Companies Build “Capabilities” Before They Build “Moats”

• Connect this to Erik Torenberg “How to Build Moats”

https://reactionwheel.net/2019/09/a-taxonomy-of-moats.html
One of the strategic tasks of an innovator is to deter imitation for as long as possible.

Moats draw their power to prevent imitation from one of four basic sources:

• The state,

• Special know-how,

• Scale, or

• System rigidity.
  
  Benefits of scale:
  either the cost per unit product decreases or the quality of the product increases as more units are produced, sold, and used.
  
  These are examples of economies of scale, where the cost per unit is decreasing as more units are produced, typically because sunk or fixed costs are a large proportion of the total cost of the product.
  Of course, Facebook was not the last social network to succeed. Instagram, WhatsApp, and others became valuable because they picked other qualities users desired and made themselves best at those. Scale advantages are only durable to the extent they inhibit direct competition.
  
  These are advantages that arise because change is hard in a complex or highly interlinked system. If changing from one product to another also requires changing other things—other products, routines, skills, etc.—the total cost of the change may outweigh the benefits so the product already embedded in the system can maintain an advantage over similar entrant products that are not (or not yet) interconnected. I will call this system rigidity.
  
  Customers may decide to stick with a product in the face of a better product because it is expensive to switch (having learned how to use a complex software package, a user may not want to invest the time and energy in learning a new one, even if it is better) or because it is expensive to learn that a new product is better (the customer may trust a producer or its brand and learning whether a new producer or brand is trustworthy may take either risky trialing or time-consuming research.) In the first instance the cost of change must include the cost of learning or the cost of changing established work routines. In the second the cost must include the cost of searching for the alternative.

Startups can approach an industry in a way that requires a fundamentally new system, putting the startup and incumbents on the same footing. Most established companies prefer to compete by exploiting their competencies while new systems make old competencies useless.

This type of challenge to incumbents is described both by Christensen’s ‘disruptive innovation’ (imitating the innovation would require incumbents to change so many things about what they do that their current customer base would be poorly served; deciding to ignore the needs of existing customers is a very difficult decision for any management team to make) and Porter’s ‘value chain’ innovation (mimicking the business model innovation or value chain innovation of the innovator would require an established company to abandon ways of doing things that are currently successful.)