The Secrets of Creating a Sustainable Competitive Advantage
By Preston Sumner and Brian Rouff
Preston: The Holy Grail of business is creating a sustainable competitive advantage. You can point to numerous companies that have established a clear competitive advantage. The challenge is sustaining that competitive advantage. The chart below illustrates this difficulty. Note the turnover in the top 5 publicly traded companies over the last three 5-year periods. Of the 5 largest companies in 2001, only Microsoft remained in the top 5 fifteen years later. Alphabet (Google), Amazon, and Facebook did not appear in 2011. Financial services companies (Citigroup, Industrial Commercial Bank of China) are no longer represented. Interestingly, as Walmart has dropped out of the top 5, Amazon has now appeared.
Is any competitive advantage sustainable? Size (economy of scale), ownership of natural resources, and superior technology are the competitive advantages that the companies on the chart enjoy(ed). Advantage due to size can be overcome by technology. Natural resources are depleted by their very nature and can be displaced by technology. It begins to look like superior technology is the sustainable competitive advantage. Will the top 5 companies by market cap look the same in 2021?
Superior technology in and of itself is fleeting. A better candidate for sustainable competitive advantage is a culture of innovation. Innovation is creativity and its importance in advancing technology is unequivocal. Taking it a step further, creativity is not a sustainable competitive advantage if it exists only in certain key individuals. There must be an organizational culture of creativity if it to be sustainable.
There is another critical component of business success. A superior technology with high demand can camouflage other business problems. Processes are necessary to assure delivery and support of that technology to the market. Processes force the discipline needed to consistently satisfy and delight customers. There is a tension between discipline and creativity and this is why businesses find building a sustainable competitive advantage difficult. Ultimately, the secret to constructing your sustainable competitive advantage is managing this tension.
Brian: Preston, you’re speaking my language. (Nice chart, BTW.) In marketing, we talk about life cycles, which apply to entire business categories, and can range from more than a century (department stores) to mere months (anyone old enough to remember the Pet Rock fad?). No matter the length, they all follow predictable stages; in the case of department stores, we’re witnessing the death throes of many venerable retailers such as Sears, K-mart, Macy’s, J.C. Penney, Toys R Us, Radio Shack and dozens more, mostly due to the pressure of online competition and the related buying habits of Gen Xers and Millennials. Even big dog Walmart is losing market share, something unheard of even a few years ago.
Innovation, rooted in creativity, can certainly prolong the lives of individual retailers within categories. And there will always be a place for outliers who stake out and own small, select market positions, such as high-end quality and service for customers who demand no less; Nordstrom and Four Seasons come to mind. But overall, innovation, which typically means incremental improvements over time, is never enough.
Recently, our marketing and PR firm, Imagine Communications, tore down and rebuilt our business model for the third time in 18 years. This is a total company effort that involves putting all of our offerings, systems and processes under a microscope and subjecting them to intense scrutiny. It’s a necessary exercise because of the deep, rapid changes that have been pummeling our industry for the past two decades. In the good old days, our field was a license to make money because traditional media, such as TV, radio and outdoor, paid ongoing commissions (sustainable income) to the firms who placed the ad buys. Today, those media vehicles have a smaller, more fragmented audience, while business clients are demanding more efficiency and better metrics in their marketing tactics. Companies like ours that refuse to change – embracing social media, for example – are doomed.
I’ll get into specifics in another blog post, but for now, you can feel good knowing that much of the future is under your control. It just takes the will to change.
Brian Rouff is a creative business owner. As managing partner of Imagine Communications (www.WeAreImagine.com), a leading Las Vegas based marketing communication firm, he is responsible for business processes. However, Brian is also part of Imagine’s creative team and a published author, so he has a foot in both camps.
Preston Sumner, President of CEO Focus of Nevada (www.ceofocusnv.com), is a curious observer of and participant in business. His curiosity extends to domains such as psychology, sports, physics, and warfare. He finds that these other domains offer models and lessons for business performance. Preston is fascinated by the intersection of knowledge and performance. Together Brian and Preston will explore this tension between creativity and the process of business.