In the startup space, it’s easy to get caught up with fancy terms like network effects and machine learning. But there are ways to build a great business outside of “tech” and without these competitive advantages.
There are plenty of product plays outside of the “high tech” arena with opportunities for disruption and innovation. Great companies have come into existence based only on a new take on some widget. Many observers at the outset would not have identified these as future moneymakers who terrify incumbents and competitors, as it seems nothing is stopping a copycat from entering the market, stealing share, and driving margins down.
As these companies grow bigger, scale advantages start to kick in. Inputs from suppliers become cheaper, and in many cases sales are able to fund better R&D which lead to more cost advantages and better products. Copycats can’t seem to get the price as low as the now-market leader, although the technology is available in the market and the pieces are there. The copycat with higher prices doesn’t live for very long, and the leader’s lead continues to widen.
When such a company sets its sights on another market, how well does this advantage travel? For a company in a space with high R&D costs which are the primary source of a large barrier to entry, this advantage travels quite well, and the company might have less trouble expanding to a new market, as long as local competitors are sufficiently behind on the R&D front.
For other companies where the primary cost advantage is extracted from a large scale of physical manufacturing, it might be a different story. Due to taxes, shipping costs, and local regulations, the landed cost in the new market could totally wipe out any cost advantage, making the price indistinguishable from local copycats or competitors. One may have an idea to localize production to get around such costs, but the advantage doesn’t travel if local manufacturers and suppliers want to be compensated for small order quantities.
When expanding to a new market, startups with a manufacturing or R&D component should carefully consider whether expansion makes sense over continuing to focus on dominating their home market. Companies should identify the source and nature of their advantage, double down on it, and be wary of distractions taking them to foreign places where their advantage doesn’t play.
This is part 3 of the series “How well does your competitive advantage travel?”
