In the early 1970s, there was a fellow named Robert Taylor, who owned a small soap company, called Minnetonka. Taylor came up with the idea to sell liquid soap in small dispensable pump containers. Although a great idea, there was no way to patent it. After all, liquid soap and pump dispensers already existed.
This caused a dilemma. If the Minnetonka liquid-soap-in-a-pump idea was successful, then larger, more established soap companies could legally steal his idea and use their scale and clout to put him out of business. So even if the idea was great, Minnetonka would probably not be able to benefit from it, right?
Taylor got bold. He decided to corner the market on pump dispensers. By raising $12 million dollars—more than his company's net worth—Taylor ordered 100 million of the pump dispensers from the only two companies that manufactured them in the U.S. An order of this size gobbled up the entire manufacturing capacity for these two manufacturers for at least a year, and maybe two. That gave Minnetonka plenty of time to establish itself in the marketplace without any real competition.
It worked. Taylor’s product, called SoftSoap, was a huge hit and owned the category because competitors couldn’t get their hands on an adequate supply of pumps.
In Taylor’s second smart move, he sold the business to Colgate-Palmolive for $61 million around two years after introduction. This would be about the time Taylor’s control of the dispenser manufacturers’ capacity was running out and anyone could enter the market—which they did, causing SoftSoap to dramatically lose market share (which hurt Colgate-Palmolive, not Taylor).
Companies hate it when they have no competitive advantage. Without an advantage, there is no advantage to exploit. Without an advantage, anyone who wants to can copy your business model and directly compete against you. Barriers to entry and exit fall. A price war begins and usually only the largest and best financed survive. Profits are minimal.
So to avoid this, firms try to build competitive advantages. The problem is that firms tend to focus on finding their competitive advantage within the product or service they are selling. After all, that is what people are buying—it is what the money is paying for, right? So firms try to create uniqueness into their product which cannot be easily imitated, using tools like patents and unique capabilities.
My favorite story in this regard was when General Mills introduced Frosted Cheerios cereal. In designing the product, General Mills did not just take their regular, oat-based Cheerios and put frosting on it. Instead, General Mills made the frosted Cheerio out of a secret blend of multiple grains. Was this done to make it tastier? No. Was this done because it would make it more desirable to customers? No.
The new formulation, according to General Mills, was done to make it harder for private label competitors to accurately imitate the product. It was done to create a small internal advantage, which I doubt will have much impact on the imitators.
Sometimes, the best advantages come from not from internal formulations, but from actions taken external to the product.
SoftSoap did not have any internal advantages. It had no exclusivity to the idea of putting liquid soap in pump dispensers. In fact, it was at a major disadvantage, because Minnetonka was a small player competing in a marketplace controlled by giant consumer products companies.
So instead of looking internally, Minnetonka looked externally. It decided to create its advantage in the upstream supply chain. By locking up the supply of pump bottles, Minnetonka created an external advantage. It prevented copying by competition not by making its product unique, but by making it impossible for competitors to get their hands on a key ingredient from a third party.
So, when looking for your competitive advantage, don’t just look internally at your product or service. Be like Robert Taylor and look for external ways to create that advantage.
The principle here has to do with control. If you control access to a scarce asset, you have a competitive advantage. This type of external control can create even stronger competitive advantages than internal product uniqueness. As we saw with SoftSoap, control of the external supply of pumps overcame no real internal advantage. And we also saw that Taylor was smart enough to sell the business before the effect of that external control was lost, since once that control was lost, so was SoftSoap’s value.
One place to look for that external control is upstream in the supply chain. That is what SoftSoap did. It went upstream to control the supply of pumps.
Another example would be Apple. They have been accused multiple times of using a similar tactic. Sometimes, they’ve been accused of locking up the supply of key electronic components needed by their competitors (their equivalent of soap pumps). Other times, they have been accused of locking up the shipping capacity from key technology manufacturing centers in Asia to the US, thereby making it difficult for their competitors to ship their products to the US in time for Christmas. Either way, the external control by Apple gives them a competitive advantage.
Another approach would be to control the downstream capacity in a supply chain. For example, I remember talking to someone at Andersen Windows shortly after they signed the deal to be the exclusive replacement window vendor for Home Depot. Although Home Depot is not the only outlet for replacement windows, it is one of the largest and most powerful distributors in the space. By being the only replacement window available at Home Depot, Andersen Windows had no direct competition inside Home Depot. That is an important downstream competitive advantage.
GE did something similar with its appliances. GE made solid connections with most of the major home builders in the US. As a result, they locked in a number of deals to be the vendor of choice for appliances which come with a new home. Other appliance manufacturers were frozen out. The ones buying these new houses could pick which GE appliance they got, but not appliances from other brands. This was a big competitive advantage.
And Apple plays in this space as well. By owning the largest distributor of digital music (the iTunes site), it controlled how the entire digital music industry evolved (to Apple’s benefit). Having only Apple products in the cool Apple stores is a similar example.
And then there is Microsoft. Microsoft would probably not exist today if it hadn’t structured the deal the way it did for selling its first product (MS-DOS) product to IBM. Normally, in these types of deals, IBM would have owned distribution rights the operating system they commissioned. But Bill Gates took a lower fee in exchange for controlling distribution rights to MS-DOS. This allowed Microsoft to sell the operating system to every other PC manufacturer, creating the de-facto standard and a lock on PC software for decades to come.
Another scarce external resource can be advertising/promotional capacity. If you lock up all the key promotional capacity, you can weaken competition’s ability to get the word out about their offering. You see something similar with consumer electronics manufacturers, who try to get massive publicity just before a competitor’s new product launch, in order to minimize the competitor’s ability to create buzz in the promotional marketplace.
Now, one might think that in today’s internet culture, it is harder to create promotional control. But think about this. If you lock up all the relevant key words on Google, you can lock up the ad space on the search engine and freeze others out a key source for getting clicks to their site.
Looking internally at what you offer is not the only place to seek competitive advantage. Controlling access to external factors can also create competitive advantage. In many cases, this external control can be a more powerful advantage than anything you can do internally. Therefore, consider external control when designing your competitive strategy.
In the end, who do you think got the biggest benefit from their competitive advantage efforts—SoftSoap with its external control of supply, or General Mills with its internal control of a slightly (perhaps even inperceptively) modified recipe for the Cheerios hidden under the flavor blast of frosting?