Unsustainable Competitive Advantage

In business school, we learned that companies need to develop sustainable competitive advantages. To build value for the long term, you needed to develop distinct competencies that your competitors would not be able to imitate, and then find a way to apply them as an advantage in the markets in which you compete. For some companies, the critical advantage was scale: any new competitor trying to enter the market was at a tremendous disadvantage because their smaller scale would lead to higher costs. For other companies, the sustainable advantage was that government regulation made it difficult for new competitors to become licensed, or otherwise limited the competitive landscape. Others still had locked up distribution channels, or employed the only scientists who were capable of designing products for their market.

Whatever the competitive advantage was, it needed to be long-lived. The capital markets, in valuing the enterprise, would consider its ability to generate profits well into the future—based on whether its advantages would be sustainable. Today we sometimes speak of “moats” that tech unicorns have built around their advantages that make it difficult for imitators to succeed.

But on the whole, truly sustainable competitive advantages are going the way of the eight-track player, the fifty-cent cup of coffee, and the Mauritian dodo. Barriers to entry are falling as the cloud and DevOps make it possible to operate at low volumes and then scale dramatically, as electronic channels make it possible to bypass distributors, and as governments are paralyzed in trying to wrap their heads around technology that changes every few minutes. What we call disruption is really our recognition that yesterday’s sustainable competitive advantages have become tenuous—that industries rapidly change their shape in ways that make previous advantages irrelevant, even if they always seemed sustainable before.

Our business environment today is much closer to the one envisioned by the economist Joseph Schumpeter, where creative destruction is normal and advantages get competed away much more quickly than anyone would expect. Any new idea you have will soon be imitated—or, worse, leapfrogged as someone in a flash of inspiration finds an even better way. Or the business you are successfully conducting today will get creatively destroyed by a company that doesn’t have your disadvantage—the disadvantage of being satisfied with the status quo. If you’re keeping your customers happy, someone will find a way to make them happier; or, your customers’ preferences will suddenly change and your services will stop getting smiley faces or high net promoter scores.

Instead of sustainable advantage today, enterprises need to be thinking about continuous innovation. As Schumpeter said, the advantage that comes from an innovation—from creative destruction of the old—will soon be competed away. That’s fine—as long as you’re ready with the next innovation.

I’m not talking about big innovations, innovation with a capital “I.” I’m talking about constantly finding new ways to satisfy customers, to retain them, to take them away from competitors and substitute products, and to grow the total market. Innovations might be new products and new features—or they might be better ways to interact with customers, or better ways to serve them.

Large, established enterprises don’t have to “reinvent themselves,” as the conventional hyperbole has it. They’re already good at something. As my colleague Phil Le-Brun says, McDonalds will never reinvent itself as a digital company that happens to sell food. It is a food company, period. What established enterprises have to do is to incrementally build upon what they already have. There is only one aspect of themselves that they have to reinvent, but it’s a big one: their ability to keep innovating with short lead times and creativity. Most large enterprises are not particularly good at that.

In the digital age, the ability to move quickly and with agility is simply table stakes. No advantage is sustainable, so the enterprise needs to continually refresh itself to stay ahead of competitors. Of course, competitors also cannot sustain many of their advantages: you can respond quickly to every move they make as well. A basic competency of any firm is to sense changes in the marketplace, innovate solutions to respond to them, get those solutions to customers quickly, refine them based on customer feedback, and then sense the next changes and repeat.

Tools exist to help enterprises achieve this basic level of competence—that’s why we’re in the “digital age” now. The cloud is a platform for agility: you can quickly obtain capabilities like machine learning, IoT, virtual reality, and augmented reality, and change your computing and storage infrastructure in moments. DevOps and Agile delivery give you a fast pipeline for delivering new digital capabilities and for trying out ideas. Together, they make innovation fast, cheap, and low risk. And that is what an enterprise needs at a time of unsustainable advantage.

Of course, digital tools are great at speeding up digital innovation—but what about physical products? Well, many competitive innovations have to do with service, customer communication, or cost—even in industries with physical products. Take McDonald’s again, which released a mobile application for home delivery in just four months. But digital tools can help even with rapid innovation in factories, with robotics, image recognition, augmented reality, and IoT sensors. True, not everything is digital, but quite a lot of things are amenable to digital technologies, digital ways of thinking, and digital ways of organizing.

Even for those innovations that must come slower to market because they involve physical hardware, the question isn’t how to move at digital speeds, but how to move faster than your competitor. You probably know that joke about how you don’t need to run faster than the bear that’s chasing you, just faster than the friends you’re with. Digital technology can often help with that (running faster than competitors, not running away from bears). That’s if your enterprise learns to take advantage of it to move quickly and nimbly.

But as I’ve said, speed is just table stakes. If every company learns to move at digital speed—to make change continuous, low risk, and rapid—then what kind of long-term competitive advantage can any one company have? The answer must be that your long-term advantage resides in your ingenuity in responding to change. It resides in your brand—your long-term relationships with customers and the trust you have built up. It resides in the values and principles you use to guide your company, and which your employees use in formulating their innovative ideas—something you might call culture, but I avoid the word because it has become overused enough to be troublesome. These things together—ingenuity, brand, and values—determine whether you’ll be able to keep innovating even as each innovation’s advantage gets competed away.

That’s assuming that your enterprise learns to move quickly and nimbly. More on how to use the cloud for that purpose in future blog posts.

For now, let’s just say during a time of unsustainable competitive advantage, you must constantly renew your competitive advantages through continuous—even if small—innovation.

—Mark
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