The Final Four Competitive Advantages
Being competitive starts by understanding exactly how customers make purchase decisions, what they want from their suppliers, and how you use that information to create or expand competitive advantages.
No company can invest in everything, nor be the best in everything, so it's critically important to focus on the areas you choose to be best, be certain those areas matter to customers and will grow your business, and that you can create or extend competitive advantages in those areas.
Competitiveness used to be gained from operational excellence, with capabilities such as leaner manufacturing or superior supply chains. But now these competencies are table stakes.
Competitive advantages used to be things like products, price, staff, service and location. But in the minds of customers these are all easily substitutable and highly commoditized.
Consumers top decision-making criteria have evolved to wanting innovative products and services, providers that know how to engage and build relationships with them, and providers that know how to deliver consistent, rewarding and memorable customer experiences.
So with a change in the mix of buying criteria customers use to make purchase decisions, how do you determine which competitive advantages are the most powerful to acquire, grow and retain more customers?
Well first, you need to define competitive advantage.
Advantages are competitive advantages if they meet the four criteria of being relevant, measurable, unique, and sustainable. The first two – relevant and measurable – are much easier to achieve than the latter two – unique and sustainable.
I’ll cut to the chase. In most industries there are only four competitive advantages that meet the four definitional criteria, and they are innovation, culture, customer affinity and predictive analytics.
Innovation is the process of converting a novel idea into a unique product, service or experience that delivers value. This may include new products or improved products, new ways to procure products such as bundled or piecemeal (unbundled) products, or new ways to consume products such as creative subscription plans, limited time usage or sharing.
So how do you innovate, and create innovative products and services? There's a well-recognized process for success, and it includes Design Thinking, hypothesis' based on customer insights, quick experimentation, customer response measurement and iteration – where each iteration gets closer to the goal. It requires passion, persistence and a business culture that often looks more like a start-up than a mature company.
Customer affinity means knowing your customers better than your competitors, and using that knowledge to better serve them, build relationships with them and earn their loyalty. Knowing your customers better than your competitors and having relationships with your customers creates customer affinity, which is a sustainable competitive advantage that isn't easily duplicated by competitors or displaced by new technologies.
So how do you create customer affinity? There are several methods, such as digital transformation, customer experience management, omni-channel customer engagement, CRM and loyalty programs. Each of these customer strategies has overlap with the others, but is unique and delivers unique benefits.
For most organizations, company culture is the single biggest untapped asset to boost staff productivity, employee tenure and company growth. Corporate culture is the human performance engine that either enhances or degrades every business strategy, revenue initiative, operational performance and change transformation. Culture is a precursor and top contributing factor to anything and everything that requires employee effort. Every company has a culture. Most low performance cultures are a consequence of unplanned actions, unforeseen behaviors and random outcomes. In contrast, high performance growth cultures are intentional, proactively designed and in a constant state of awareness and improvement. They don't leave employee productivity and business performance to chance.
So how do you create a high-performance growth culture? Start by defining your culture ideology (identity, purpose, vision, values and behaviors), align your ideology with the business strategy and operational processes, recognize the 6 culture levers that determine business impact, and then communicate, model, coach, measure and reinforce the ideology. Refer to the Culture By Design framework for a proven approach.
Predictive analytics essentially means correctly forecasting the future, and taking action to profit from those forecasts. It's a shift in business intelligence from information that is backward looking to forward looking.
So how do you create predictive analytics? You start by creating a data-driven culture that shifts its decision-making process, by discouraging intuitive, subjective and gut-based decision making and favoring data-driven, fact-based and objective decisions – that are better, repeatable and more profitable for the company. About 100 years ago, a smart man named William Edwards Deming provided the below instruction to his team.
Technology uses analytics to identify relationships and patterns in order to create predictive models. But you also need to align process and technology to deliver the right information to the right person or customer interaction at the right time, in order to improve a business decision or customer experience. Making better business decisions or using data to deliver differentiated customer experiences are sustainable competitive advantages, as they don't lose value.
Some advantages are not competitive advantages.
There are other areas of competitive differentiation, that may offer competitive advantage except for the sustainability requirement. For example, brand is interesting as it plays a factor in customer buying decisions. It's still relevant, but in decline, more fluid and out of your control. With the rise of consumer technologies, such as social media and mobility, consumers are more connected, informed, empowered and demanding, and that has forever changed the power and sustainability of brands.
Companies no longer yield control in determining their brands. That control is being ceded to customers.
While far from worthless, brand is increasingly worth less to consumers who often distrust or otherwise remain highly skeptical of what companies say about themselves and put much more weight into what other consumers say about them.
Research shows that brand advertising is losing its effectiveness as consumers turn to social media to form their impression of the brand. Most consumers don't trust vendor advertising and instead develop their impression of companies and products from social media—be it the comments of friends, the commentary of complete strangers or the reviews on countless websites and social networks. As McKinsey advises, "As consumers become more digitally empowered, brand messages lose their impact, and the likelihood of conversion, on average, decreases."
If you need proof of businesses that rested on their perceived size and barriers to entry, only to later find themselves displaced or gone, consider what's happened to the Fortune 500. Over half of the companies listed on the Fortune 500 in 2000 are no longer around – they have been taken over, gone bankrupt or simply no longer exist. In the next four years, as many as three quarters of Fortune 500 companies will be names we do not recognize today.