Have you ever been to a strategic planning workshop where a list of initiatives goes up on the flipchart? Things we need to do to improve.
Each functional leader adds their priority areas to invest in. Usually, benchmarking has been done relative to stand‑out leaders. For example, if you’re looking at digital customer experience, Amazon is held up as the standard to meet or beat in areas like:
- Ease of selection
- Speed and reliability of delivery
- Transactional transparency—order status, delivery status
The list goes on and on. As the digital leader, you outline how you will get better. Your colleagues do the same.
Then you cluster that long list of initiatives into themes to narrow the focus. Themes that may be labeled strategies, when really, they are just a collection of initiatives clustered around ambiguous, and rather generic higher‑level goals, like:
- Improve customer experience
- Accelerate innovation and new product introductions
- Improve cost structure
Next‑up, prioritization. What matters most, and WHY?
And this is where the absence of strategy will trip up a team every time. Without strategy and a clear sense of direction, the basis to decide how to allocate and focus your limited resources can devolve to leadership influence and financial returns.
A CEO recently asked, “How will we decide and align as a leadership team on this strategic partnership opportunity in immune‑oncology, a new disease area of focus?” It could be worth $1B, he says. A common prioritization logic—“the more an initiative helps us grow, the higher the priority.”
I get it: Financials are the concrete language of business. But they are not strategy. They are the outcome of your integrated set of strategic choices and an important litmus test on the viability of your strategy.
The heart of strategy is creating a distinct way of winning, relative to your competition, where you have chosen to play (i.e. markets, customers, needs, geographies).
What Is Your Theory of Competitive Advantage?
To shift from a list of initiatives to strategy, answer the question:
What is our theory of competitive advantage?
Competitive advantage allows a company to produce goods or services better or more cost‑effectively than its rivals. Which leads to more revenue or superior margins than your competitors. The more sustainable the advantage, the more difficult it is for competitors to replicate or neutralize it.
Sustainable competitive advantage is highly desirable, but it is also hard to define, or measure, in practice. It emerges from an interrelated set of choices that, collectively, enable you to outperform your competitors in ways customers value. Your theory of advantage is the basis for the design of your organization—deciding which capabilities to build, partner, outsource or acquire to create value in the distinct way you envision.
And you can’t copy it from another company. A clear‑cut competitive advantage is the exception, not the rule. Which is why it takes hindsight to see a firm’s theory of competitive advantage play out. For example, IKEA created a unique and complex equation of interdependent decisions to:
- Design furniture for mass production
- Establish retail presence in every major country (to achieve scale)
- Ship in flat boxes (to reduce shipping costs and enable high‑volume manufacturing)
- Outsource manufacturing for mass production (to gain a cost advantage)
Most competitors would have to completely change the way they design, manufacture, and ship furniture to disrupt IKEA’s advantage of selling inexpensive, fashionable furniture to young professionals. IKEA configured distinct capabilities to address target customer needs in a way that has enabled them to sustainably win against competition.
From the Concrete to the Abstract
So, you’re asking me to go from a concrete, actionable list of initiatives to an abstract, hard‑to‑define, and hard‑to‑measure “theory of competitive advantage”? Great, sign me up.
To help you navigate the complexity of creating this “Holy Grail” of strategy, let’s start with a list of potential sources of competitive advantage. The first two represent an important strategic choice: to be either a cost leader or a differentiator. Roger Martin, a prominent strategist, shares his views on why you must choose one or the other. After that, your theory of competitive advantage strengthens when it combines multiple sources of advantage, as Amazon has done brilliantly.
Top 5 Sources of Competitive Advantage
1. Cost‑based advantage
When everything else is equal, customers will choose the lowest price alternative. This is only sustainable if your organization is uniquely designed and configured to produce products or services more efficiently than any competitor. You must design your organization to create the same customer value at a meaningfully lower cost than your competitors—often through distinct processes, configurations, and scale advantages in manufacturing or distribution.
