The Biggest Lie in Business: Strategy Happens at the Top

Episode #394 The Biggest Lie in Business: Strategy Happens at the Top

STRATEGY IS ABOUT COMPETITION

All strategy is built around competitive advantage.

Do you have a better product? A cheaper product? A higher quality product?

But competitive advantage is relative. How do your advantages compare to your competitors’? Why would a customer buy from you, rather than choose one of the many other options available to them?

Companies compete at the product level, and that competition crystallises at the point of the customer transaction: the decision a customer makes to buy your product… or not to buy it.

Most people assume that competitive advantage is hatched in the boardroom. Workshops produce growth strategies; which turn into plans for acquisitions; new product lines; new market entry; and other bold strategic moves.

But in reality, competitive advantage is built in the middle. It relies on the decisions that middle managers make every day about people, priorities, and standards.

I start by briefly examining a traditional model of competitive advantage; I look at a recent article from McKinsey about how competitive advantages are being eroded in many companies. And I give you a single gem of wisdom on how you can maintain competitive advantage, despite the fact that you may not be involved directly in setting the strategy..

HOW SUSTAINABLE IS YOUR COMPETITIVE ADVANTAGE?

I realised as I was writing that it’s almost 20 years since I studied at Harvard Business School. Time flies when you’re having fun!

One of my favourite subjects was strategy, facilitated by the incomparable David Yoffie. I’ll never forget a piece of research that Yoffie shared with us. Even back then, it was clear that competitive advantages are fleeting. On average, high performing companies revert to the mean surprisingly quickly.

If your company manages to build a competitive advantage, it’s likely to last somewhere between, maybe three and seven years before you slide back to the industry average… and I suspect that these days, the accelerated pace of change in many industries has eroded this advantage premium even more.

If you factor into that equation, the availability of information that was previously privileged or inaccessible, you’ll see why competitive advantages are fleeting.

It’s important to understand the source of any competitive advantage, because that’s what determines how great the lag time is before your competitors can catch up to you.

To catch up, they have to find a way to improve something that you’ve found a way to do better than them; and this takes time.

For example, an advantage you create by selling your products at a lower price can be overhauled pretty easily, typically within a couple of months. A pricing advantage simply isn’t sustainable.

It’s not unreasonable to use discounting tactics to steal market share from your competitors, but unless you truly are the lowest cost provider, the race to the bottom that starts with a price war is eventually going to destroy your profitability too.

And remember, your competitors will defend their market share vigorously. Price discovery is really easy these days, so it’s likely that any advantage you manage to create by selling your product at a lower price point is going to be neutralised in a matter of weeks, not months.

Let’s look at an example from the world of manufacturing. You could possibly create a competitive advantage by increasing throughput capacity in your factory. An advantage in manufacturing would traditionally have lasted up to three years, but these days, that type of advantage is even easier to overhaul.

A major capital investment in automation or robotics used to be hard for competitors to copy, because the upfront capital cost of the investment presented a huge barrier. But with cheap, reliable manufacturing technology coming out of China, those advantages are less distinctive.

And regardless of whether the IP is homegrown or pirated, it certainly levels the playing field.

Competitive advantages that you build in your distribution channels are still highly valuable, but once again, they’re easily eroded. As e-commerce platforms proliferate, now any punter can plug into a SaaS application to distribute their cottage industry products globally.

What used to be a sustainable competitive advantage with a response lag of up to four years can now be overhauled rather quickly (unless, of course, you are the distribution channel: good luck if you’re trying to compete with an 800lb gorilla like Amazon).

Still the most durable competitive advantage comes from people and culture, and this requires leadership. Why? Because a true advantage in the people space is incredibly difficult to create, and it’s almost impossible to copy.

Typically, advantages that are based on people, culture, and organisational processes can last seven years or more. And even then, the advantage isn’t usually destroyed by your competitors becoming better; it’s more common that your company simply loses its edge.

High performance is mercurial, and it requires incredibly strong leadership to extract exceptional performance from talented people over a long period of time.

