Achieving Sustainable Competitive Advantage

Today, businesses are operating in an intensely competitive environment. New products and markets are continuously being created disrupting the traditional offerings. To succeed in this environment, your business needs to shake up the status quo and avoid competing in exactly the same way as your rivals.

When it comes to competitive advantage in business, it is critical to understand that advantage over rivals is rooted in differences. Of course, no one has advantage at everything, but what is important is for the business leaders to be able to identify key asymmetries that are capable of being converted into superior advantages.

Is competitive advantage sustainable?

Your business has a competitive advantage if you’re able to produce products at a lower cost than can competitors, or deliver more perceived value than can competitors, or a mix of the two.

However, you need to understand that your product costs differ with the product and application. Your customers are geographically dispersed, have different knowledge, varying tastes and other characteristics. As a result of these subtleties, you will realize that most advantages will extend only so far.

Thus, many at times, the advantage is only on certain products and/or services and among only a specific group of customers. The group’s earning potential and desire for a unique shopping experience determines the level of value placed on your company’s products and/or services.

With customer behaviors constantly shifting, competing on price alone is no longer sufficient. Today’s customers are looking far beyond lower prices, they want value for money and an unforgettable user experience. In many industries, technology has reduced or removed market entry costs and other barriers.

Your business might be able to achieve cost leadership but how is this reflecting on your margins? Take IKEA for example, one might argue that they are doing well with a cost leadership strategy. Fair enough. But if you look closer, the company has managed to combine all three of Michael Porter’s generic strategies to deliver its value proposition and unique customer shopping experiences.

These capabilities have been honed and improved on by IKEA over the years and are very difficult for a small start-up to copy as is. A small start-up lacks the investments needed to develop the market and capabilities to achieve efficient processing and economies of scale, thus preventing him from achieving equivalent costs.

Just as in IKEA’s example above, for your competitive advantage to be sustainable, your competitors must not be in a position to easily duplicate it, or they must not be able to duplicate the resources underlying it. This kind of unique offer demands your high level creativity and the ability to imagine differences that are possible and even those that are not currently possible.

These differences must not only be unique to your own eyes, but must also be valued by the customer enough to pay for that difference.

Some differences are not attractive enough to justify the additional cost of delivering them. Instead of being appreciated by the marketplace, they are viewed a negative attribute of the offering. In long run, the company ends up losing stupendous amounts of money because it is now trying to change the minds of customers, with no certainty of success.

Isolating Mechanisms

The concept of “Isolating Mechanisms” is borrowed from biology and describes the reproductive characteristics which prevents species from fusing. Applied to business strategy, this describes unique characteristics that prevent competitors from entering your marketplace and dethroning you.

Possessing these characteristics is key to sustaining your competitive advantage. Examples of isolating mechanisms include reputations, brand names, commercial and social relationships, tacit knowledge, network effects, skills gained through knowledge, significant economies of scale and complementary services.

Isolating mechanisms enable us to shift our focus from competing on price alone and find unique ways of increasing value. Today’s competition is very intense, and by providing more value to our customers we avoid being commodities.

How do we create value?

Having an edge over customers is not the same as achieving higher profitability. Think of Uber, the ride-sharing company. The company disrupted the taxi industry with its advanced technology and applications, making a name for itself. However, although the company has been taking in more revenues, it has also been losing money like crazy.

The relationship between wealth and competitive advantage is dynamic. In other words, wealth increases when competitive advantage increases or when the demand for the resources underlying it increases. That’s why it is critical to understand all the sources of your competitive advantage.

How many times have you come across statements that read, “We are the best in the world, We are the leaders, We are number one.” If you’re one of the organizations using these rhetoric, can you easily back your statements with facts? It is one thing to say you will be the best in the world in a certain industry, it’s quite another to explain how this is reflected in costs, differentiation and focus.

It is therefore important that your strategy clearly articulates how your overall intentions are translated into competitive advantage. Advantage over rivals only becomes more valuable if the number of customers grows and/or the quantity demanded by each customer also grows.

Increased demand will lead to an improvement in long-term profits only if the business is in possession of scarce resources that enable it to create a sustainable advantage.

1. Continuously Improve

What Got You Here Won’t Get You There. We are living in an ever-changing world where change is no longer a nice-to-have but a must. There is no guarantee that your current value proposition will continue to deliver stellar performance.

You therefore need to deepen your advantage and widen the gap between your customer’s value and cost. Many businesses are comfortable with the status quo and the way things are currently being done. The assumption is that everyone knows what they are doing. This is a very dangerous way of running the business.

