Is the concept of sustainable competitive advantage still relevant in today’s business environment?
Based more on politics than military strategy, George Washington’s decision to defend New York in the summer of 1776 nearly cost America its independence. With no warships, the rebels were powerless against the British armada. Washington had worried about how to defend the city without a navy, but he underestimated the danger that his army might get trapped on Manhattan or Long Island. After a disastrous four-month campaign, the rebels cut their losses and escaped across the Hudson River to New Jersey, narrowly avoiding annihilation by superior British forces.
To Washington’s credit, he learned from his mistake. Just a few weeks after the retreat from New York he made a bold move that saved the Revolution. He needed a win to rally his troops and show the civilian population that independence wasn’t a lost cause. And he needed it soon: his soldiers were enlisted only through the end of the year, and most planned to go home to their farms as soon as the year was out. Washington’s brilliant attack on Hessian mercenary troops at Trenton on Christmas night stunned the Hessians — and their British employers — and convinced Washington’s men to reenlist.
The frustration Washington felt during the summer of 1776 may be familiar to business executives who have made similar blunders, entering markets where they were competing at a hopeless disadvantage against a dominant rival. So how can you stake out an advantageous position, especially in today’s rapidly changing marketplace?
Competitive pragmatism: Fight battles you can win
The lesson Washington learned that summer was the same one Columbia MBA students learn each spring in Professor Bruce Greenwald’s Economics of Strategic Behavior class: Don’t get into a market where you’re an ant competing with an elephant. (Read an excerpt from Greenwald’s book Competition Demystified.)
One company that ignored Greenwald’s maxim was AT&T. In the 1990s, it entered the data processing business, in spite of being at a disadvantage against IBM and other large companies with captive customers and extensive software expertise. The move, which Greenwald calls the worst strategic mistake by an American company in the past 30 years, had disastrous consequences for the former telecom giant. It remains to be seen whether the new AT&T — formed through a merger with a former subsidiary — can recoup the billions of dollars in shareholder value that the old AT&T squandered.
Similarly, Apple set itself up for failure when it tried to dominate both the hardware and software segments of the personal computer market, an impossible goal given the size of the market and the strength of firms like IBM and Microsoft. Apple’s fortunes revived when it finally took on a battle it could win: Its iPod has captured 80 percent of the market for personal digital music players, and that success has spurred sales of its other products. Since 2005 the company’s profits are up almost fourfold, and its stock price has nearly doubled. Because Apple’s R&D and advertising expenses for the iPod are spread over such a large number of unit sales, its competitors will be hard-pressed to catch up.
In Jack Welch’s best-selling book Winning (Harper Business, 2005), the retired General Electric CEO offers a three-step formula for effective business strategy. The first step is to “come up with a big aha for your business — a smart, realistic, relatively fast way to gain sustainable competitive advantage.”
German military analyst Carl von Clausewitz used the French term coup d’oeil to describe the “big aha” concept, which he considered a key element of Napoleon’s success. A big aha isn’t a completely new idea but rather a new combination of things that have worked in other settings, explains Professor William Duggan. (See Strategic Intuition: The Key to Innovation.)
Great strategists look for ways to apply successful ideas to new situations. And the best military strategists don’t pursue territorial goals, as Washington did at New York; instead, they look for opportunities to win battles, as Washington did at Trenton. The former approach puts planning before strategy, while the latter approach lets you respond to a dynamic environment. The same principle applies in business.
“GE had a whole system for stealing — legally stealing — ideas within the company and outside the company and combining them to make things work,” Duggan says. “To do that, though, you have to have what von Clausewitz calls presence of mind, and you have to give up your preconceptions about what the combination was going to be and where it was going to take you. That’s hard for many people to do. The opposite idea, that first you set your goal and then you figure out how to get there, is very deeply rooted.”
In other words, if you set a goal before you’ve found a winning combination for reaching it, you’re likely to get stuck in an ant-versus-elephant scenario. If you want to be an elephant, you set your goal after you’ve found a big aha, not before. Both the goal and the means of achieving it are part of the strategy process. The planning process, which comes later, just fills in the details.
Professor Willie Pietersen, who ran large divisions of several major companies before joining Columbia’s faculty, notes that many companies confuse strategy and planning. He explains the distinction using a simple metaphor: “Strategy is about where to lay the railroad tracks, and planning is about making the trains run on time. You can’t run a railroad without doing both of those things extremely well, but the one is not a substitute for the other.”
