Sometimes people talk about their business’s competitive advantage like it is a thing or collection of things—see that shiny thing, it is the source of our competitive advantage.
You will hear comments like “our competitive advantage is customer loyalty” or “economies of scale” or “technology” or all three and therefore we should make certain investments or changes. But how do you know that they are right? How do you know that the thing being pointed to is an actual source of competitive advantage?
Competitive advantage to a marketer may be a winning value promise, to a financial investor it may be a strength that can’t be copied by competitors, to an operations leader it may be product quality, and so on. People in companies are naturally prone to advocate for strategies and priorities that elevate the roles that they play individually. These creative tensions can easily muddle strategy conversations.
The Four Metrics for Competitive Advantage is a solution for enabling team members to discuss and optimize decisions and changes for the greatest impact toward competitive advantage. It works by defining competitive advantage not as a given thing but instead as four metrics that are applied to assess directionality and weigh impact. Decisions, investments, and changes will move either toward or away from this future state. Those that most move toward it should be prioritized.
Imagine a situation where one team member wants to hire a new resource, while another wants to innovate a new product. The Four Metrics for Competitive Advantage provides a method for comparing these two vectors. The optimal choice will be the one expected to most contribute toward:
- Market potential
- Operational scalability
- Business model sustainability
- Financial performance—in the order of that cascade.
This robust logic cuts through inherent biases. If all members in a team and all teams in a company apply this logic together, they will be able to fly in formation toward overall competitive advantage.
This is the first and most important measurement of competitive advantage. We live in the era of choice, more so than any other human beings in the history of the human race. Today’s customers aren’t just choosing between one or two brands or service providers that happen to be available locally. They have seemingly endless choices!
Smart business leaders recognize that their success depends not only on serving their customers and shareholders, but on serving a network of stakeholders that also includes their employees, their communities, and more. For each of these stakeholder groups, a business needs to be the preferred provider—the company of choice. You can break this down by answering five key questions:
- Am I the provider of choice for my customers?
- Am I the employer of choice?
- Am I the channel partner of choice?
- Am I the investment of choice?
- Am I the community member of choice?
Assessing market potential is the most important aspect of competitive advantage. It is also the highest risk part. It’s the hardest area to get right, and the area in which so much can easily go wrong. That’s why it’s number one. If you prioritize any of the other metrics above this one, you will fundamentally undermine the business.
How scalable is your business model? How far can it go? If you’re selling high-end supercomputers, you might have an extremely limited market, with moderate potential for operational scalability. If you have a ridesharing business that consists of an app used by independent contractors, you can potentially scale your basic business model across the entire globe, at least in theory. Scalability determines a lot about the overall competitive advantage of any business. It’s no accident that Wall Street’s ideal investment moment is after a business has proven its market potential and right before it begins to operationally scale (while it still needs money to do it).
Business Model Sustainability
How sustainable is any given business? How long is your runway? Are there particular constraints on your resources? Are you in an industry like food or fashion where consumer tastes change rapidly? Or are you in technology, with the ever-present danger of a competitor making your business model obsolete? Do you have an effective moat or a near monopoly? Are you in the fossil fuel industry with political headwinds to consider? Or perhaps you’re in the infrastructure business that is highly dependent on whichever political faction is in power? These are the types of questions you need to ask yourself about business model sustainability over the short and long term.
No business will last long without financial returns. For public companies, this becomes a quarterly reality, but it’s true for any business. It’s worth noting that I have consciously put this metric as the last in this foursome. It’s critical, but it’s not the most important. Financial returns will naturally flow when you are increasing your metrics in the other three areas of competitive advantage.
Leaders who think it works the other way around make a huge mistake. If you prioritize financial returns over market potential or operational scalability or business model sustainability, you may temporarily increase profits and returns, but you will compromise the business over the longer term. You may be extracting financial returns at the cost of market potential, scalability, or sustainability, and that is a dangerous path. Of course, financial returns must be part of the picture. But business leaders have to understand where they fall in the priorities of competitive advantage, or it’s easy to get off course.
Adapted from Navigate the Swirl by Richard Hawkes.
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