STRATEGY’S BIGGEST BLIND SPOT

I got the idea for this newsletter from an article published by McKinsey quite recently. It was titled Strategy’s Biggest Blind Spot: Erosion of Competitive Advantage. The article made some very astute observations, and without going through the whole thing, the punchline was awesome.

The authors proposed five rules for maximising competitive advantage.

1. Develop a granular view of competitive advantage.

“Leading companies know which attributes affect customer choice: they invest in strengthening them, embed them in their most important markets, and make them transferable so they can apply them at scale.”

This is a great statement. Some of this comes from the executive team for sure, and some of it comes from the marketing department. But it mostly comes from the interactions people have with customers, product designers, and operations staff on a daily basis.

2. Tailor the advantage to each market.

“Competitive advantage occurs at the intersection of offering, geography, and customer. In other words, what you’re selling, where you’re selling, and to whom you’re selling.”

This is about really knowing what your basis for competition is. It enables you to make very conscious choices about your competitive strategy. The intel for how that strategy is working comes from the people closest to the customer transaction, not from the chairman of the board. This is why the middle layers of a company are so important.

3. Don’t overinvest in areas that won’t improve competitive position.

“Organizations sometimes fall into the trap of believing that their offerings are superior to their competitors, when customers don’t see or don’t value that difference.”

It’s really important to know what product features are valued by the customer. We tend to think that more features results in a better product, but adding features also adds to the cost of production. If the customer doesn’t value these features, then you can’t increase the price on that basis.

It’s like buying a block of land in a sh!tty neighbourhood, and then building a Taj Mahal on it. When you make a poor decision to overcapitalise, you never get your money back.

4. Boost the return on competitive advantage by embedding it into strategic decision making.

“A company needs a competitive advantage to maintain a market lead as new entrants emerge, and competition evolves. Successful businesses regenerate their advantages over time and apply them broadly, especially to the most attractive market opportunities.”

Fundamentally, if you can work out what’s at the heart of your competitive advantage and then how to leverage that across different markets and product groups, you’ll really see the magic of competitive edge.

5. Track the metrics that can signal changes in the competitive landscape.

“Since the risk, complexity, and dynamism around a company’s competitive advantage vary by market, business leaders need to monitor their competitive advantage at the market level.”

This is tricky, because it means on-the-ground intelligence has to make its way up to senior decision makers. The authors offer three tips:

1. a) Track the shuffle rate at the market level. That is, how quickly are competitors switching positions in terms of pure market share?
2. b) Follow the money. Shifts in startup patterns, and investment flow activity can signal the arrival of new competitors, potentially reshaping industry dynamics and undermining an incumbent’s advantage
3. c) Watch for acquisitions by players outside of the industry. This is a sure sign that money’s being placed with companies that have a lot of competitive upside.

When we’re talking about sustaining a competitive advantage, these five rules of thumb are a great guide to help you focus on the right things. And of course, if you say it fast enough, it sounds easy!

COMPETITION PLAYS OUT IN THE MIDDLE

“Okay, Marty,” I hear you say, “That’s all fun and interesting, but what does it have to do with me and how I lead my team?“

You may not have a huge amount of say in product decisions: the investment roadmap, the target customers, or the market verticals. But how competitive advantages that are imagined in the boardroom actually play out in real life is very much up to the people who are way further down the org structure.

Where you are is not just where the work happens, it’s where competitive advantage is either built or eroded.

Just to be clear before I go on, I’m going to talk about “products”: a product can be either goods, or services, or a combination of both.

Your product may be household furniture, something very tangible; or your product may be less tangible, like legal advice for property purchases; or your product may be a combination of both, say, selling a car, which is normally a tangible good, with a bundling of service warranties.

In all of these cases, I talk about a customer buying your product.

Let’s turn our minds back to competition:

• Competition plays out in product teams where design and production occur;
• It plays out with the frontline managers who make resourcing decisions;
• It plays out through speed of execution and customer responsiveness; and
• It plays out under the rules and standards imposed by operational processes.

