Many companies have implemented single source procurement agreements to provide stability with their suppliers and to show that long-term relationships are more important than short-term cost savings. It is very common for this structure to be used to implement the exchange of intellectual property, joint design teams and sharing of cost savings. Once the relationship is in place, not only will it protect repeat purchases of the same products or service, but it can result in lower cost of sales for cross selling products and services.
Complex products which require considerable up front installation and ongoing support are also effective ways of capturing customers over a long period.
The ‘switching costs’, which includes costs, time and stress of moving to another product, can often be very high, thus once sold, customers tend to stay with the initial supplier for a long time. This relationship can be used to leverage cross selling opportunities, especially where additional products can be easily integrated into systems or products already in place. Many software products fit this category.
Some products have a lock in feature due to the conditions under which they are acquired. Life insurance and health insurance, for example, can be prohibitive to change if personal circumstances change and a new policy would be difficult and/or costly to acquire. To retain the benefits, the customer has to stay with their existing policy.
While not 100% perfect, many membership programs create a form of lock-in of the customer. Airline frequent flyer programs or store frequent purchaser programs attempt to create loyalty and to provide the customer with additional benefits which only accrue with frequent or volume purchases.
Gaining control over the point of sale to the customer is an effective way of controlling the customer purchase. While the customer might have a range of choices in theory, they might be willing to limit their choice through a preference for a particular method or place of purchasing. Gaining access to a preferred channel, or owning or controlling a preferred channel, gives you effective control over the final purchase. The question which the seller needs to ask is, ‘Where does my customer buy?’ If you are the only product in your category at Office Works or Toys R Us, then you have greater influence over the ultimate customer purchase.
You might be able to use the synergies of an existing preferred channel to reduce costs and gain premium profits or lower your price and undercut competitors. Some firms are able to significantly reduce their costs by using distribution qchannels which already serve the desired customer. Thus a firm which introduces a new product to an existing distribution channel need only recoup the marginal costs of using that channel. Excess capacity in the channel can be used to cross sell additional products thus achieving deeper account penetration.
Owning, controlling or being able to influence the availability of a limited, unique or rare input can give you effective control over the entire supply chain.
Companies which have integrated backwards to own specialist components or rare commodities have greater control than their competitors who must work with less favourable inputs.
Inputs can be physical, like a commodity or a component, or it can be information or expertise. For example, specialist staff with deep expertise who are in limited supply can be an effective blocking factor if you can develop some form of exclusive supply arrangements. Many situations require an accreditedspecialist or highly trained or experienced or knowledgeable expert, the firm which has long-term access to them through their supplier has a sustainable advantage.
Another form of exclusivity existswhere specialist stores and wholesalers have an arrangement with their suppliers where the supplier will not place another
store or use another distributor in their immediate vicinity or region. This protects their immediate market and should assure them of limited competition. This is especially effective where the supplier provides brand name products which have high customer loyalty.
Another effective way of controlling the supply chain is to limit the access of other competitors to the point of supply. Owning or controlling the inbound delivery channel can provide this level of protection. The most obvious example of this type of control is a unique distribution agreement with an overseas
supplier. Where the distributor has an exclusive distribution agreement, they have effectively locked out their competitors. This is especially effective where the product solves a unique or difficult problem and satisfies a compelling need.
The last point of protection is with the business itself. There are two layers of protection, stopping someone coming into the industry and stopping a competitor from copying your product or service. Industry barriers are those things which build a wall around the industry which excludes potential new entrants or requires considerable cost or time to overcome. The number of ways in which this type of protection can be achieved is extensive but would include such things as:
If you are already in the industry, you want as many of these as possible. If you are entering a market or trying to grow the business, these can be serious impediments. They can also have negative consequences. For example, high costs of set-up might limit the number of effective competitors in a market but the same high costs may lead to intense price discounting when business levels decline.
It may deter others from coming into the market but it may not be sufficient to protect the profits of those which are already there. Within their market sector,
the firm needs to make it difficult, stressful, time consuming and/or expensive for anyone to copy or negate their competitive advantage.
Many companies see their relationships with their customers as an important blocking factor to new entrants. Some firms have nothing else going for them other than strong customer loyalty, but this can be sufficient to protect their business over a long period of time. Their level of customer service, customer empathy and willingness to go the extra mile to delight their customers is their
strength.
Employees can themselves be a major competitive strength. In many businesses recruiting and retaining the best people is the key to long-term success.
Retaining the best people for research and development may give a firm the ability to bring great products to market quicker and cheaper than competitors. Other blocking techniques are needed to fence off your customers. Such things as:
A patent which solves a unique problem can be a powerful blocking strategy.
The other techniques may be more or less effective but are not guaranteed and may only work in some circumstances. They are, however, all factors which can impede the effectiveness of a competitor. The greater the time and/or cost to duplicate or overcome, the greater the level of protection.
Few of these barriers are, however, permanent or 100% effective. Many people believe that patents and other registered intellectual property rights provide the ultimate protection. In truth, these rights are only effective if you have the money to defend them. Many patent holders have been worn down by the time, stress and expense of litigation. A large corporation might be willing to take the risk of infringement litigation or be willing to spend a large amount of resources finding a way around the patent.
Few companies can achieve long-term sustainability without re-inventing themselves and developing new innovative products or services. In the short to medium-term, the best approach is to develop a combination of strategy, protection and employee and customer relationships that can best meet the business needs.
Implementing an integrated solution of blocking techniques or factors across the entire supply chain will be the strongest mechanism you can have to ensure protection of future revenue from existing customers. One hundred percent protection is an ideal but that should not stop you from implementing a range of blocking techniques to give you the strongest position.
Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.
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