2. Value‑based advantage
Also known as differentiation, you offer customers something they value that competitors don’t have. There are many sources of differential value, including:
- Technology Innovation (enabling new features/benefits)
- Quality and reliability
- Ease of use
- Variety/Offering breadth
- Source of goods (such as fair trade or organic certification)
- Customer service/experience
3. First mover advantage
Such advantage may occur for the first company to reach the market with a product/service. Being first may enable a firm to establish strong brand recognition, customer loyalty, economies of scale, and switching costs before competitors enter the arena. Netflix is a great example. That said, there are many examples of successful fast followers that have been able to exploit the disadvantages of being the first mover.
4. Speed advantage
Speed can include speed to market, speed of delivery, and speed of service. When a business can do something faster than the competition, time can become a source of competitive advantage. The time to bring new products to market can be critical in high technology where product lives are short. Many customers will pay more for fast or reliable delivery—for example, Amazon Prime with guaranteed two‑day delivery on Prime‑eligible products.
5. Structural advantage
An effective way to gain and sustain competitive advantage is by creating high barriers to entry. For example, participating in industries with high start‑up or capital costs—an obstacle to competitive entry. More common in technology‑driven industries is intellectual property (IP) that protects your innovations, and network effects (when a product/platform’s value for all users increases the more it is used by any one user, like LinkedIn).
Putting It into Practice: From Lists to Strategy
The next time you are in one of those strategic planning meetings looking at that long list of initiatives, pull out this list of actions instead to put your strategic leadership into practice. It’ll help you create a robust strategy that wins against competition and forms a much stronger basis for deciding how to allocate your limited resources for maximum impact.
1. Bring your competitors into the room
Who are the primary competitors of your business? Winning in the market is relative performance to the competition. Which means better than, not just better. So, who exactly are you trying to beat?
A high‑growth technology platform provider in life sciences was looking to Amazon for best practices in digital experience. While industry leaders can be a great source of ideas, design your strategy around your core competitors. This means many of those best‑practice ideas might not make the cut relative to your competition—the players you are trying to outperform in creating distinct value for your customers.
How will your list of initiatives enhance your position relative to your competitors?
2. Bring your customers into the room
How will your list of initiatives enhance your ability to create distinct value for your customers? Your customers, the ultimate revenue decision‑makers, must be in the room (not literally) for any strategy conversation. Specifically, the customers' needs that you seek to serve.
On the surface, one might say United Airlines and Southwest Airlines serve the same customer—anyone who seeks to travel by plane. But Southwest was created to address distinct customer needs for travel that is low‑cost, reliable, and convenient (in the form of frequent travel options) to travel short(er) distances.
So, Southwest doesn’t worry about lagging their competition in a service experience associated with warm towels and champagne. In fact, they intentionally choose to be the “no‑frills” airline. A clear strategic choice and element of their theory of advantage that applies to a distinct set of customers.
3. Map your competitive position
Strategy and planning conversations are inherently about change—a from/to state. And that usually means getting better. So, the conversation around where to intentionally lag competition can get lost. When we try to be good at everything, we excel at nothing.
These are the trade‑offs of strategy that give an advantage. A first‑mover advantage can come with the trade‑off of a less reliable product, initially. Which might also come with a trade‑off decision to invest more resources around robust technical support.
A strategy canvas is a simple but powerful tool to envision your competitive positioning. Does your collective set of choices around where to lead, lag, or be at parity with competition add up to a winning strategy for the future you envision?
4. Prioritize initiatives based on your theory of competitive advantage
Now, with your theory of advantage outlined, consider where to focus and allocate your limited resources for maximum impact. Which initiatives advance that position, and which do you need to de‑prioritize or eliminate? Once your theory of advantage is clear, prioritization decisions become more clear‑cut. You move from a potpourri of best practices to be better to an integrated set of choices that create your unique and distinct theory of advantage to create value for your customer, better than your competitors.