By Michael Woloszynowicz

By Michael Woloszynowicz

Thursday, December 9, 2010

Resource Based View of the Web 2.0 Firm

In an industry characterized by rapid change, traditional strategic planning falls flat on its head. It's a waste to develop long-term strategies for an agile web startup when its competitive landscape and consumer preferences will look completely different in a matter of months. The strategic imperative should therefore be to look at competitive advantage, and more specifically, looking at the company's resources and determining how to best leverage those resources and further develop them.

There is a great deal of misunderstanding as to what constitutes a resource that confers competitive advantage. For example, many companies advertise that their employees are their greatest resource, and while it's true that employees are paramount to the success of a firm, they are not a resource from a competitive advantage standpoint as will soon become clear. Since there are many great articles on the Resource Based View of the Firm (see Competing on Resources by David Collis), I intend to focus on resources in the context of a Web 2.0 company.

Before we delve into specific resources let's recap what constitutes a resource from a competitive advantage standpoint. First off, in order to establish a competitive advantage the resource must be scarce and relevant to your company's key success factors. Clearly if the resource is something that everyone else has, or it doesn't matter in your industry or market, you won't gain any advantage with it. While establishing competitive advantage is important, what we are really looking for is a resource that sustains that advantage. In order to achieve this the resource must possess the following characteristics:
  • Durability, the resource doesn't depreciate rapidly
  • Appropriability, you capture the value from the resource
  • Substitutability, there are no readily available substitutes for the resource
  • Superiority, is it really better?
  • Non-transferable, it cannot easily be bought by a competitor
  • Inimitable, can't easily be copied by your competitors
Based on the above characteristics it is clear that employees are not a resource since they can be bought by competitors. We've seen a great deal of this recently with Facebook poaching Google employees at a rapid rate. An exception to this could be someone like Steve Jobs as he's not likely to move to another firm; however, his durability is still questionable.

Now that we've defined the characteristics let's apply them to Web 2.0 companies and look at examples of resources that can provide you with a sustainable competitive advantage. The below list is meant to serve as a starting point and you will have to look closely at your business to determine your own resources.

A patent or complex algorithm
Since a patent is owned by you and is protected from competitive use, it meets the majority of the above characteristics provided the patent covers a truly important technology. As we know, patent trolls have created entire businesses around holding patents and suing those that infringe on them. The one point of failure is durability as patents do expire, albeit over a long period of time. More worrisome however is the rapid rate of innovation that may render the underlying technology obsolete. A complex algorithm is similar to a patent, with the best example being Google's PageRank algorithm which others are unable to copy due to its size and evolution over time, resulting in what is known as path dependency.

A large user base or market share
If your application exhibits a high degree of network effects and you have a large base of users (e.g. Twitter or Facebook), competitors would be hard pressed to duplicate this easily and recreate the value of your system. Of course we know that this doesn't guarantee perpetual success as MySpace and Digg both had large user bases but are now struggling, so it is still necessary to provide a product that people like to use. 

A high degree of third-party integration
If your application offers an API that is utilized by a large number of established third-parties the value of your product drastically increases and it makes it more difficult for competitors to match your value proposition. Of course users must be using your product via the third-party applications for this to be valuable. With this resource you do however have to evaluate appropriability to see who really captures the value of the API, you or the third-party. If the third-party is the primary beneficiary or is the one with the majority of the power, then the API doesn't serve as a sustainable resource. The Facebook like button is an excellent example of this, as is the Apple App Store. 

A superior path to market
If you have a large number of users across a variety of services, it allows you to easily promote or roll out additional offerings to a large user base in a low cost and rapid manner. Once again Google is quite good at this with the obvious exception of the Google Buzz launch which took this resource a step too far. It is critical that you control this channel so that your new offerings stand out and are differentiated, otherwise you coulld reproduce the resource simply by using the Facebook platform or the Apple App Store. Facebook has also demonstrated this internally as their introduction of Places and Deals has been extremely successful by allowing them to rapidly surpassed the user base of Foursquare. 

Data
Similar to algorithms and patents, data is the new currency. Although Google and Facebook don't charge their users, the users pay them by submitting information which they in turn convert into revenue. Amassing huge quantities of valuable data on user habits, preferences and social circle is something that a competitor cannot easily copy as it is acquired over time. Once again durability is a strong factor as old data is typically less valuable than new data so a company must continually provide value to end users so they may collecting fresh information. The nature of the data will of course dictate its value as a resource.

A strong brand name
This is one of the most universal resources that companies have. A strong brand such as Oracle, IBM, or Salesforce provide a tremendous amount of value that others cannot easily copy, regardless of their marketing budget. The bulk of Salesforce's success is due to the fact that their name is synonymous with CRM's and that they have become the go to source for small and medium sizes firms. This however is also one of the hardest resources to acquire as it takes time to develop brand recognition and a positive reputation. 

To identify the resources in your own business begin with the key success factors for your market and compare them with your strengths and weaknesses. You should appraise these strengths and weaknesses based on their importance to your market, how they compare to your competitors (benchmarking), and finally putting your strengths through the above qualification test. If your weaknesses prove important to your market then you must manage those weaknesses by converting them into strengths. An example of this is explaining that a lack of functionality is intentional as it keeps the product user friendly, think 37 Signals. It is also crucial to nurture your resource and keep them up to date so you must have a system in place that continually upgrades existing resources as well as developing new ones.
Although the above resources result in a competitive advantage, the rate of innovation seen over the last decade is unprecedented. Executives and strategist must therefore continually survey their environment and see how they can utilize their valuable resources to offer new and innovative solutions. After all, a resource only has value if you utilize it to its fullest. 

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