Bye bye sustainable competitive advantage, hello lily pads

Many entrepreneurs make an analogy between the process of building a startup and a frog cross a pond by jumping from one lily pad to another. The point being that whilst it’s important to know where you’re trying to get to the path is never straight and that often times it’s hard to see past the next step (or lily pad).

Increasingly the frog/lily pad analogy applies to all companies. Traditionally businesses have sought out sustainable competitive advantages and then organised themselves to extract the most value from the advantages they found. In todays world of increasingly rapid change that strategy is increasingly ineffective. In her new book The end of competitive advantage Rita McGrath describes it thus (I pulled the quote from Steve Denning’s review of Rita’s book on Forbes):

The list of once-storied organizations that are either gone or are no longer relevant is a long one. Their downfall is a predictable outcome of practices that are designed around the concept of sustainable competitive advantage. The fundamental problem is that deeply ingrained structures and systems designed to extract maximum value from a competitive advantage become a liability when the environment requires instead the capacity to surf through waves of short-lived opportunities. To compete in these more volatile and uncertain environments, you need to do things differently.

Competitive advantages are, of course, still a good thing for companies to build, and the more sustainable they are the better. For this reason businesses with good network effects, companies with strong economies of scales, and companies whose algorithms get stronger with each extra user will continue to make good and popular investments. Rita’s point is that even companies that have strong competitive advantages need to keep innovating if they want to stay strong.

Three good examples from recent times:

  • Google’s strong market share in search would traditionally have been regarded as a sustainable competitive advantage but they are still innovating hard to catch the next wave so they stay on top – Google Glass, driverless cars and Project Loon are three of my favourite examples, but there are many others
  • Amazon has great economies of scale in it’s core ecommerce business and strong network effects from the Amazon market place, but they also continue to innovate heavily so they stay relevant – be it in the Kindle hardware to protect their content businesses or AWS to increase their cost advantage
  • Netflix built a dominant position delivering DVDs by post but changed their delivery model from post to streaming and their business model from buying DVDs to acquiring expensive rights

The good news for startups is that it’s hard for large companies to stay nimble enough navigate through waves of short term opportunities, and when they miss those opportunities it’s small companies that take advantage. The bad news is that the chances of getting to a point where you can relax, breathe a sigh of relief, and think “the hard work is done now” are increasingly slim.

  • http://putt1ck.blogspot.com/ Chris Puttick

    I guess that means a good (investable) startup has a few “lily pads” mapped out 🙂

  • James Penman

    Doesn’t that have a profound effect on your industry? How do you exit an investment if the product or service isn’t sustainable? Or do you guys now concentrate on generating cash from your portfolio companies as opposed to exiting them?

  • http://www.theequitykicker.com brisbourne

    The increasing pace of change is having a profound effect on every industry. For VCs I think it means that the peak exit points will either be when you’ve got to the point that you’ve proved one competitive advantage and you sell to a company looking to jump to the next wave, or when you’ve shown that you can ride the waves yourself.