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Sustainable Competitive Advantage for Technology-based (Internet) Firms
Chloe Xu, Other, Australia
A survey on all 29,688 companies listed on U.S. Stock market from 1960 to 2009 revealed that recent firms, listed from 2000 to 2009, are dying more quickly than older ones, listed before 1970.
On average, the recent firms spent more than twice as much as the older ones on organizational capital (such as patents, R&D, intellectual property, and personnel) but only half as much on physical assets. This does allow the newer firms to be nimbler, but leaves them more vulnerable to quick imitation. Life cycles are longer in the physical world, while they have shortened in the technology-based sectors.
What can newer firms do to increase their longevity? Govindarajan and Srivastava (2016) suggest 3 approaches as below:
- Incorporate both technology and physical assets into your business model. This makes it harder for competitors to create a me-too service quickly. For example, Tesla has developed deep expertise in batteries and vehicle manufacturing as a competitive advantage that no one else in the market can copy easily.
- Design strong network effects into your business model to prevent customer switching. Facebook’s one billion users network discourages people to jump to a rival platform because they'd have to reconnect to friends and perhaps having to recreate the content they've created.
- Focus on continual innovation. Manage your core business at peak profitability, convert breakthrough technologies into new products or services, and abandon ideas, practices, and attitudes that could inhibit innovation.
⇒ In what other ways can technology-based (internet) companies strengthen their longevity?
Source: Govindarajan, V. and Srivastava, A., Strategy When Creative Destruction Accelerates (September 7, 2016). Tuck School of Business Working Paper No. 2836135. Available at SSRN.
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