Time and again, you must re-examine each aspect of your products, processes and details of how value is delivered, not just from cost controls or incentives (financial) point of view but also from the stakeholder (non-financial) point of view.

Are you carefully studying their attitudes, decisions and feelings?How strong are the isolating mechanisms surrounding key value delivery methods?

Having answers to the above questions will help you anticipate and prepare for problems before they occur.

2. Broaden the extent of advantage

There is always a part of the market that is currently not being served and needs exploiting. Sometimes, in order to create value you don’t have to compete in exactly the same market as your current competitors.

Extending an existing competitive advantage brings your company into new fields and new competitors. What are the special skills and resources that are underlying your current advantage? Can you build on these existing strengths?

The challenge for many leaders is that when looking at their company’s capabilities, they do so only at face value or generalizations. The real danger in this is that they end up diversifying into products, markets and processes they know nothing about, or have limited knowledge of. After venturing into these new avenues and performing dismally, they wonder why this is the case.

To successfully extend your advantage, you need adequate knowledge and know-how of your new territories. Failure to have this important information at your disposal is a recipe for disastrous consequences.

You should not expect to take existing products to non-traditional customers, or create new products for existing customers, or create new products for new customers and expect overnight success if you have not first done your homework and defined the value proposition all these customers are seeking.

3. Strengthen your isolating mechanisms

As mentioned earlier on, isolating mechanisms prevent rivals from replicating your products or service offerings, or the resources driving your advantage.

Now that you have identified and defined characteristics that are essential for your business to increase value and succeed, you need not rest on your laurels, but rather, create new ones and/or strengthen existing ones. The aim is to have as much little imitative competition as possible and have increased value flow to your business.

Depending on the nature of your business and industry, you need to locate that set of competitive advantages that allows you first to survive and then to thrive. For instance, in tech-related industries, having stronger patents, brand-name protections and copyrights works best. In other industries where the collective knowledge of groups drives performance, strengthening this isolating mechanism depends on turnover rates.

Another broad approach to strengthening isolating mechanisms is to have a moving target for imitators. This approach ensures you are always steps ahead of your competitors. By the time your rivals figure out how to replicate much of your proprietary know-how and other specialized resources it would be too late for them.

Continuously improving your products, services, processes, systems, proprietary knowledge etc. makes it very difficult for rivals to imitate and catch up with you.

Remember, no one has advantage at everything. Chances are that your rivals are already trying to differentiate and are doing it better. Don’t lose heart. As the old saying reads, “Do not put all your eggs in one basket.” That is, do not be over reliant on any one attempt to gain a single competitive advantage.

Press where you have advantages, side-step situations in which you do not have and exploit your competitors’ weaknesses and avoid leading with your own. Obstacles will always be there but you need to be adaptable so that you can react to setbacks without losing your business. It is all about where to play and how to win.

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The Art of Risk Management

This is the title of the article by BCG published a few years ago. The article discusses the principles that should govern the approach to risk management by companies of all shapes and sizes.

The authors make several points with which I agree. Here are some excerpts:

