Customer Leadership: Innovation and competitive advantage

Been a little while since I posted. Been a bit frantic I am afraid. Have plenty to talk about so hopefully over the next week or so I can catch up.

Anyhow one of the tasks I had was another article for the guys at CIMTech. I was asked to tackle the issue of building and sustaining competitive advantage. I have to say this was a nightmare to get out - took several re-writes. But hopefully it gives you some food for thought:

Innovation will be the single most important factor in determining America’s success through the 21st Century.
The Council of Competitiveness

Things have changed dramatically over the past 30 years. In the 1970’s the industrial landscape of Britain (and many other Western nations) was characterised by inefficiency and poor quality.

The Japanese, Germans and others were able to take ready advantage of the situation. By using cost and quality, it was easy for them to keep a competitive advantage. This was a sufficient differentiator in the market.

Western companies reacted in the 80's by adopting Quality Assurance programs such as Six Sigma. Many organisations also began applying the process lessons of manufacturing to other business functions – HR, Accounts, Sales and so on.

The last 10-15 years have seen some of the biggest improvements in productivity ever. Not only have process improvements been honed, but technology now automates many tasks. Companies routinely rely on ERP systems to tell them how things are going daily. Yet, so far, these programs have been about one thing – doing the same things better. This thinking is no longer enough.

Most of the efficiencies have been made. Indeed, in contrast to the 1970’s, today most companies are in good shape. Quality is now a given and any cost advantage gained by efficiencies brings only short-lived advantage.

Deciding where to build your advantage

Today, business needs to look further afield to build sustainable Competitive Advantage.

The starting point is to focus on being great at one thing consistently at the expense, if need be, of others. Dell Computer, Apple Computer, IBM, Amazon, Wal-Mart, Tesco are examples of great companies who have built advantage and, if needed, ignored short term profitable choices along the way. HP, Barnes and Noble, K-Mart and Sainsbury’s all pay testimony to that.

It is not easy to stay this focused. It is too easy to chase every opportunity. Discipline is paramount. Many become distracted by their competition.

• “How are we faring relative to our competition?” “How do our products compare relative to our competition?”
• “Before we decide how much to spend on R&D, how much is the rest of the industry spending?”

These are valid questions, but they must never become the main guiding posts for decision making. Great companies are built from the absolute that is ‘how can we be our best at our one thing’.

Michael Porter, the Harvard professor, is the father of competitive strategy thinking– it is worth revisiting his thoughts.

He believes that Competitive Advantage can only come from three sources.

1. The first type is a cost advantage – tools for achieving this might include economies of scale, a proprietary technology advantage or materials supply advantage.
2. Competitive Advantage can result from differentiation. Differentiation often comes from the product you sell. However it could also come from the way you sell your product or, as in the case of some luxury brands, how you market it. Reliability is a great differentiator for industries like logistics.
3. Finally, Competitive Advantage can come from focus. This sits across the other two. It suggests that competitors are failing to deliver on either a cost or differentiation basis because of their more general approach. You provide that benefit through your focus. Many small businesses choose this route.

Taking these lessons together, to build Competitive Advantage you need to:

1. Understand your industry.
2. Decide on a single source for your Competitive Advantage – cost, differentiation or focus.
3. Decide what the characteristics of your product or business model are that give you that single Advantage. Is it design as in the case of Apple Computer, supply chain as in the case of Dell Computer and Tesco, or marketing as in the case of L’Oreal.
4. Sustain and build on these characteristics.
5. Ignore the short term temptations

The role of innovation

The discussion so far has covered all these points except how to sustain and build your Competitive Advantage. This is where innovation comes in.

I have already said that the efficiency and quality game is over. Any small advantages you can gain are quickly eaten away.

Within your strategy, you now have to ask what you are going to do that's different. The response to this question needs a more innovative mindset and culture.

The nature of Innovation

I like this definition of innovation – the act of creating a new idea, method or device.

Innovation in this sense becomes the lifeblood that supports and builds your area of competitive advantage. As such, you need to build an organisation to support sustained innovative thinking.

Formal innovation processes need to be developed across the organisation – how are ideas encouraged, captured, built on, tested, either accepted or rejected and what happens to them then. An innovation culture needs to spread – that silly idea may not be so silly after all once we have played with it! People need to feel free to bring ideas to the table and not feel the fear of rejection.

Innovation for its own sake helps no-one. It needs to be directed. You will need to align your innovation efforts and processes towards your single chosen strategy. Does your investment in time and money help you move closer in your journey to being the best at your chosen one thing? How are you going to measure the success of your innovation efforts?

Example – Dell Computer as a master innovator

Dell is a great example of a business that has been on the leading edge of thinking for some time. Michael Dell realised at an early stage that the PC business was going to be commoditised. He decided that he would take a cost leadership position. Having done this he realised his primary job was to drive value out of the PC business.

His first great innovation was to sell PCs direct to the consumer. He reckoned that the money he could save in middleman’s fees could be passed on to the consumer. He was right and this helped grow the business rapidly. Dell was also the first major manufacturer to embrace the internet as a channel for sales and support.

But he didn't stop there. He then oversaw a rework of the entire supply chain. Like Wal-Mart, Dell’s model is to cut the number of companies in the supply chain, squeeze the margins of each in favour of price to the consumer and continue this loop relentlessly.

In Tom Peter’s new book Re-Imagine, I recently read:

“One hundred square feet. That’s roughly the total amount of space needed for spare-parts storage at Dell Computer’s new Optiplex facility, a manufacturing operation that turns out 80,000 custom-engineered computers…per day.”

Makes you think, doesn’t it!

Innovate: make cows purple?

Seth Godin in his book Purple Cow asks the question – What makes your business remarkable? It’s a great question. In today’s market being remarkable means an even greater focus on the single value you bring. It means avoiding short term temptations.

It also means developing the innovative culture that brings you the flow of new ideas, methods and devices. These will help you sustain and build your competitive advantage.

According to Porter, failure to do this results in being ‘stuck in the middle’ – typically broken brand promises and weakened profitability. Companies of this type are at the mercy of their more focused competitors.

So the incentive is large enough! Now, go make it happen.