How do you ensure sustainable competitive advantages?
It’s a discussion that happens several times. We meet several passionate and energetic management teams seeking growth capital to take their businesses to the next level. As we learn more about their business and their long-term vision for it, we ask them to define their sustainable competitive advantage.
Very often we hear them describe advantages such as “first-mover”, “customer contracts”, and “superior technology”. But the question remains – which of these advantages is truly sustainable? Not just an advantage in the competitive landscape today, but one that they believe can be leveraged and sustained for the future. And, what is management’s plan to ensure that it is sustainable? It often gives them pause for thought.
To be fair, each of the advantages mentioned above are competitive advantages which can position businesses for success in the short or even medium term. However, organizations often make the fallacious assumption that their competitive advantages are sustainable on their own. Being first to market, or having a superior technology platform can definitely be an advantage, but that does not guarantee long-term success for a firm. Evolving customer needs or market disruptions can change the environment diminishing the effectiveness of established competitive advantages.
Often times, when a competitive edge is established, there can be a tendency to get complacent. In some cases, the complacency is rooted in arrogance – a belief that the market position that has been achieved will remain in perpetuity. In other cases, it is risk averseness – a view that a change in strategy may backfire. In either case, complacency can be fatal.
In 2007, Nokia had a worldwide market share in smartphones of 49% (as per Gartner). By 2013, it was down to under 3%. Nokia had spent so much of their time and energy focused on the hardware (making different designs that appealed to people globally at different price points) that they ignored the software – something Samsung and Apple capitalized on. Was it a case of arrogance, risk-averseness, or lack of urgency? Regardless of the cause, in seven years, shareholder value at Nokia eroded from $150 billion to $7 billion.
Blockbuster, Kodak, Sony, Barnes & Noble were all leaders with competitive advantages… until a disruption occurred. The disruption didn’t happen overnight. In all cases, the change was visible on the horizon, but the erstwhile leaders chose a defensive strategy rather than address the inevitable change in the market landscape.
Competitive advantages need to be dynamic and adaptable to truly be sustainable. Technology, it turns out, is rarely a sustainable advantage. It may give you a head start, but sooner or later competitors will catch up with you. If there is something that you are doing, which is working well, chances are that competitors will employ a copy-cat strategy to capture some of the pie.
The only way to make your position sustainable is through constantly
reevaluating your competitive strategy, understanding emerging trends that can impact the business, identifying potential adjacencies for expansion and areas for efficiency improvement. You can create switching costs, build a brand that is synonymous with trust and quality with customers, and constantly innovate and attract the highest quality employees.
There are few things that we at SCP recommend management of companies do on a regular basis:
- Identify new opportunities within your product/service offering. Being complacent, or operating with blinders on is one of the surest ways of losing a competitive advantage or missing out on new opportunities. Having a static product line in a fast-evolving market will eventually render your range obsolete. Business leaders need to be spending a significant portion of their time evaluating new opportunities, and innovating and expanding their line of offerings to delight customers.
- Be proactive about emerging trends that can impact your business. They may be a small blip on the horizon for now, but recognizing them early and foreseeing the impact they can have on customer preferences or market dynamics can help you be proactive with your response to them rather than being reactive and stuck with a defensive maneuver.
- Nurture a culture of innovation and collaboration. Competitors can follow suit and replicate products, Go-to-market strategies, and technologies; but competitive advantage often boils down to execution excellence which is itself driven by a culture of relentless innovation and collaboration. Establishing a culture that nurtures and supports that can take years, and it has to emanate from the very top of the leadership.
- Overinvest in talent. Steve Jobs famously said that if the top 50 people are right, it cascades down throughout the organization. If the top 5% of people in an organization are the right ones, with the credibility, expertise, integrity, work ethic, and commitment to the organizations goals, the same culture will cascade throughout the company. The right people will not be cheap, but they are often the ones that will open up new markets; bring new customers; innovate new products and processes; and generate enormous value while paying for themselves several times over
- Keep the long-term objective in mind. Establish your vision and set SMART (Specific, Measurable, Attainable, Realistic and Timely) goals towards achieving that vision. Buying growth in the short term may help in attaining quarterly targets, but it is expensive and unsustainable. Focus on developing your core competencies and on addressing any areas of weakness. That focus will take the organization from one competitive strength to another
A constantly innovating organization that attracts the brightest talent and seeks to delight its customers? Now that is fertile ground for developing sustainable competitive advantages.