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Managing Competitive Advantage

This article appears in the issue May 2000 [Volume 9, Issue 4]

It May Depend Less on Legal Protections and More on The Golden Rule

"Winners" in business--companies that consistently create wealth and competitive advantage for their stakeholders--understand that survival and prosperity depend on mastering the relationship between strategic decision making and effective operational execution. Which means, pick the right markets--those that are growing and offer a real opportunity--and execute well in those markets to beat competitors to customers and keep customers loyal. To win in the long term requires an understanding of a firm's core competency. Here's a quick definition:

The concept is best defined as one or maybe two qualities about a firm that are competitively unique--which encourage product and service differentiation and cannot be copied by competitors, and which contribute a disproportionate share of customer-perceived value. It's the reason why customers buy from you, not from competitors, and forms the basis for entry into new markets. If you can make your current product or service approach work, then find other markets that align with that quality.

Firms that understand and leverage core competencies will win--it's that simple. The other side of the competitive dynamic are the "key success factors," which are what every company in a market must do simply to remain in that market and sell something. KSFs are nothing special--everybody has to do them simply to survive, but that's not why most entrepreneurs start businesses in the first place. When products and services mature in the natural order of things called the product life cycle, core competencies usually devolve into KSFs. In other words, the qualities that set a company and its products apart from the crowd early on become merely the minimum that every firm competing for marketshare must do just to sell into that market.

Enter IP

Intellectual property, for the most part, represents competitive advantage for companies focused on core competencies. Amazon.com, for example, has a patent on its One-Click technology and a strong brand. They are qualities of its core competency; the real core competency for Amazon.com is the experience that it creates for customers. The main goal for almost all e-commerce businesses must be to make it a pleasure to do business with them. Make it easy to use (One-Click), make people perceive that they're getting a deal (whether they are or not matters little) and sell the products people want to buy to the people who are brand-aware.

Amazon.com has managed to protect its technique for capturing customer attention. Whether One-Click is really "patent-able" is another matter; most companies would ask whether it's really anything new. I would argue that business processes like those are certainly patent-able, if only to prevent competitors from securing the same features. In effect, commoditizing the features of its business and turning it into a mere KSF.

IP forms a solid basis for core competency in many ways--which, of course, translates to competitive advantage. It's true purpose is to protect firms' investments in innovation and R&D efforts from commoditization by low-cost producers. IP is also a lot broader than patents. When considered in the context of competitive advantage, you must also include trademarks, trade secrets and copyright protections. In our Amazon.com example, the company has a powerful brand, which is based entirely on its trademark-protected name.

Copyrights

Consider copyrights, the idea that implicitly prevents copying and redistribution of ideas and creative efforts in any form by other parties without the permission of the creator of that media. This article, for example, is implicitly copyrighted to its author (me), at least according to U.S. copyright protections. As the author, I'm not even required to attach the "All Rights Reserved" label to the bottom; it's simply implied that it's copyrighted to the author, unless declared elsewhere--for example, in the masthead of the publication.

Today, it's more important than ever for knowledge businesses, those whose product is media itself, to support the most rigorous copyright protections. The music industry, for example, is currently dealing with the uniquely Internet phenomenon of MP3. One might say that MP3 is the death of, if not the entire music industry, at least the record industry.

Musicians will still make music, presumably, whether they're paid or not. In fact, many artists have embraced the idea of free distribution of their wares because it allows them to accomplish their true purpose more effectively--distribution of their ideas. But record companies are businesses and must protect the investments they've made in promoting, packaging and distributing their products (the music created by their artists under contract) or risk eventual bankruptcy. When a product is pirated, it's free of cost--although not entirely so, because copyright owners can still attempt to prosecute the pirate.

Napster, perhaps the most important development in the MP3 saga, was created by a college student (where have we heard this before?) who had trouble finding free MP3s on the Internet that he wanted to listen to. So he decided to write a program--to make available for free, downloaded on the Net--that would allow each user of the software to also become a distributor of whatever music they currently had in their MP3 collection on their PC. The recording industry finds this the most aggressive competitive threat to its continued survival--let alone its prosperity and ability to create wealth for its stakeholders! With Napster, users themselves are participating actively in music piracy, through passively tolerating MP3 downloads from their PC without intrusion into their normal computer use. Lawsuits are underway, but frankly, I think it's too late. It's like a big bootleg swap.

Napster sums up the power of ideas. They can serve to create or destroy markets wholesale by recruiting and involving blackmarketeers in profiting, in this case through simply requiring passive participation in piracy of copyright material in the form of music they already have, in order to have access to the music they want. Until creative products are seen as more than just downloadable files that "want to be free," we'll continue to face the cultural tides that will ultimately undermine all legal matters when it comes to IP.

Intellectual property on a global basis, now a chief concern because of the Internet and the globalization of even small businesses, requires a different approach. IP revolves around laws, and laws are based on the legislative decisions of nation-states. There are a couple of hundred different nation-states in the world today, each with its own set of protections designed to prevent competition in certain markets, protect intellectual property owners and, sometimes, preserve the nation's competitiveness.

Lately, we've seen copyright become an issue with regard to software licenses, definitely an intangible intellectual property that requires strong protections, where certain countries are less willing to protect American copyright holders. The efforts of the U.S. government and its foreign trade policies have helped ameliorate the problem, as have the efforts domestically of the Business Software in catching software pirates (usually through tips from disgruntled employees that their former employers are using pirate wares), but it's still estimated that software hacks and piracy cost the U.S. software industry billions of dollars in lost revenue each year.

Clearly, the Internet and the evolution of the knowledge economy have brought about new challenges to intellectual property owners and have made it necessary, more now that ever before, for us to have strong protections. When there is no longer a mechanical restriction on access to others' IP, "Do unto others as you would have others do unto you may be the only law we can count on.


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