Companies that are great at strategy have rigorous, separate processes for strategy and planning, says Pietersen, and they always do strategy first. “Planning is about numbers and budgeting and forecasting. Strategy is about developing insights about the external environment and using those insights to make intelligent choices about how to use the scarce resources of the organization for competitive advantage.”
Dynamic strategy: Take advantage of change
Michael Porter’s Five Forces model — the dominant business strategy framework since the 1980s — is still useful, says Professor Rita Gunther McGrath, but it’s too focused on the holy grail of “sustainable competitive advantage.” Today’s world requires a more dynamic approach. “The Porter approach was basically: create a position of advantage, throw up entry barriers like crazy and then try to ride that wave for a long, long time,” says McGrath. “In strategy today we’re much more aware of temporary advantages.”
In Marketbusters (Harvard Business School Press, 2005), McGrath and coauthor Ian MacMillan present five “lenses” for identifying opportunities in a dynamic environment.
1. Dramatically change the customer experience. A Bellevue, Washington company called Coinstar came up with a convenient way to process loose change. Instead of having to roll coins and take them to the bank, you can use a machine at your local supermarket that counts your change and gives you a receipt that you take to the cashier. Coinstar’s 2005 revenues were $459.7 million, and its sales are growing at a rate of almost 50 percent.
2. Reconfigure your products or services to appeal to particular customer segments. The fastest-growing hotel segment in the United States consists of hotels that have stripped out amenities that business travelers don’t care about and replaced them with features that these customers value. This reconfiguration allows the hotels to offer more attractive pricing than their conventional counterparts.
3. Change the metrics by which you define your product and measure its success. Recognizing that no customer gets really excited about buying cement, Mexico’s largest cement company, Cemex, changed its business model. Instead of selling commodity cement and competing on price, the company now sells ready-mix concrete with guaranteed on-time delivery.
4. Spark a disruption in your industry, react to a disruption in an advantageous way or exploit changes in related industries. Google capitalized on the availability of inexpensive data storage and transmission by entering the e-mail business with its Gmail offering. Similarly, these two factors have allowed Google to pursue advertising dollars in a way that is extremely disruptive to traditional advertising.
5. Pay attention to slow but powerful demographic and cultural changes and find ways to take advantage of emerging capabilities and needs. In 1954, Swanson introduced the TV dinner, profiting from the convergence of rising television sales and American housewives’ growing demand for convenience.
In spite of the shifting competitive landscape, today’s business environment presents executives with a predictable set of challenges, McGrath says. How can you turn those challenges into opportunities?
First, think carefully about the timing of your strategic moves and investments. In particular, McGrath notes, it’s increasingly important to link together your financial strategy and your product market strategy.
Second, when a new product or venture doesn’t work out as planned, manage that disappointment in a productive way. Failure can have a devastating effect on morale. But if you properly manage the people side of your business, a failed project can be a rich source of information that contributes to the success of future initiatives.
Third, when you succeed, pay close attention to emerging trends to avoid getting stuck in a competence trap. The Victor Talking Machine Company, which made Victrolas, had deep expertise in moving parts and gears. But when radio arrived on the scene, requiring a completely different set of skills, Victor couldn’t make the transition.
Finally, in spite of the day-to-day demands of running a business, remember to step back and look at the bigger picture. “The strategy process requires time,” McGrath says. “And I’m seeing in organizations that are increasingly time stressed that they’re not very good at marshaling the kind of time you need to think strategically in an appropriate way.”
Strategic learning: Create a cycle of renewal
Perhaps because of time constraints, many companies approach strategy as an ad hoc exercise instead of an embedded business process. As a result, they don’t get enough practice to become really good at creating and implementing strategy, says Pietersen. “The way that work happens in organizations is through business processes. And whenever you’re doing something truly important, the way you make things happen is by having a business process.”
Pietersen has developed a process called the Strategic Learning Cycle, which builds on the work of Arie de Geus, Peter Senge and David Garvin. Those scholars advocate a Darwinian approach to strategy: in a dynamic world, only organizations that continuously adapt will survive and thrive. The missing element in that approach is strategic focus, Pietersen says. Adaptive learning doesn’t automatically lead to the right outputs.
The Strategic Learning Cycle fills in that gap, offering a systematic method for turning insights into results.
1. Conduct a situation analysis of your firm’s external and internal realities. The first step in developing a competitive advantage is to understand the changing environment better than your competitors do. Breakthrough strategies are based on unique insights into customers, competitors, your firm’s own strengths and weaknesses, industry dynamics and the broader environment.
2. Use key insights from the situation analysis to define your strategic focus. Strategic choices include your customer focus (which customers you will serve and what you will offer them); your winning proposition (what you will do better than your competitors to create greater value for your customers); and your five key priorities (the handful of things that will make the biggest difference).
