6: Competitive Advantage (Part 1)

(Issue 6)

It was terrific to see many of you at American Academy of Orthopaedic Surgeons (AAOS) and the Canacord Genuity Musculoskeletal Conference last week. A special congratulations to Brad Estes, Ph.D. , Chris Lyons and the team at CytexOrtho for winning the AAOS OrthoPitch from a field of over 40 companies. Congratulations!

Two Product Tales

Here are two stories - the first an all-too common horror and tragedy, and the second a rare but pleasant bedtime story with a happy ending. The real-life question is: Which do you live in, and when will you know?

The Commodity - Hero's Quest Gone Wrong

First the tale of terror.

In the beginning was the Commodity Product. It was needed and solved a very particular problem for its healthcare customer, but was undifferentiated. Customers had choice among many different examples (Competitors) which could also address their problem, and those customers didn't really care which they chose. They were all interchangeable. While there may have been small differences between the offerings, none were so great or compelling that a customer would pay more or undergo inconvenience to choose one particular offering over the others. They were all "the same" in the customer's eyes.

The Commodity Product was not always this disregarded. A decade before, it had proudly established a new category of must-have technology and products. It had blessedly high margins, and was sought out by customers of all types for its unique innovations. But it rushed to the quest without preparing.....

The surrounding woods harbored terrors. Monsters, in the form of Competitive Products sought its customers and markets, gobbling them up as quickly as they were uncovered. Initially, it was a single Monster, who found an unguarded path to the customer, and sliced off a section of market, high-margin at that time. Then another. Eventually, as the unguarded path became clear, they swarmed, consuming and eventually diminishing the very market that sustained them all. Why not? The attractive market was deliciously appealing, and the defenses were thin.

Henceforward, the once-Innovative Product became a Commodity, and had to compete for sustaining business based primarily on price. Price was a harrowing path, with battles at each turn and bend. The Commodity Product had to be continually ready to reduce its price to win business. Steak is better than gruel, but steak was no longer on offer and isn't gruel is better than going hungry?

Ultimately, as the price commanded dropped to, or even below the cost of its capital, the Commodity Product became undesirable and unprofitable for its company to sell. The land had become barren and there was nothing to feed on - All the profits had been grazed away and growth in this market would now cost more than it produced.

Even worse, the Commodity needed to spend badly-needed capital on new updates to even maintain its place in the low margin landscape that its markets had transformed into. These were not innovations to raise margins and sustain itself, nor to enter new Market-lands, or collect new customers. These were capital and development investments that had to be made repeatedly for survival. Advancement is a distant dream, and maximal effort to attain status quo is the best of available futures for the Commodity.

How might our Commodity Product survive in this parched and barren land? It must transform by building differentiation, even while wandering in the desert. This would have been much better accomplished during the development and planning stages at the fortress, before the quest began and when the Monsters were still in the distant forest. But under the new conditions, it was change or die.

Our Commodity Product must build services, adjacent and supporting products and other means to become a Compelling Differentiated Product. It is likely too late to move past Differentiated to become Advantaged, but by moving beyond the packaged product to strap on weapons like Services and Adjacent Products, our Commodity Product may develop limited potential to fight off the monsters, and even to become Compelling. But in the arid lands, the Monsters can take up the arms race as well, and seek also to become Compelling.

What choices to survive without making this transformation? The alternative is narrow and the risks are many. Our Commodity could only become the low-cost provider: ruthlessly driving out costs, owning the access to the lowest cost manufacturers and suppliers, cutting already meager sales margins and otherwise aggressively positioning to allow Commodity Product to sell below the pricing of its Competitors. Volume and razor-thin margins are the weapons needed, and few dare take this path.

With many Competitors, only those obtaining the blessings of low cost could best the other Monster-Competitors. The transition to an enhanced Compelling Differentiated Product is not one that could be easily accomplished for our malnourished Commodity. And so he, who started so hopefully as an Innovative Product, expired with a whimper amongst the swarm, and served as yet another cautionary tale. The End.

The Advantaged Product's Tale

But there is another, decidedly more pleasant tale. One that you might even tell to your children. It is the tale of the product with Durable Competitive Advantage - the Advantaged Product.

Once upon a time, a Company, in its great wisdom, developed an Innovative Product. Recognizing the unusual potential of said Innovative Product, the development team planned for its success by identifying paths to strengthen it in its markets. They identified specific tools and processes that could transform the product from its initial shape as an Innovative Product into one that had Advantages. When possible, they sought to impart advantages that could continue for many years.

They considered Patent Protection, and built protective armor to cover the Product in its vulnerable places. But there were still areas of exposure. So they looked at Regulatory Pathway to extend protection. In turn they looked at Network Effect, connecting the Product to others so that each was strengthened and could support each other in battle; and at Marketing Claims supported by girders of Evidence; and at Brand Reputation to put joy in the hearts of customers and fear in the hearts of Competitors.

They looked systematically at the opportunities for transforming the Innovative Product into an Advantaged Product, and incorporated those that were available. They refused to be distracted by other opportunities, products with less potential, knowing that only ongoing, consistent effort to build Advantage could position the Product to attain its destiny.

Even when the now Advantaged Product was completed and moved forth into the world on its quest, the team continued to strengthen it with Evidence, ongoing investment in Brand, and engagement with customers to enhance its fitness for the market it was in. They knew that this Product was among the Chosen, and investments in its strength were well-spent. It had been built, according to its destiny, as an Advantaged Product, and it was unlike the others.

As a result, the Competitor-Monsters were held at a far distance. They could not make their way into the storied lands, because they were not Advantaged. When the Advantaged Product needed to increase its prices, it found a land of abundance. Customers knew it, relied upon it, and could not envision a future without it. There was no other with its abilities or its good name, and it only became stronger as time passed, reputation was enhanced, and conquests were tallied. The Advantaged Product could keep its profit margin high, and live on the fine produce of the Market-Land, without interference from Competitors. The Advantaged Product lived ever after in a land of milk and honey, and Storybooks are filled with its adventures.

Elusive... and Illusory - Advantage

These are the tales of thousands of medical products. Some go swiftly and unadorned to meet their doom, and some are armored and strengthened to dominate their Market-Lands for many years. Some are strong for a time, until their market Advantage begins to erode - and they must change or die. The difference is often planning, thoughtful market entry, and single-minded cultivation of legitimate advantage wherever it can be found.

In part 2, there will be less of the mythic quest (apologies to those that found the above tales to be painful!), and instead a discussion of the advantages that accrue to companies from their products; origins of Advantage in Value Investing and Business Strategy; the importance in product portfolio management; and finally, asking the question "Can Competitive Advantage really still be durable today." Please come back.....

What advantages are possible with your product and in your market? Please share your thoughts in the Comments section...

Todd Boyce | [email protected]

Shaping Innovation for Medical Commerce

(c) 2024 Todd M Boyce | Some images created using DALL-E3.