A sustainable advantage
By Carmel Fisher, Managing Director
02 December, 2016
Do you know who invented the CD? The compact disc was a pretty amazing invention, but few of us know of David Paul Gregg because his legacy didn't stand the test of time.
Today CD's are cheap and plentiful and have become a commodity. In fact, if you listen to Kanye West, CD's are in their death throes and will be totally replaced by streaming music.
There are a lot of products and services that have followed the life cycle of the CD. As soon as a clever product or idea becomes popular, competitors emerge and copy, duplicate and build on it, claiming the idea as their own.
The key to long term business success is having a sustainable competitive advantage; one that lasts.
Because it is hard to build a sustainable advantage, and rare to find products that truly stay ahead of competition, there is an expectation that commoditisation is the destiny of most businesses.
I read a Financial Times column recently that quoted Columbia Business School professor, Bruce Greenwald, "In the long run, everything is a toaster." His point was that, all great innovations eventually become commodities, bought on the basis of price and nothing else.
The author disputed Greenwald's view, suggesting that toasters are by no means commodities.
"History shows the constant reinvention of toasters — they still make good money, and they make better toast than they used to – has allowed toaster makers to sustain their businesses over time."
He set out to show that businesses can be too quick to call something a commodity, and not try hard enough to differentiate, add value and innovate in order to build a sustainable advantage.
England's Crompton and Company invented the electric toaster in 1893. Competitors entered the industry and in 1909, General Electric's D-12 became America's first commercially successful toaster. It retailed for US$3 and could toast only one side of the bread at a time.
Wall sockets were uncommon at the time, so the power cord was designed to be screwed into a light socket.
A decade later, Charles Strite revolutionised toaster technology with his 1919 invention of the pop-up toaster, largely used by restaurants. By 1926, Toastmaster had created a consumer version.
Toaster sales skyrocketed and prompted bakeries to innovate to the technology by selling pre-sliced loaves of bread.
Fully automatic toasters appeared in the 1940s.
Fast forward to today and you have toasters that can cook breakfast foods like bagels and crumpets; some have silicon chips to regulate temperature and create toast with just the right amount of colour; and they cater for frozen bread and delayed consumption (toast is kept warm until you eat it).
No observer would describe the multi-billion-dollar toaster market as a commodity.
There is innovation, constant reinvention, and the spawning of associated products and ideas that have allowed for a competitive advantage to be maintained over time.
Toasters are no more a commodity than computers or cars; even after more than a century of competition.
Economist Adam Smith described water as a commodity in 1776. Try telling that to Evian as they enjoy double-digit profit margins on their bottled water sales.
Coffee too has long been considered a commodity; Starbucks would tell you different.
If only David Paul Gregg had given CDs extra functionality, made them difficult to reproduce, or given his invention a clear point of difference.
Then maybe he'd have created a sustainable advantage and a lasting legacy.