Sunday, October 11, 2015

Sustainable Competitive Advantage

My contention is that the true object of strategy is to sustain value creation, which demands a capacity to relentlessly create and capture new value. The difficulty with setting a given market position or competitive advantage as your strategy’s goal is that its direction-giving guidance is effectively dead upon your arrival. It fails to reveal what’s next.
Sustainable competitive advantage is typically defined as "a long-term competitive advantage that is not easily duplicable or surpassable by the competitors.The American Enterprise Institute reports that the length of time that a company is in the Fortune 500 has declined from 75 years in the 1950s to just 15 years today. Why does is seem to be getting more difficult for companies to create long-term competitive advantage?
One answer, according to author and consultant Richard Foster, is that "creative destruction" is wiping out companies faster than ever. His observation is that big companies are very bad at out-innovating the market and a conclusion one could take from his research would be that big companies are going to continuously be disrupted and displaced by smaller competitors. 
In my opinion this would be the wrong conclusion. I believe that companies CAN get better at strategy and innovation and can participate in the same forces of creative destruction that threaten them. But most do not and here are three primary reasons and some things you can do about these challenges in your company:
  1. People will behave in ways that relate to their rewards. Companies have reward systems that reinforce old patterns and discourage change.
  2. Innovation in 2015 has a lot to do with technology and business leaders do not sufficiently understand technology trends to anticipate how those trends will create disruption. 
  3. Companies have not operationalized innovation as a core process in their businesses nor invested enough in innovation.

Behavior and Rewards
"Hey, our company has an award that the CEO gives out each year for innovation - what do you mean we reinforce old patterns?"
While companies may tinker at the edges with encouraging innovation, the reality is that running a successful business requires most people to focus most of their time on the way things are now and not on the way things might be in the future. Successful companies are successful because they have defined an operating model which allows them to efficiently accomplish a particular thing very well (at least at the moment).
Think of this as a smoothly oiled machine -- for example, a successful hotel chain needs to be good at setting up franchisee hotel owners, filling rooms with guests, monitoring and maintaining quality... and they need the majority of their staff to stay focused on continuing to do those tasks well and NOT be distracted by some disruptive idea like Airbnb.
Can anyone in your company come up with a good idea? Sure they can! Should you have a system in place in your company to let people suggest ideas? Definitely! But the reality of continuing to run the machine is that most people, most of the time, need to stay focused on keeping the machine running as it is and not thinking up how it might be in the future. You have to have sales goals and you need to reward people for achieving them. A successful business has a "business as usual" way of reaching those sales goals and doesn't need all the sales people running around testing new ideas for achieving those goals, many of which would be unsuccessful.
To be clear -- do not get confused about the difference between continuous improvement and innovation -- when you are running business as usual everyone should always be looking at how processes can be improved. But improvement is a fundamentally different activity from innovation. When we innovate we look for a way to do something entirely differently. Airbnb, for example, makes every home owner into a kind of franchisee hotel owner and each makes each hotel the size of one room (or house) -- you can't have your franchisee operations team off experimenting with an Airbnb model when they need to continue opening 100 room hotels. 
It may be a hard pill to swallow, but most people should not be innovating -- that is, should not be breaking the machine -- at least in their primary job. And the incentive models that encourage not-innovating are fine for the most part.
The problem most big companies get into, however, is that the people running "business as usual" have too much power over the future of the organization as opposed to the present. And companies don't have adequate incentive models for that portion of the company which should be exploring and inventing that future -- especially in cases where the future threatens the business as it is today.
Companies need to create the right incentives for all business leaders to embrace disruptive change that destroys business as usual when it has been shown to be successful. And a portion of the company must be given the explicit job of coming up with those ideas that will destroy business as usual and be given the resources to test and prove those ideas.
Technology and Business Leaders
For too long leaders in business roles -- sales, marketing, operations, service, finance -- have looked at information technology (IT) as a cost center. IT is a necessary evil and the CIO's job to manage cost down. But in an age of constant disruption from new technologies, companies need to develop what Gartner callsbi-modal IT. Gartner defines this as
"...the practice of managing two separate, coherent modes of IT delivery, one focused on stability and the other on agility. Mode 1 is traditional and sequential, emphasizing safety and accuracy. Mode 2 is exploratory and nonlinear, emphasizing agility and speed."
Business leaders and IT leaders need to be close partners around mode 2 -- recognizing that technology will be a primary source of competive advantage. Manage cost on mode 1 IT -- in fact outsource or send to SaaS as much of that category of IT as possible. But mode 2 will require a different operating model and a different level of investment. This is where your next product, business model, staffing method, or partnering strategy is going to come from. 
Operationalizing Innovation
Strategy and innovation, as Todd Zenger in the previously mentioned HBR article points out, will not reliably come through trial and error. Companies can not depend upon an ad hoc process for innovation. Any company which seeks to maintain a dominant position in its market must commit to a program ofcontinuous innovation just as successful companies commit to continuous improvement.
The amount of investment required will certainly vary from industry to industry and the strategy for these investments will entail different activities. Some mix of the following are certainly required for any large company:
  • Venture investing both to participate in and learn from disruptive start-ups
  • Mergers, acquisitions and disposal of unproductive assets
  • Continuous examination of market conditions and trends 
  • A scientific approach to the development and testing of hypotheses
  • Investment to engage in these activities at a sufficient scale
The right organizational structure for taking on these activities will include disciplines as widely ranging as business strategy, IT solution architects, experience designers, and data scientists. And these professionals will need to work hand-in-hand with the very business leaders whose "business as usual" operations will be threatened by this innovation.
Companies that succeed in developing long-term competitive advantage will be those that follow these three principles -- creating and investing in a strategy and innovation team and process, making sure that strategy and innovation is developed through close collaboration between business and IT, and fixing incentive models so that business leaders will embrace the creative destruction and benefit from the transition of their existing business as usual to new models.