Competition plays out in every single interaction with a potential customer, whether you see it or not. At the top of the company, they’ll be looking at certain metrics to confirm whether or not the strategy is working. They’ll have indicators like brand awareness; market share; leverage of intellectual property; and the rate of new market entrants.

But customers see something very different: they’re looking at factors like product reliability; price (including any discounting offers); and the speed, quality, and responsiveness of service.

Just think about this for a moment… I don’t know about you, but I’m happy to spend more on a product from a company that has its sh!t together. A company that I know, if there are any real problems, they’ll make good quickly; where there’s no friction in my dealings with them.

Those attributes are delivered by the countless operational decisions that are made every day by the teams who have contact with customers, and those who provide the back-office support services that are required to make it all happen.

This is where real competition lives. This is where any advantage is either won or lost.

So, what can you do if you’re in the middle layers where competitive advantage is built? You may feel helpless because so many critical decisions are made above you, but nothing could be further from the truth. You have way more power than you could possibly imagine.

ONE POWERFUL FOCAL POINT

I’m going to break this final piece into two separate categories to cater to your specific context a little more precisely. I’ll give you a perspective for customer-facing roles and for non-customer-facing roles, and I’ll give you one gem of wisdom for each.

This is the one thing that you can focus on to build competitive advantage in the middle, win customers from your competitors, and reduce customer churn.

You may already be doing this, and if you are, just take a moment to congratulate yourself before refocusing on improving and refining it even more.

1. If you lead a team that ISN’T customer facing?

The one thing you can focus on to create competitive advantage is to improve the efficiency of everything you do.

Decisions about products, markets, and distribution channels are often beyond your control. So, like anything else, you have to control the controllables.

Even if you’re in a supporting area behind the scenes and you have no customer touchpoints, you still have a massive bearing on the cost of production. So, it’s important to ask yourself a few searching questions:

• Does my team understand what value looks like for our customers?
• Is my team as lean as it could be?
• Is our attention placed squarely on how to improve the customer experience or are we doing work that’s just internally focused?
• Am I building an empire or am I trying to keep my team as efficient as possible?

I recently delivered a keynote speech at a leadership conference for KONE, a global business specialising in lifts, escalators, and other critical building infrastructure.

One of the things that really impressed me about that company was their customer focus. The customer was elevated to the center of everything they did (if you’ll pardon the pun), and it was at the forefront of every single conversation they had.

What is arguably a pretty unsexy product, which most people wouldn’t think twice about, was being seen through the eyes of customers in every part of the value chain: from property developers, to architects and builders, to commercial property managers, and to the billions of people who experience the product each day, most without even knowing it.

This was a masterclass in customer focus, because it was so evident even in leaders whose roles would never put them in front of a person making a buying decision.

If you are behind the scenes, you can still have a massive impact on competitive advantage.

2. If you lead a team that IS customer facing.

The number one focus should be to understand your customer value proposition profoundly.

You should be able to describe precisely why your product delivers better value than any of your competitors’ products. It has to be so clear that anyone can articulate it in 10 or 15 seconds.

And I’m not just talking about your sales and BD people. I’m talking about every individual who has a touchpoint with an existing or potential customer: delivery drivers; service technicians; customer support center staff.

It doesn’t matter what your non-executive directors and senior leadership team think your competitive advantage is. You have to be able to describe it clearly and accurately: it has to be completely obvious to your customers why your product is better, why it’s offered at a particular price point, and why it’s superior to other offerings in the market.

I’ve never seen a company that didn’t have room to improve the communication of their value proposition to the customer.

UNLEASH YOUR COMPETITIVE ADVANTAGE

It’s easy to dismiss strategy as something that belongs at the top of the company, but it’s what happens in the middle that makes the potential power of the strategy come alive… or not.

Competitive advantage plays out in the day-to-day decisions that are made at the lower levels of the company, which determine the customer experience. And that’s as true for back office teams as it is for sales and customer support staff.

If the company at those levels stops improving, adapting, and outperforming rivals, no amount of boardroom strategy will save the competitive advantage. And then, you’ll find yourself back in the pack with everyone else just trying to survive.