Creating sustainable competitive advantage; in a modern context
Despite avoiding a triple dip recession thus far, the UK’s GDP is only 0.6% bigger than it was a year ago. Our economy is still 2.6% smaller than it was before the start of the recession five years ago.
Many companies have suffered from the effects of reduced turnover, increased costs and ever greater competition. It would be easy to be full of doom and gloom and to focus purely on survival but that would be to miss a great opportunity – how to prepare for the end of the recession and what comes next. Not all companies are doing badly! Some of those who were focused and well run have survived and come through the initial crisis relatively unscathed e.g. HSBC and Santander. Do you understand what resources you have and how they can be used to gain future competitive advantage? Can you inspire your stakeholders with your strategic messages?
In the past, western countries have tended to focus on an industrial approach to using resources to maximise profitability, regardless of the cost to stakeholders. Following on from the recent global financial crisis, society has begun to question the ethics and morals of corporate leaders to the extent that they are now questioning the methods companies use to make profits. Have you thought about how you make your profits and how your strategies might affect others?
A better approach would be to ensure that your resources are used to make profits in a more accountable manner. Of course you still need to focus on making profits, but in future you will need to be aware of the effect your profit making strategies have on your employees, suppliers and consumers; on the planet and the environment; and whether or not you are acting in an ethical and moral manner. Better to do it willingly, before society forces you to do so.
Having a clear corporate Vision is imperative – it gives you a focus. From that starting point you will need to create business strategies that will utilise your resources to ensure that you gain sustainable competitive advantages (SCAs). You could consider creating strategies from the bottom-up, with your managers proposing localised strategies and tactics, or top-down where you set the goals and budgetary constraints. Alternatively, you could take a more collaborative approach and work together to assess options and plan for the future; your strategic plans will emerge rather than being owned solely by you or the managers. Before you create your strategies you must understand what the market looks like and how you are positioned relative to your competitors.
Outside–in or macro-approaches
In the 1970s Michael Porter famously recommended that to understand your market positioning you needed to look at the 5 competitive forces affecting your company and its ability to earn above average profits. The five forces you need to analyse and understand are the:
- threat from substitute products
- threats from new competitors
- intensity of competitive rivalry
- bargaining power of customers
- bargaining power of suppliers
Using these five factors you should be able to analyse and understand your company’s market positioning and from that can develop one of three basic strategies to enhance your chances of developing SCAs.
- Cost leadership strategies – you could set out to become the lowest cost producer in your industry.
- Differentiation strategies – implies that you want to provide better services or products than your competitors but for the same, or better, prices.
- Focused strategies - indicate that you intend to be “the best” in your market niche, trying to create localised rather than industry wide advantages.
Inside-out or micro-approaches
Another approach you could consider is that of Prahalad and Gary, who suggest that you build your company round its core competencies (i.e. what you are really good at, but hopefully other companies are not). Your company’s core competency could be technical know-how, processes, the quality of your relationships with customers, new product development abilities and even your corporate culture. If you really understand what your company is “great at” then you can build strategies to exploit them against your competitors.
Post industrial strategies
Unfortunately there is an issue with using either inside–out or outside–in analyses to create traditional SCA strategies. If your business revolves around a more modern focus of accumulating and manipulating knowledge then your strategies need to reflect that. Blaxill and Eckardt suggest that in a knowledge based economy all your strategies will have to focus on how well you manage the ownership and use of your intellectual property (IP) because that is almost the only unique asset that you own.
It gets worse; in the post-industrial world that you operate in, the benefit you gain from most traditional SCA strategies may already have been, or is about to be, eliminated. Your competitors can easily achieve economies of scale; your process improvements can easily be copied; and your customer’s loyalty is harder to maintain as they are constantly bombarded with new products and brands. In the end differentiation may truly be the only way to maintain any economic or market superiority. You must OWN what differentiates you from you competitors. You must protect your IP otherwise your advantage will be lost forever.
Knowing the competitive threats to your organisation, your core competencies and your IP is not enough. Your company can become the victim of its own success, as Doz and Kosonen point out in their book Fast Strategy. It is relatively easy for your competitors to copy your successful strategies to the extent that resource fluidity deteriorates over time, models become more tightly defined and collaborations turn into “ties that bind”. Unfortunately the cost to you of cycles of success, rigidity, crisis and renewal is no longer affordable.
Perhaps this is your first ever recession and it has come as a nasty, almost psychological, shock. The safe world that you thought existed; the business models that you thought worked; the strategies that you thought would last for 5-10 years, or more, no longer seem as relevant. Those strategies were probably based on the premise that you had power over your corporate environment and the world you live in, whereas in fact you don’t. In future you will need to develop competitive strategies that you have to review on a regular basis, that are based upon sound research, as well as gut feelings. In effect you will need to develop corporate agility in order to create your own futures, to shape the markets and the competitive landscape within which you work to your own advantage.
Not forgetting the customer revolution
In the 1970’s Theodore Levitt pointed out that companies should only produce what consumers want thus heralding the marketing, not sales driven, revolution. Remember your customers are not interested in a given product per se but instead want solutions to their problems, preferably wrapped up as an exciting or stimulating experience. The challenge is to recognise Porters 5 forces and then to agilely create continuous reinventions of your core business without losing momentum. The paradox of strategic ability, where insight replaces foresight and an integrated management approach substitutes for decentralised management, creates higher order demands on corporate leadership. The question is are you up to the level of agility needed?
Limitations to the creation and utilisation of strategies
Any strategy can stifle creativity and, if internalised into a corporate culture, can lead to “group think” where everyone in the company thinks about issues in the same narrowly define way. Remember IBM – it became a behemoth that created expensive main frame computers that no one wanted – now it provides consultancy services helping people use the software and hardware that other people create. Strategies must not be allowed to dominate actions or delay them or, in the end, your company may end up paralysed and stuck in a rut.
Whilst you could encourage blue sky thinking it is just as important to understand and develop practical strategies that operate successfully within known constraints. It serves little purpose to presuppose that everything is possible - in the end understanding what you can do within the constraints you have and then doing it; that’s what is really important. When you create your strategies be creative, open minded and accepting of new ideas and concepts and then be prepared to delegate to others to add, and finally, execute the detail.
Remember: begin with the end in mind. Remind yourself of your long-term Vision, understand your market and your constraints and then create SCA strategies that focus on your core competencies, especially your IP.