P E T E R  S. C O H A N  &  A S S O C I A T E S

Technology can change a company's competitive position for better or for worse.  In February 2001, Nike blamed a 28% earnings shortfall on a poorly executed $400 mm installation of supply chain software.  By contrast, Charles Schwab catapulted itself into the lead in online stock trading with the help of a home grown online trading system. 

How can a company avoid pitfalls such as Nike's while gaining competitive benefits as did Schwab?

One of the most fundamental problems companies face is a tendency to change themselves from the inside out rather than from the outside in.  Simply put, most companies change themselves based on what makes senior management comfortable rather than what creates more value for customers.  This problem was particularly pronounced during the dot-com boom when many companies created dot-com spinoffs which were set to enrich senior management in the dot-com stock market boom rather than to create more compelling value propositions for customers. 

In order to avoid the inside out trap, companies can follow a three-phase process.  This process helps managers use technology to transform a company in a way that creates competitively superior value for customers.

1. Customer Need.  The first step in transforming a company's competitive position is studying the way customers make purchase decisions.  This study should reveal critical details about how customers perceive your firm's competitive standing.  For example, studying customer needs should reveal the ranking of decision criteria that customers use to evaluate an array of products.  Such study can also reveal how competing firms stack up in their ability to satisfy a customers' needs. 

Ultimately such an analysis should help identify ways to improve how a firm creates value for customers.  For example, such an analysis gave Schwab the confidence it needed to introduce an online stock trading service at a competitive price, a service which resulted in significant short term losses that were ultimately offset by tremendous revenue, profit and stock price growth.

2. Incumbent Weakness. The second step in competitive transformation analysis is to develop detailed insights into where incumbents are weak.  While the first step in the analysis can reveal specific customer purchase criteria on which competitors are vulnerable, the second step reveals how well competitors perform the critical activities that determine customers' perceptions. 

The ultimate outcome of this analysis is to find opportunities for a firm to use technology to develop capabilities that competitors will find difficult to replicate.  Schwab's analysis of the online trading market identified two sets of competitors with different sources of vulnerability.  Incumbent online trading firms such as E*Trade had developed competitive online trading services, however, they had access to a relatively small number of customers.  Incumbent retail brokers such as Merrill Lynch faced a deeper challenge -- online trading threatened the livelihoods of the tens of thousands of its brokers. 

Schwab's online trading capability was difficult for both groups of competitors to replicate and it still enjoys market leadership even after a plunge in overall trading demand.   A 2002 Barron's survey ranked Schwab's service tops in six criteria ranging from trade execution, variety of services, quality of research, and costs.

3. Capability Transformation. The most difficult aspect of competitive transformation analysis is taking the concepts developed in the first two steps and turning them into reality.  In order to use technology to improve a firm's competitive position, it is best to build rapid prototypes of the new product or service.  Such prototyping is generally inexpensive and quick, thus providing a useful basis on which to gain market feedback.  Rapid cycles of prototyping and modification based on customer feedback can enable a firm to transform its capabilities more effectively.  The ultimate result -- as Charles Schwab found -- was a service that was valuable to customers and difficult for competitors to replicate.



1. Customer
2. Incumbent
3. Capability