Is this a company with the best competitive advantage in the world?
Imagine that your company is so important that if threatened, the most powerful nations jump to your defense.
You may have read in the news that U.S. House Speaker Nancy Pelosi visited Taiwan a few months ago. At first glance, the reason for the visit is simple and obvious. She wanted to show support for Taiwan's democracy, human rights, and freedom in wake of tensions with China, which wants to claim Taiwan as a Chinese province.
But the second reason is deeply rooted in politics and business. The picture below was shared by a Taiwanese president, Tsai Ing-wen, on social media. It shows who was invited to the lunch with the US House Speaker, showing us who the most important stakeholders of the visit were.
Do you see the older gentlemen with glasses and a pinkish red tie? Meet Morris Chang, the founder of TSMC.
1. TSMC? What's that?
There is a very high chance that you own a TSMC product. Well, you are likely using a device with its chip to read these very words. TSMC is the world's most advanced chip maker used in many smartphones and computers. For example, they supply chips for Apple's iPhones and Apple Silicon Macs.
Chips are the heart and brain of high-tech devices. And in the world of high-tech, having access to the best chips is super important. Better chips help you build better consumer products, better military equipment, and better medical devices. So, that's a big part of why the US House Speaker visited Taiwan and TSMC.
Right now, there are only two companies in the world that can make the most advanced 5-nanometre chips. The Korean producer, Samsung, and Taiwanese TSMC. While Samsung's production of 5nm chips is solely for their products, TSMC supplies chips to other companies like Apple.
That in itself puts TSMC in an incredibly valuable position. They produce more than 90% of the world's most advanced chips and they are the world's only high-quality chip producer for hire.
2. Why don't others copy TSMC?
When one company dominates a market and shows great financial results, others try to emulate their success and take a part of the pie. But the thing with chips is that they are incredibly hard to produce. It takes years to build factories, get the right equipment, and acquire the right know-how. And by the time you do all that, the best chip makers (Samsung and TSMC) have already introduced an even better chip.
In business, we call that a strong competitive advantage. And there is a cool tool to assess industry attractiveness and so indirectly company's competitive advantage. It's called Porter's Five Forces and it looks at five competitive forces. Here is how it would break down for TSMC:
Threat of New Entrants - As we've just pointed out, it is very hard for new companies to simply enter this space. Capital requirements are enormous (tens of billions of US dollars) and the know-how is scarce.
Negotiating Power of suppliers - There are a lot of suppliers in the semiconductor industry and they are offering fairly standardized and non-differentiated products (e.g. silicon). This gives TSMC negotiation power over suppliers.
Negotiating Power of Buyers - As we've pointed out, TSMC is the world's only high-quality chip producer that companies can work with. This means TSMC has a huge negotiation power for a business whose products rely on advanced chips.
Threat of New Substitutes - There is simply no substitute for the most advanced chips.
Rivalry Among Existing Firms - The demand for chips is so high that there is no fierce rivalry between Samsung and TSMC.
When all five forces are low (as is the case for TSMC), we say that an industry is attractive and companies in that industry has an incredible competitive advantage. And when all five forces are high (e.g. airlines), industry is unattractive and companies don't have strong competitive advantages.
3. How is this relevant for designers?
You can apply Porter's Five Forces to your company. Think through the five forces and see if your company is in a good industry and if it has a competitive advantage.
If you find out that there is a certain force that really affects your company's position, you can try and reimagine it. For example, if a Threat of New Entrants is high and your product can be easily copied, you can focus your design efforts on that aspect. What can we do to differentiate our product in a defendable way? What unique features can only we offer?
Chips are in short supply. Especially high-quality chips. Creating a more elegant and lighter UI or UX may help your product be feasible with a more simple chip.