How to Create Barriers of Entry in the Age of Innovation

By on August 23, 2008

Bright ideas in abundance. An idea (or a concept) is conceived by entrepreneurs; products / services are the embodiments of the idea. Some ideas are intrinsically harder to emulate compared to others, due to its intrinsic characteristics and/or its business model.

For example, Google discovered a better way to search information and its PageRank idea is codified in algorithms (Google’s secret sauce and hard to copy). For PageRank, it’s intrinsic characteristics are functionally superb; it’s commercialization strategy (AdWords, AdSense) is creative. The combination is creating a formidable barrier of entry for Google. Today, the company captured over 60% of web searches worldwide and about 45% of US Internet advertising revenues.

Of course, not many ideas are like PageRank. Many product ideas are relatively easier to copy. Within a market segment, there are multiple variations. For example, in the microblogging marketspace, there are Twitter, Plurk, Rejaw, Identi.ca, Brightkite and Jaiku. Each with different features and interface structure but fundamentally similar to the others.

If a product idea is relatively easy to emulate, then how to create competitive advantage? How to build (temporary) barriers of entry? The followings are some tactics to create and sustain competitiveness:

Strike First Probably, the most well-known strategy among web enterprises. Speed is king. Here, it’s not about bringing the best and unique idea to the marketplace but it’s about execution and implementation. If there are 10 people working on the same idea like yours and you bring to the market first, you are likely to win the ‘game’. Being first in the market enables a company to lock-in users and create network effects. eBay still managed to lead the market segment it pioneered. However, as we have witnessed in several cases, first mover is not an advantage all the time. ExciteExamples: (a) Although once commanding 90% of the market with its Navigator browser, Netscape lost the browser war to Microsoft. (b) MySpace and Friendster losing ground to late-comer Facebook in the social networking market. (c) One of the earliest search engine, Excite, lost its shine and was overtaken by Altavista, Hotbot, Google, etc.

Timing SixDegrees.com is probably the first social networking site on the Internet. It lasted from 1997 to 2001. Unfortunately, in Sixdegrees1997, social networking is not in vogue. Its demise is partly due to timing. If it were launched a few years later, it may join some of the thriving social networks around today such as Friendster, Bebo and MySpace. So, if your idea failed to take-off, it doesn’t mean the idea sucks. Maybe, it’s simply way ahead of its time. This is probably an anti-thesis of first-mover. Sometimes, the market forces and dynamics are just not ready for the products and ideas introduced by the first-movers. The lesson here is to have speed in the right direction. The right direction is dependent on entrepreneurial creativity and ingenuity.

Big Bang Once in a while, a company introduced big bang, disruptive technologies in the marketplace. The company changes the rules of the games, introduces a new order and alters the competitive landscape. Over the past years, we have witnessed a few disruptive forces. HotmailFacebook opened its Platform to third-party developers in 2007 and changed the way social network operates. Since then, its competitors adopted similar strategy. Google Gmail entered the web-based email with then unheard of 1Gb free storage. Prior to the launch of Gmail, leading services like Microsoft Hotmail and Yahoo! offered 2Mb and 4Mb, respectively. Another example is iPhone, which introduced discontinuity in mobile phone market. Since its introduction, leading players like Nokia, Motorola, Samsung, Research In Motion (BlackBerry) and Palm are playing catch-up. Big bang tactic is highly suitable for a new player to compete with established players and define new competitive rules in the marketplace. It’s about creating a ‘blue ocean’ marketspace, proclaimed W. Chan Kim and RenĂ©e Mauborgne.

Scale and Scope Amazon.com started as an online bookstore and became a virtual mega-store selling toys, clothes, Amazongrocery, tools etc. Then, it started to rent its e-commerce infrastructure to merchants and also offers its cloud computing and storage services to thousands of websites (eg. Twitter, SmugMug, and AdaptiveBlue). Amazon.com is constantly extending and expanding its offerings by leveraging on its core assets and knowledge-base to tap market opportunities. The strategy is to organically grow into a distinct organizational form that is hard to emulate. Similar to traditional industries, economies of scale and scope are the barriers of entry.

Conclusion

Enterprises are created to design, develop and deliver value objects to the market and always strive to gain leadership position in the marketplace. Building barrier(s) of entry is imperative for businesses to sustain profit generation and ultimately, enhance organizational survival in the competitive marketplace. First-mover advantage, right timing, unique value proposition and distinct organizational form can be used to make life a lot harder for your competitors.

Sources of Images: Excite, Sixdegreesre, Hotmail, Amazon.com






Better Tag Cloud