Friday, September 09, 2011
Postal Service Blues: Substitution is Always the Biggest Threat!
Over the past few weeks, we have heard a great deal about the troubles at the US Postal Service. The USPS experience offers a crucial lesson regarding threats to competitive advantage. Many firms spend enormous amounts of time conducting competitor analysis of various kinds. They worry constantly about how their rivals might overtake them. However, the most dangerous threat to competitive advantage really does not come from direct rivals in your industry. Instead, it often comes from substitutes. In other words, different goods or services emerge that address the same customer need, thereby supplanting your product in the marketplace. Think digital photography undermining instant cameras, NetFlix destroying Blockbuster, tablets eroding the position of traditional PC makers, mobile and social gaming undermining the position of traditional console-based video games, and clearly... email and other electronic forms of communication threatening the sustainability of the USPS business model. In sum, companies should spend much more time scanning the external environment for the rising threat from potential substitutes, as opposed to fixating on their existing direct competitors. Of course, in so many cases, companies fail to acknowledge the threat from a substitute until it's far too late... even though they are aware of the emergence of this alternative good or service. Unfortunately, existing mental frameworks often make it difficult for executives to get their arms around the very different business model associated with the substitute.