Building Better Barriers

Posted by Ken Sawka on Feb 2, 2015 9:30:00 AM

Boston Cab

I hopped into a Boston cab a couple of months ago and was greeted with a sticker facing me from the Plexiglas panel that separates passenger from driver. The sticker called on regulators to clamp down on the now ubiquitous Uber and Lyft drivers that ply the streets of our fair city and implored customers to eschew such services in favor of medallioned, and regulated, taxis.

Let's see, would I pick:

A) A broken down Boston cab that may take me 30 minutes or more to hail, in which I will not know the cost of my ride until the end of the trip, and for which I will have to fumble with cash or a credit card to pay, or

B) A car I can reserve minutes in advance of my ride, with a set fare and an easy transaction over my mobile phone?

Sorry, hack, I choose B. And yes, I'm OK with Uber's dynamic pricing model.

If I'm representative of the broader, taxi-riding consumer set, perhaps there are better competitive responses than asking the government to regulate out the new competition.

Classic competition strategy inspired by strategy guru and former Harvard Business School professor Michael Porter would advise building high barriers to entry to impede new entrants and help ensure that incumbents can take more than their fair share of industry profits for a long period of time. And, while lobbying for favorable regulations is certainly one way to erect barriers, there are arguably more effective ones. Ongoing business model innovation, anyone?

And here’s the beautiful irony. The online platform that underpins Uber’s business model is not all that special. Combining a searchable inventory of products and secure online transaction capabilities has been around since Amazon’s debut more than 20 years ago. Sure, Uber and Lyft added a geolocation component, but still, this is not revolutionary technology in the year 2015, or even in 2009, when Uber got its start.

What would have prevented Boston taxi operators from launching a similar platform? I’ll tell you what: adherence to stodgy business models and a fear of self-cannibalization.

And so, as in so many other competitive strategy dilemmas, we must ask the age-old question: WWPD (What Would Porter Do?). Building and maintaining high barriers to entry is not a one-and-done strategy. It requires companies to pursue multiple avenues, including asset specificity, economies of scale, high switching costs, and the like. Ultimately, innovation must, and will, find a way.

Just like the industry incumbents they’re trying to unseat, upstarts must continuously innovate as well. Uber, for example, having upended taxi services in the 200+ cities in which it operates cannot become complacent. It must press ahead by innovating around new services, entering new markets, or finding creative ways to use the data it collects on drivers and riders.

Already, new entrants are encroaching on Uber’s position; in Boston, Bridj, an alternative to taxis, could become a viable alternative to Uber and Lyft, not to mention the city’s entire public transportation system.

Business model complacency will kill any competitive strategy faster than you can say “Kodak and digital consumer photography.” Continuous business model innovation that keeps competitors on their heels and forces new entrants to look for other industries to penetrate is perhaps the most effective barriers-to-entry approach an industry incumbent can take.

And, in this age of technological disruption, being a fast follower can work almost as well. Case in point: razor blades. If you’re a guy, you’ve no doubt seen ads on your Facebook feed for subscription-based razor blade offers from companies like Harry’s and Dollar Shave Club. Here’s another case of simple technological innovation trumping old business models – online subscriptions as a substitute for retail channel distribution.

These upstarts are making no secret of their target: the large consumer-branded razor companies like Gillette (part of Proctor & Gamble) and Schick (part of Energizer Holdings). They are to Uber as Gillette is to Boston taxi operators. But Gillette, in response, didn’t press the Consumer Products Safety Commission to modify regulations that would have made it impossible for the new entrants to compete, like banning sending sharp, dangerous razor blades through the mail (yes, I’m being facetious).

Instead, Gillette, the industry incumbent with much to lose, rolled out a subscription model of its own that leverages its brand strength and product innovation. To be sure, Gillette risks channel conflict with its retail partners, but it can manage that. Were it to let Harry’s or Dollar Shave Club take more share than they already have, it might never get it back.

Building and maintaining better barriers is an ongoing, multifaceted challenge that companies must pursue relentlessly to achieve and retain industry leadership. Companies that rely on a single, one-off barrier strategy like regulatory relief risk falling victim to complacency, allowing more innovative new entrants to knock them off their perch.

Topics: Competitive Intelligence, Consumer Goods, Industry Convergence

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