Risk management is essential in today’s volatile economy. In a continuously changing economic environment, companies cannot assume a stable risk landscape.
Stop thinking of risk management as primarily a regulatory issue. Embed risk management in the mindset of the broader organization.
Risk management is a value-creating activity that is an essential part of the strategic conversation inside the company. The goal of that discussion should not be to eliminate or minimize risk but to use it to create a competitive advantage.
Risk management starts at the top. The organization needs to demonstrate that it has made risk management a high priority and an integral part of the decision-making process by appointing a dedicated risk leader who reports back frequently to the CEO and the board to discuss the latest trends and any changes in the company’s risk scenarios.
Risk cannot be managed from an ivory tower. Risk Management should not exist in isolation from the rest of the organization, with an insufficiently granular understanding of the actual business-specific risks the company faces. To avoid this outcome, integrate risk management into the company’s entire routine management processes, including planning, capital allocation, controlling, and reporting.
- Understand the scope of the risks the company faces.
- Plan for how the company will manage those risks.
- Act to mitigate the risks or take advantage of strategic opportunities.
Avoid relying on black boxes. Although sometimes appropriate, over-reliance on complex metrics or models can muddy the risk management process, turning it from a transparent management activity into a frustrating black box. The appropriate level of complexity is company-specific and depends on the industry, business model, availability of data, level of experience, and mandatory legal requirements.
Align risk management with a company’s overall business strategy. Companies need to identify all relevant risks – not just those that can be easily quantified. Some of the relevant risks for a company may be those that are qualitative and especially difficult to quantify.
Risk management is more than a policy; it is a culture. The objective of a company’s risk-management system should be not only to enforce new policies but also to create a risk-aware culture that addresses risks proactively, not reactively, and manages them to create new sources of competitive advantage.
Effective risk management depends on the free flow of information throughout the organization. Unless employees at all levels of the organization are actively involved in the risk management process, it will be difficult to maintain the unrestricted flow of information. This can result in the most important data getting buried in one part of the organization unavailable to other parts of the business.
Risk management deals with uncertain futures. As a result, the goal should not be to develop precise metrics or future outcomes but to strive for a general understanding of the probabilities and potential impact of various trends or scenarios on business performance and enable decision-makers to confront the uncertain nature of risk and act accordingly.
Risk management is never about finding “the answer.” Rather, it is about continually refining the organization’s assumptions about the future and its understanding of the implications of those assumptions for the company’s business. Assumptions about risk often change quickly, so the relevant parameters, probabilities, impacts, and correlations should be revisited frequently.
It is possible to prepare for unknown risks by building an organization that so excels at crisis management that it is resilient even in situations in which it is blindsided by unprecedented challenges. For example, through developing the ability to detect, capture, and exploit information patterns as well as to think outside existing frameworks and risk landscapes.
Avoid the downside, but don’t forget the upside. Companies should use risk management also to identify new opportunities and to exploit them systematically. For example, scenario planning should be used to define not only worst-case scenarios but also best-case scenarios. Think in advance about how a company can make the best use of the latest market developments and trends and ultimately make the right decisions.

I enjoyed reading the article and highly recommend it.

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Leading in Uncertain Times

One of the biggest challenges facing business leaders today is making the right decisions that will ensure their organizations succeed, survive, and remain competitive in an increasingly uncertain and complex environment.

A recent post, The best way to lead in uncertain times may be to throw out the playbook, by Strategy+Business has several good points.

The article is about the COVID-19 pandemic, how global companies navigated through the crisis, and how best to prepare for future disruptions. Here are some key points and my comments.

Rather than follow a rigid blueprint, executives must help organizations focus on sensing and responding to unpredictable market conditions.
- Comment: Senior leaders play a vital role in providing clarity about the organization’s strategic direction, creating alignment on key priorities to ensure the achievement of enterprise objectives, and ensuring the business model is continuously evolving to create and capture value in the face of uncertainty. They must not rest on their laurels and stick to the beliefs and paradigms that got them to where they are today and hope they will carry them through tomorrow. Regulatory changes, new products, competition, markets, technologies, and shifts in customer behavior are upending many outdated assumptions about business success. Thus, the businesses you have today are different from the ones you will need in the future hence the importance of continuously sensing changes in the global economy. Employees and teams often feed off the energy of their leaders and tend to focus their attention where the leader focuses attention. If the leader is comfortable with current business practices and rarely embraces the future or challenges the status quo, then the team is highly likely to follow suit.
When it became clear that supply chains and other operations would fracture, organizations began scenario planning to shift production sources, relocate employees, and secure key supplies.
- Comment: Instead of using scenario planning to anticipate the future and prepare for different outcomes, it seems most of the surveyed organizations used scenario planning as a reactionary tool. Don’t wait for a crisis or a shift in the market to start thinking about the future. The world is always changing. As I wrote in The Resilient Organization, acknowledge that the future is a range of possible outcomes, learn and develop capabilities to map out multiple future scenarios, develop an optimal strategy for each of those scenarios, then continually test the effectiveness of these strategies. This does not necessarily mean that every change in the market will impact your business. Identify early warnings of what might be important and pay closer attention to those signals. In other words, learn to separate the signals from the noise.
The pandemic forced the organization’s senior management team to re-examine how all decisions were made.
- Comment: Bureaucracy has for a very long time stood in the way of innovation and agility. To remain innovative and adapt quickly in a fast-changing world, the organization must have nimble leadership and an empowered workforce where employees at all levels can dream up new ideas and bring them to life. Identifying and acting on emerging threats and potential opportunities is not the job of the leader alone but every team member. To quote Rita McGrath, in her book Seeing Around Corners, she writes, “Being able to detect weak signals that things are changing requires more eyes and ears throughout the organization. The critical information that informs decision-making is often locked in individual brains.” In addition to the internal environment, the leader must also connect with the external environment (customers, competitors, regulators, and other stakeholders), looking for what is changing and how.
It’s worthwhile for leaders of any team to absorb the lessons of sense-respond-adapt, even if there is no emergency at hand.
Sensing: Treat the far-flung parts of your enterprise as listening stations. The question leaders must ask is, “What are we learning from our interactions beyond the usual information about costs and sales?” Train your people to listen for potentially significant anomalies and ensure that important information is not trapped in organizational silos.
- Comment: Cost and sales data are lagging indicators that reveal the consequences or outcomes of past activities and decisions. Although this information can help leaders spot trends by looking at patterns over time, it doesn’t help understand the future and inform what needs to be done for the numbers to tell a different story. In addition to lagging indicators, pay attention to current and leading indicators and understand the relationship between these indicators and outcomes.
Responding: Improve communication across intra- and inter-organizational boundaries. Leaders should view business continuity as an essential function that acts as connective tissue for the enterprise.
- Comment: In addition to creating mechanisms that allow the free flow of information both inside and outside the organization, decision-makers should also be comfortable receiving information that challenges their personal view of the world, even if it’s not what they want to hear. Create a culture of psychological safety where people are not afraid to share bad news for fear of getting punished, but rather are acknowledged and rewarded for speaking up. Leveraging the diversity of thought enables leaders to anticipate the future as an organization, decide what to do about it collectively, and then mobilize the organization to do what’s necessary.
Adapting: Challenge assumptions, and question orthodoxies. There’s always the temptation to mitigate threats simply by applying existing practices harder and faster. One way to get at those deeper issues and encourage double-loop learning is to ask, “What needs to be true for this to be the right approach?”
- Comment: In an increasingly uncertain environment, it’s difficult to survive and thrive with an old business model or outdated technologies. Many businesses fail because they continue doing the same thing for too long, and they don’t respond quickly enough and effectively when conditions change. As a leader, stay curious and connected to the external environment, look for market shifts, understand what needs to be regularly refreshed and reimagined, adopt new technologies and capabilities, and adapt in ordinary times but also during times of transition. Unfortunately for many leaders, it’s just more convenient for them to continually downplay the fact that conditions are changing than take the appropriate course of action that drives business success.

