Thursday, December 22, 2005

About competitive advantage

So how does one identify companies with powerful, sustainable competitive advantages? Look for companies with sensible, consistent, well-defined strategies, because strategy is the root of competitive advantage for most companies.

Here are some excerpts from Michael Potter's latest thinking, which is available for free online in an interview published in Fast Company.

  • "Only strategy can create sustainable advantage. And strategy must start with a different value proposition. A strategy delineates a territory in which a company seeks to be unique. Strategy 101 is about choices: You can't be all things to all people."
  • "Many [companies] have abandoned strategy almost completely. Executives won't say that, of course... Typically, their 'strategy' is to produce the highest-quality products at the lowest cost or to consolidate their industry. They're just trying to improve on best practices. That's not a strategy."
  • "There's a fundamental distinction between strategy and operational effectiveness. Strategy is about making choices, trade-offs; it's about deliberately choosing to be different. Operational effectiveness is about things that you really shouldn't have to make choices on; it's about what's good for everybody and about what every business should be doing. Lately, leaders have tended to dwell on operational effectiveness."
  • "If all you're trying to do is essentially the same thing as your rivals, then it's unlikely that you'll be very successful. It's incredibly arrogant for a company to believe that it can deliver the same sort of product that its rivals do and actually do better for very long. That's especially true today, when the flow of information and capital is incredibly fast. It's extremely dangerous to bet on the incompetence of your competitors -- and that's what you're doing when you're competing on operational effectiveness."
  • "The underlying principles of strategy are enduring, regardless of technology or the pace of change. Consider the Internet. Whether you're on the Net or not, your profitability is still determined by the structure of your industry. If there are no barriers to entry, if customers have all the power, and if rivalry is based on price, then the Net doesn't matter -- you won't be very profitable."
  • "The error that some managers make is that they see all of the change and all of the new technology out there, and they say, "God, I've just got to get out there and implement like hell." They forget that if you don't have a direction, if you don't have something distinctive at the end of the day, it's going to be very hard to win."
  • "A leader ... has to make sure that everyone understands the strategy. Strategy used to be thought of as some mystical vision that only the people at the top understood. But that violated the most fundamental purpose of a strategy, which is to inform each of the many thousands of things that get done in an organization every day, and to make sure that those things are all aligned in the same basic direction."
  • "In great companies, strategy becomes a cause. That's because a strategy is about being different. So if you have a really great strategy, people are fired up."

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