3. Align the organization behind your focus. Your measurements and rewards system, organizational structure and company culture must all support your strategic focus. Above all, your people must embrace it. Make the case for change in clear, simple language. The biggest mistake you can make at this stage is to overwhelm and confuse people with a complicated strategy.
4. Execute today while experimenting for tomorrow. In a dynamic environment, you can’t separate strategy creation from strategy implementation. The execution phase should include a set of experiments that provide fresh information and insights for the situation analysis.
5. Repeat steps 1 through 4 over and over again. The ability to continuously learn, focus, align and execute creates a cycle of renewal that separates adaptive organizations from those destined to become obsolete.
“Sustainable competitive advantage in a dynamic world is not a product and it’s not a service,” says Pietersen. “Those things have shorter and shorter shelf lives. Sustainable competitive advantage is an organizational capability to be adaptive. And it’s what I call intelligent adaptation, which is adaptation driven by learning.”
No matter how good your strategy is to begin with, you have to be flexible enough to amend it in response to new information and changing conditions. The trick is figuring out when to make midcourse corrections, says Robert Amen ’73, former president of International Paper. “You don’t start changing course five minutes out of the harbor.”
Companies should examine all outcomes — successes and failures — using the same rigorous process, Amen says. International Paper based its process on the U.S. Army’s procedure for analyzing outcomes: “What drove the outcome? Was it strategy? Was it execution? Was it resources?”
When Amen thinks about strategy, he likes to visualize the battlefield at Gettysburg, scene of one of the most important conflicts of the U.S. Civil War. “Did you have the good ground? Were you able to hold your ground? Were you short on men or ammunition? In business, if you had a leading position and you lost it, was it because you didn’t have the technology? Was it because you were arrogant and weren’t paying attention to your customers? Was it because the market moved away from you?”
Strategic leadership: Win hearts and minds
Leadership is such an integral part of strategy that after Pietersen’s first year at Columbia, he told the dean that he refused to teach the two subjects separately. “No leader can lead effectively without a clear and compelling strategy to provide direction,” Pietersen says. “But a strategy, no matter how brilliant it is, is going to take you nowhere without effective leadership, because you have to win the hearts and minds of everybody behind the strategy if you’re going to operationalize it.”
For the past two years Pietersen has been assisting the Girl Scouts of America with a major transformation. Because of social changes affecting both the girls and the volunteer troop leaders, the organization found itself stuck in an obsolete business model. After a thorough situation analysis, the leadership team arrived at a new mission statement: “We are a leadership development organization for girls.”
Once the organization decided that it was in the leadership development business — that its purpose was not just to organize fun activities for girls — the next step was to build a leadership development model. An important element of that model is community service. The change is now in the execution phase, and while significant work lies ahead, the new strategy has generated tremendous energy and excitement within the organization.
“The hallmark of effective leadership is the ability to give people a stunningly clear and simple strategy that they can align with,” Pietersen says. “There’s no excuse for making it complicated. Organizations are paralyzed by complexity.”
Pietersen emphasizes that alignment starts at the beginning of the strategic learning process. “You can’t complete everything and say, ‘Hey, go do this,’ particularly with a lot of volunteers.” The Girl Scouts process had a high level of participation from the outset, and the findings from each phase were communicated through an interactive Web site.
Joe Tucci ’84, president and CEO of information-storage giant EMC, notes that leaders must be much more visible during times of organizational change. “The work back at the office still continues, but you’ve got to do that on weekends and nights,” says Tucci, who has led turnarounds at Wang Global and EMC. “In your daytime hours you have to be out there with customers and out there with the troops, leading from the front.” (See Decision Brief: EMC Turnaround.)
During any major change, Tucci says, about 20 percent of the people will immediately buy into the new strategy, 60 percent will be skeptical and the other 20 percent will be cynical. “There’s nothing better than converting a skeptic,” he says. “And they’re looking to be converted. So what you’ve really got to do is shoot the cynics, give a quick kiss to the guys that came right on the bus and spend your time with the skeptics. The skeptics are actually your best ally, because you always need to be challenged. No idea is perfect.”
Despite the influence Tucci enjoys by virtue of his title, he sees corporations as democracies. “The real leadership comes when you say, I want to follow that person, and not because that person demands it, but because he commands it,” Tucci says. “I have put in managers and they’ve failed miserably because they just never won over their people. So it’s a pure democracy, in a way. The people in the company have to want to follow you. And if you don’t think you have to earn that, you’re going to fail.”