The list of Fortune 500 companies has been published from 1955. The top 500 companies make the cut and figure on the list based on their performance in terms of their revenue. Studying this list is an educating and fascinating experience. One of the interesting things one notices is that many of the companies which made the list in 1955 are no more in it. What is worse, many of them do not exist anymore.
Even a glance at the list ten years apart shows high churn.
All this indicates one thing. It is difficult to sustain superior performance over time.
Like the Indian cricket team discovered, while it is relatively easy to attain number one status in test cricket, it is rather difficult to hold on to that slot. Once we fell off the proverbial summit (I think we stayed there for less than two years), we never could regain it. Currently, we are ranked 5th.
Business organisations have been eternally seeking the secret formula for achieving sustainability in performance. Very few have succeeded in that endeavour.
What it takes to sustain performance
Firms achieve superior performance by developing a competitive advantage over rival firms. This competitive advantage can come in many forms but broadly it is classified as a ‘cost-based’ or ‘differention-based’ advantage. In the former you offer acceptable product at an affordable price while the latter is about offering superior value proposition at a premium price.
Both can be successful strategies. For example, in the auto industry you find that the Maruti 800 co-exists with latest model of Mercedes Benz. This occurs based on this principle.
Having achieved such superior positions in specific segments, how does a company sustain this?
Sustain the position
Let’s go back to the earlier assertion that superior performance is the result of superior competitive advantage. Now, firms build this advantage in different ways and forms. These advantages are derived from a combination of ‘Commitment’ and ‘Capability’.
Commitments are one-time, lumpy, irreversible decisions. For example, Investing Rs 1,000 crore in buying a certain technology is a decision that cannot be changed.
Capability has to do with the competency, skills and abilities of the organisation to make this technology work to the optimum and leverage the maximum value and benefits from this investment.
If Commitments can be considered akin to hardware, Capability is the software that runs it. However, it takes both to tango.
It is in being able to combine both commitment (yin) and capability (yang) in a unique way that provides for sustainable advantage.
How Walmart did it
Walmart was the first commercial organisation to own a satellite and it cost them close to a billion dollars in the 1980s. A lumpy, one-time, irreversible investment. While it would have been easy for rivals with deep pockets such as KMart to buy a satellite, what they would not have been able to replicate is the way Walmart used and leveraged the satellite.
It was not only used as a communication tool (their famous Friday and Saturday meetings were broadcast / conducted through satellite communication throughout their stores across the US) but also used to link the suppliers to their mainframe computers to track in real time the inventory of their supplies under the ‘Vendor managed inventory’-initiative.
This enabled every ‘store-in-store’ (category) manager to compare his or her store's performance (in terms of revenue, growth, gross margin, inventory) on a real-time basis with same category performance across 5,000 stores on a daily basis. These are some of the important aspects of Walmart’s competitive advantage and are difficult to identify and/or duplicate. Thus, a sustainable advantage.
The second, but equally important aspect in building sustainability, is again illustrated by Walmart.
While a unique combination of ‘Commitment’ and ‘Capability’ provides for sustainability, if it comes from few sources, it is imitable if not in the short run, certainly in the medium and long term by smart competitors.
To make the advantage sustainable over a long period of time, such an advantage should come from many different sources than just few large ones. Walmart derived its advantage from a plethora of small things. Rent, salaries, wages, shrinkage (theft), advertisement, travel, procurement, corporate overheads and many such aspects. They add up to a formidable cost advantage and it is very difficult for rivals to even identify such sources, leave alone replicate the effort by creating a unique set of their own.
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