24 Mar 2016 16:50 IST

Threats to sustainable competitive advantage

In this era of hyper competition, one also has to watch out for threats that could undermine such a superior position that looks unassailable.   -  shutterstock.com

Imitation, slack, substituition and hold-ups threaten an organisation's continued run at the top

The topmost concern and priority for any leadership is to build a sustainable organisation over long period. This entirely depends on staying relevant over time. Sustainable superior performance is the holy grail of management and leadership from time immemorial.

Read Simply Strategy: The art of sustained superior performance

Such a sustainable performance can be built through a unique combination of commitment (irreversible decisions) and capabilities (the intangible ability of the firm to leverage the commitment).

For instance, Walmart invested $800 million in buying a satellite. While K-Mart could have matched such an investment, what they could not replicate was the innumerable ways Walmart leveraged the investment by embedding day to day rituals and activities using the power of the satellite.

Enabling sustainable advantage

What enables companies to create sustainable advantage is a good external fit (fine-tuned core competency with market opportunity) along with a good internal fit (across functions and levels) strengthened over time by creating a series of reinforcing virtuous cycles.

In this era of hyper competition, apart from creating unique combinations of commitment and capability, one also has to watch out for threats that could undermine such a superior position that looks unassailable. For this, there is a need to understand the sources on which such an advantage is built.

Management literature identifies three broad sources:

~~ Size-related advantages (scale: Walmart, scope: Amazon and experience curve: Honda)

~~ Superior access to resources

~~ Markets and customers (know-how: Dupont, Innovation: Apple, market/customers: Debeers)

According to global strategist and author Prof Pankaj Ghemawat, the major threats to sustainability are imitation, substitution, hold-up and slack.

Imitation is inevitable as successful companies are studied threadbare by competition. There are instances where an imitator by avoiding costs of initial experimentation and failures is able to match the pioneer firm in product quality and features at a much lower cost. Samsung versus Apple is an example.

Substitution works to undermine the value proposition by having a better price-quality trade-off. Walmart smartly co-opted threatening substitute formats like warehouse clubs and so on. It is better to self-cannibalise rather than letting the competition cannibalise you.

Slack is the third threat identified by Ghemawat. Over time companies, like middle-aged people, put on weight and at wrong places. Complacency sets in and bad habits grow and multiply.

The last one is that of hold-up. Customers, suppliers, employees, complementary players bargain away larger share of the total value created in the system.

Are there ways to combat such threats? Yes there are. May be they will be tackled in a future article. Stay tuned.

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