Tech companies will eventually displace the majority of Fortune 500. Competing without software is like competing without electricity.

Naval Ravikant

Unless you’ve been living under a rock, you’ve seen how tech startups like Uber and AirBnB have disrupted entire industries around the world despite not owning any cars or property. Despite their ‘disadvantages’, they are considered the largest transport and travel operators respectively. Instead of owning these ‘requisite’ assets, they focused their efforts on building the technology to support their operations at scale, and designing for the best possible user experience to get customers on board.

It worked. Almost too well.

Uber and AirBnB would not have grown as quickly if they had to own their underlying assets. They are but only a couple of companies whose growth are empowered almost solely by technology, and one of the few that are poised to change the world, a mission only a few companies dream of. These companies don’t play by the same rules as non-tech companies, sometimes even flouting regulations that are used to keep entire industries in check, but they do it anyway because their value to society is undeniable.

Many companies already own the cars and properties, etc, they rely on for operations, considering them strategic assets. However, only a handful of smaller companies have considered owning the technology they rely on, and exploiting it to its full strategic potential.

In time to come, it will be considered foolish not to own the technology that you rely on, even more foolish than not owning cars and property. According to Uber and AirBnb that day is already here.

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Software as Competitive Advantage

The story of incumbents not being able to keep up with the new kids on the block isn’t a new one. Time and again, newer, more innovative companies outdo the older ones with newer improved products or services. Successful companies already do this pretty well, and in doing so builds competitive advantage.

Innovation doesn’t have to stem from technology of course; companies like Nespresso and Gillette rewired their business models, and transformed their product lines such that consumers would be locked in, generating strong recurring revenue streams for them.

There are many ways to capture value from innovation, and for the longest time, a lot of these options were only available to large companies with economies of scale to pull off. These days though, a lot disruption comes from smaller companies, we call them startups, with a technology edge often times far more effective than what traditional methods of innovation can provide.

In fact, Peter Thiel, of PayPal fame, opines that companies should build proprietary technology that is at least 10 times better than existing alternatives. For example, Amazon can hold 10 times more books, if not more, in their inventory than what a traditional book store could.

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Amazon built its foundations decades ago, yet the notion of building such proprietary technology is still a mystery to most; smaller companies often find themselves purchasing off-the-shelf tech products, with the more savvy ones customizing it for their specific needs. In doing so, companies typically only gain access to commoditized technology that is readily available to the rest of the market. 

Commoditized technology merely allows companies to play catch up to what everyone else already has, and is decidedly not a source of competitive advantage.

To Own or Not to Own

There’s nothing wrong with buying off-the-shelf solutions. Choosing to own software or not is strategic decision-making after all, and building everything in-house may not be the most cost-effective way to go about things.

In a lot of cases, you shouldn’t be building some pieces of software. For example, many companies use existing accounting packages instead of writing their own. This makes sense because accounting practices are similar between most companies, and there is really not all that much room for innovation; even if you were to build your own custom accounting software, it will not yield much competitive advantage over your competitors.

Additionally, writing accounting software is really tough work, error prone, and requires a lot of keeping up with legislation. The costs and risks you are unlikely to be worth it for the value you are getting, when there are entire companies are built upon maintaining accounting software you can leverage for a fraction of the cost.

Don’t write your own accounting software, unless you are absolutely sure that you need to.

On the flip side, off-the-shelf products are often tougher to customize, and you may find yourself locked in to that particular solution. If you require some customization work done, you may find your vendor charging an arm and a leg, if they are even willing to do them in the first place!

In some cases, you will be able to build your own customizations around an existing off-the-shelf product. This is easier if they embrace open software and data, and have what we call an Application Programming Interface (API) which allows your software to talk to their software.

Choosing the right platforms to build on are key parts of good information strategy, and not one to be taken lightly. Companies often choose to adopt cheaper technology solutions, only to find that getting real value out of them will cost a lot more than a more expensive solution.

One great example of an open software platform would be Xero, an accounting platform with extensive support for developers. Xero’s API and support for third-party services, provide a myriad of customization options unparalleled as far as accounting software goes.

If you find your business requiring a lot of customizations on a piece of software, you may want to consider owning that piece of technology. Customizing and building around other people’s software can get very expensive, and your lack of control over their software may get in the way of your own plans.

For example, if the product is upgrading to a newer version, you may have to make changes to your customized work, or risk being broken and obsolete, which can be a security risk.

Requiring a lot of customization is also indicative of a mismatch in software and requirements, or a source of competitive advantage. Owning this piece of technology can have major advantages, because you have greater control over when and how you want to work with technology.

The sooner companies start to realize that they are turning into software or technology companies, the better their chances dominating their industry, or at the very least surviving their tech-enabled peers. Companies that fail to build competitive advantage in tech will quickly lose their market position, if not already, as competitive landscapes get more polarized.


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