How are you preparing your organization for potential future disruptions?

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The Collaborative Organization

These days the term collaboration has become synonymous with organizational culture, creativity, innovation, increased productivity, and success.

Let’s look at the COVID-19 pandemic as an example. At the peak of the crisis, several companies instructed their workers to adopt remote working as a health and safety precautionary measure.

Two years into the pandemic, they are now asking their employees back to the office full time or are planning to adopt a hybrid model.

The need to preserve our collaborative culture and accelerate innovation are two of the top benefits being cited by organizational and team leaders for bringing workers back.

Collaboration is indeed essential for the achievement of team goals, functional objectives, and the overall success of the organization.

Today’s breakthrough innovations are emerging from many interacting teams and collaborative relationships.

When teams, functions, and organizations collaborate, the whole is greater than the sum of its parts; group genius emerges, and creativity unfolds.

But, what makes a successful collaboration? What are the key enabling conditions?

It extends beyond the boundaries of the organization. Business success is a function of internal and external relationships. Instead of viewing your business in vacuo, understand that you are part of an ecosystem. External to your organization, who do you need to partner with to enhance your value creation processes, achieve/exceed your objectives, or successfully execute your strategy?
Ensure the objectives are clear and there is shared understanding by everyone. Unclear objectives are one of the topmost barriers to team and organizational performance.
Foster a culture that encourages opinions and ideas that challenge the consensus. People should feel free to share their ideas and not hold back for fear of others penalizing them or thinking less of them. Collaboration is hindered when one or two people dominate the discussion, are arrogant, or don’t think they can learn anything from others.
Groups perform more effective under certain circumstances, and less effective under others. There is a tendency to fixate on certain topics of discussion amongst groups which often leaves members distracted from their ideas. To reduce the negative effects of topic fixation, members of the group should be given periods to work alone and switch constantly between individual activity and group interaction.
Effective collaboration can happen if the people involved come from diverse backgrounds and possess complementary skills to prevent conformity. The best collective decisions or creative ideas are often a product of different bodies of knowledge, multiple opinions, disagreement, and divergent thought processes, not consensus or compromise.
New technologies are making collaboration easier than ever, enabling us to increase our reach and broaden our network. Although new technology helps, it will not make your organization collaborative without the right culture and values in place. First, define what you want to achieve through collaboration then use these tools to promote creative collaboration.

How else are you championing collaboration within your organization to create value and succeed?

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Achieving Sustainable Competitive Advantage

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