Join Anil Gupta for an in-depth discussion in this video Relationship advantage, part of Developing a Competitive Strategy.
- For over 20 years, Microsoft has had an almost dominant market share in office productivity software. Part of the reason is that it's good software and people like it. However, it's hard to imagine that other companies, for example, Google, Apple, lack the capability or the capital needed to develop as good or even better software. So why has Microsoft continued to maintain its massive competitive advantage? A major part of the explanation lies in the fact that customers' relationship with Microsoft has become sticky.
Customers have learned how to use this software and are unwilling to invest the time and effort needed by competing applications. They face high switching costs. They also know that their family, friends and colleagues are all likely to be users of Microsoft Office. Thus, they feel confident that by using Office, they can share documents without any problems. In short, Office enjoys significant competitive advantage based on high switching costs.
Coke and Pepsi illustrate a different type of competitive advantage. For a consumer who likes to drink soda, the cost of switching from Coke to Pepsi or vice versa are basically zero. Also, it's hard, if not impossible, for most consumers to tell the difference in the tastes of the two colas. Yet, most consumers of Coke and Pepsi persist in drinking the same brand of cola for years on end.
Why? The answer lies in the extremely strong brand loyalties built by the two companies through ubiquitous and relentless advertising. It's not for nothing that Roberto Goizueta, Coke's legendary CEO through the 1980s and 1990s, when asked to share Coke's secret formula, was reported to have said something like the following: "Early to bed, early to rise, "work like crazy and advertise." A third type of relationship advantage is rooted in deep customer alignment.
This means understanding the specific customer's needs and making sure that your products and services are tailored to meet these needs. Think of companies such as IBM and Accenture, which provide IT solutions to corporate customers. In this business, it's extremely critical for solutions to be custom tailored. Thus, for IT service companies that exist, a large opportunity to build durable competitive advantage based on strong one-to-one relationship with each customer.
The relationship advantages can be important not just relative to customers, but also other players in the ecosystem. Compare Toyota's relationships with its suppliers with those of, say, GM and its suppliers. Research studies indicate that historically, Toyota's relationships have been much more partnership-like, trusting and long-lasting. Whereas those of GM have been much more transactional.
As a result, Toyota has found it much easier to implement practices such as zero inventory and total quality management, than General Motors. The end result has been a competitive advantage for Toyota in terms of the quality and cost of its cars. To summarize, sticky relationships with customers can be major sources of competitive advantage. Such relationships can be formed through the creation of high switching costs, branding and advertising, and/or a deep alignment between each customer's needs and the company's products and services.
Further, sticky relationships with other partners in the ecosystem also have the potential to create and sustain competitive advantage. In these cases, however, it also depends on whether or not a partner is a leader in its own domain. As a way to apply the ideas in this segment, I propose the following exercise: Compare your company with major competitors in terms of who has more durable relationships with customers.
Now, think about what you could and should do to increase the stickiness of your company's relationships with your existing customers.
Skill Level Appropriate for all
Q: This course was updated on 08/19/2015. What changed?
A: Due to member demand, we've added three movies to take you even further into competitive strategy: Competing through disruption, Managing complementors, and Understanding industry dynamics