competitors, this task is almost impossible. This is why most venture capitals will insist on you having an edge.

There are many names to such an advantage. Warren Buffet calls it moat. Jack Welsh used to instruct GE to go out from all markets where they cannot be #1 or #2. Andy Grove called it the 10x factor.

But this is easier said than done. How can you create such a huge advantage that is not easy for a competitor to overcome and imitate quickly?

In a great book called "Blue Ocean Strategy" the authors suggest to categorize the product features and then take one or few of them to the extreme while keeping the other features more or less at par with the competition (or even decrease them if the market thinks that they are not no important). By taking one factor to the extreme they open a new market with zero competition, no sharks and no blood - a blue ocean.

There were many interesting examples such as gyms for women only, or a Golf club with an over sized club head where any amateur who never thought s/he can hit this small ball, is now able to.

The chart below shows how a wine company analyzed its product comparing to other wine makers. they decided that people are too confused about wine. Wines are focused on the winery brand, age, barrel, grapes, wide wine selection, etc. Yellow Tail surveyed many potential users (including ones who do not drink wine) and recognized that many people were looking for a simple wine for fun and adventure (kind of a red bull drink). Many people want an easy selection and they could not care less which winery makes it and how aged the wine is. They went for it full force. Read the book to see how they did.

When I come to think of it, the oldest famous example I know of, is how the Japanese car manufacturers took the market by offering simple family cars, but a supreme quality.

The problem with technology based companies is that it is difficult to create a long term barrier unless you are clearly developing something so complex and full of patents (say a rocket). Most companies do not have such a luxury and any feature they build into the product, their competitors can imitate within months. No wonder that Warren buffet said that he "does not understand how to invest in technology firms." It is obvious that he DOES understand it better than most of us. He means that there are no moats!

What companies can do is not to use the product but to provide a logistical service which is superior and which their competitors consider as total lunatic/impossible. If we take quality as an example, then if it comes with a 10 years guarantee as opposed to 1 year by the competitors, now we are talking. Competitors will not rush so fast to offer it. It is obvious that such an offer must be backed up and never (or very rarely) be paid, because if not, you will lose all your business due to: 1) you cannot afford to pay so much and 2) your users will grasp your guarantee as a fraud.

Other offers might be:

1. Offering an "always on time" service where the competitors are pretty much late. Suppose you are an outsource firm that does software projects. It is known that projects are never on time/budget. What if you commit to your promise and put a hefty late charge on each date you are late? What will be the market response? (how to do that is a different question)
2. Offering an ultra quick service where the market is slow to respond. See how fast DELL can send you a PC to your home based on your personal configuration. I think that no one except DELL can do that. This requires something ultra special of managing their supply chain.

Taking one factor which the market really needs to the extreme creates an edge, taking a factor that competitors think is impossible or idiotic to offer, creates a long term decisive competitive edge.

This like enlarging the tail of a dog until the tail is waving the dog instead of the dog waving his tail.

In my next post, I will discuss this issue further and speak of a paradigm shift, how frightening it is, and how to use it to your advantage in creating a decisive competitive edge.


Best,
Amir