Once the keystone components are designed into a
customer’s system, the customer will incur switching
costs if it defects to another supplier.
One of the best ways to preserve bargaining
power in an ecosystem and blunt imitators is to
continue to invest in innovation. I recently visited
a furniture company in northern Italy that supplies
several of the largest retailers in the world from its
factories in its home region. Depending on a few
global retailers for distribution is risky from a valuecapture
perspective. Because these megaretailers
have access to dozens of other suppliers around
the world, many of them in low-cost countries, and
because furniture designs are not easily protected
through patents, there is no guarantee of continued
business. The company has managed to thrive, however,
by investing both in new designs, which help it
win business early in the product life cycle, and in
sophisticated process technologies, which allow it
to defend against rivals from low-cost countries as
products mature.