'Sustainable competitive advantage' has been at the forefront of business strategy for many years. But all good things come to an end, and Professor Michael Porter’s theory was declared officially 'dead' last year.
Now there’s much debate about whether the strategy was a ‘good thing’ in the first place, as it discouraged innovation.
The search for a sustainable competitive advantage was considered by many to be dangerously optimistic. It implied that if you found a unique business opportunity, you could build walls around your niche and then sit back and enjoy the profits of your timeless idea.
As with the natural environment, the business environment is transient; thinking about it in any other way is not only inefficient but counterproductive.
Rita Gunther McGrath’s book, ‘The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business’ sums up the flaws of this theory perfectly.
The problem is best explained with a surfing analogy. Just like the economy, the sea is not static and with every wave comes an opportunity for the surfer to ride the tide back to the beach. Rita Gunther McGrath writes that companies need to “move from wave to wave of competitive advantages, trying not to stay with one too long because it will become exhausted… the environment requires instead the capacity to surf through waves of short-lived opportunities.”
In today’s climate, competitive advantage can evaporate in as little as a year as product features can be quickly copied. Companies need to move away from a long-term strategy, and create an adaptive culture than can embrace wave after wave of opportunities.
A transient environment
Risk, instability and volatility best describe the current business environment – a description which certainly doesn’t suit a fixed strategy.
According to the Harvard Business Review, the volatility of business operating margins has more than doubled, along with the gap between the biggest business winners and those left behind.
The battle for market leadership is even more uncertain, with companies that make it to the top finding it much harder to stay there. The proportion of companies falling out of the top three rankings in their industry has increased from 2% in 1960 to 14% in 2008.
The nature of business competition is clearly more unpredictable than ever before. If companies get to the top they struggle to stay there, and it’s increasingly difficult to know which companies – or even industries – businesses are competing with.
Competition moves from industries to ‘arenas’
Established industries are now competing with newer industries in, what Professor Rita Gunther McGrath calls, ‘arenas’:
“The driver of categorisation will in all likelihood be the outcomes that particular customers seek (‘jobs to be done’) and the alternative ways those outcomes might be met.”
With innovate technology springing up from every sector; a solution to your customers’ core problem could just as easily come from another sector as it could from one of your traditional competitors.
Take, for example, Google’s operating system challenging traditional phone operating systems, or the way online video calls are creeping into the traditional telecoms’ market share; all are great examples of a ‘cross fertilisation’ of industries.
Customer experience and innovation are the new USPs
Customer experience and innovation are not only unique selling points, but essential qualities for gaining a competitive advantage. A culture of innovation is essential to stay ahead and break away from traditional business practice.
Customer experience is perhaps harder to define. Gartner describes ‘competitive advantage’ as a difference between a company and its competitors that matters to its customers.
It’s through whose eyes companies are considered better that’s important. Business competition has moved towards intangible and emotional factors, such as how a customer feels about a brand. What’s key here is that the aforementioned hard-to-define ‘experience’ cannot easily be replicated because it’s hard enough to pinpoint what’s going right, let alone copy it.
However, the financial benefits of an excellent customer experience are huge – with the Harvard Business Review finding that emotionally engaged customers are three times more likely to recommend a product and to repurchase.
Why the cloud is key to adaptability
In an era of instability, being able to adapt to industry changes is vital. This change in business strategy lends itself well to developments in cloud technology.
The essential principles of the cloud, such as scalability, reliability, and easy deployment are perfect for helping businesses meet the demands of the current climate.
The principles of the cloud just reflect what the current business environment needs. For instance, basing technology on open standards allows companies to integrate new components easily – all of which enables them to adapt and change without the clunky weight of multiple incompatible technologies holding them back.
Plus, without reliance on plug-ins, the ‘cable has been cut’ as far as businesses are concerned, ensuring every organisation can be independent of a device or location, which in turn, makes a business truly adaptable.
What is competitive advantage in 2014?
A combination of creating the right experience, implementing the right technology and seizing every new opportunity leads to a competitive advantage.
But what companies have to remember is that a competitive advantage is no longer theirs to keep for years to come. Being there first doesn’t cut it in today’s market – even if a company is a pioneer, their competitors can still catch them in no time.
Innovation is not just what businesses have to think about on day one – but every day. Companies need to ask themselves:
- What opportunities are out there that we can seize?
- How can ideas from other industries be adapted to enhance our own?
- How long do we have to exploit the competitive advantage before other competitors respond?
- How could this opportunity enhance customer experience and the public perception of the company?
If you can leave behind the “sustainable competitive advantage mind-set” and be ready to adapt with every change in the market, you can stay ahead.
Stability may be considered ‘dead’ – but was that really ever a good thing anyway?
Article first published in WIRED