Early warnings of a fading competitive advantage
As the world begins to open up and I’m back on the speaking circuit, a question I get asked again and again is how one can tell when a once-robust competitive advantage is starting to show its age. Here’s how you can diagnose it.
The traditional strategy prescription
Find a competitive advantage, throw up entry barriers like crazy and defend that advantage with full throated energy. That’s been the strategy prescription for years, and sometimes it can provide a useful perspective on how to compete (for one of my favorite perspectives on this kind of competition, see George Stalk’s book Hardball and our Friday Fireside chat).
But a dramatic fall from grace isn’t the norm. More often, what happens is a slower, barely noticeable fading away of what was once a formidable franchise. It can take years before the alarm bells announcing impending doom start to ring.
Take Revlon, the glamourous company that Ronald Perelman bought in 1985. It ushered in an era on Wall Street of junk bonds, hostile takeovers and a sea change in how deals are done. Over the years, the company gradually seemed to lose its relevance (despite kudos for its CEO, Debbie Perelman). The firm went bankrupt in 2022, losing out to a whole host of factors – less interest in buying cosmetics in drugstores, the rise of celebrity brands, the growth of dedicated retailers like Ulta Beauty and a failure to center in many of the conversations of the moment. This is a far cry from the Revlon of the 1980’s which featured supermodels, photography by Richard Avedon and one of the best tag lines ever “the most unforgettable women in the world wear Revlon.”
The thing is, by the time bad news shows up in your numbers, it is usually way too late to avoid a turnaround at best, or a bankruptcy and restructuring at worst. And nobody in their right mind goes into these things thinking they are going to be easy (see this piece on the human factors that make transformation a long-odds story).
So, ask whether there is evidence of any of the following to structure an honest assessment of how things are really going.
I don’t buy my own company’s products or services
In an ideal world, employees are the most enthusiastic ambassadors for a company’s brand. So if they aren’t literally bought in, that’s an early warning that something about the “job” they want to get done isn’t happening at your organization. It’s even worse if your people are hiding the fact that competitors are doing a better job than you are, because that can create a real blind spot.
We are investing at the same levels or even more and not getting margins or growth in return
It’s been called “escalation of commitment to a failing course of action” and it’s very human. Even when the evidence suggests otherwise, we continue to invest time and resources into a business that is flat-lining or even going into decline.
Customers are finding cheaper or simpler solutions that are “good enough”
It is incredibly common in business to overshoot what customers really need – to put too much tech, too many features, too much ‘stuff’ into your offerings and expect customers to pay more. At some point, they stop being interested in more of the same. That’s one reason why Dollar Shave Club’s hilarious on-line ad went viral. “Stop paying for shave tech you don’t need” struck a real chord.
Competition is emerging from places we didn’t expect
A trap of thinking of your competition in terms of industry is that it can create blind spots about ‘competitors’ who emerge from places you weren’t paying attention to. For instance, makers of traditional products such as thermostats are finding their roles in their ecosystems dislodged by the entrance of new players, often from tech, seeking to create voice-operated controls or even whole smart home hubs enabled by technology.
Customers are no longer excited about what we have to offer
Customers can be a pain – what was once an exciting shiny new object eventually becomes taken for granted, something all competitors in a field need to offer. Or new technologies offer up a better solution – for instance, streaming content has replaced content stored on physical devices like CD’s and DVD’s for many users, though not all!
We are not considered a top place to work by the people we would like to hire
The reality is that top talent is smart enough to go where they feel the best opportunities are, and will shun places that they feel are a waste of time. This is one reason why companies so often fail to attract the talent they would like, and are confused as to the best way to get those people in the door.
Some of our very best people are leaving
This is a major red flag that things are not progressing in a positive way! While its inevitable that there will be some churn if your organization is going through a major change, if you’re losing the people you were counting on to get you through it, that’s dangerous. AT&T’s acquisition of Time Warner was doomed in part because the key executives the company was counting on left en masse.
Our stock is perpetually undervalued
Any publicly traded company can go through bad patches, particularly in the midst of a wrenching change or reorganization. But if this goes on for quarter after quarter, year after year, it doesn’t take a genius to recognize that investors will eventually run out of patience. Our concept of the Imagination Premium is a useful idea here.
Our technical people (scientists and engineers, for instance) are predicting that a new technology will change our business
In a sad irony, most of the time when a business is facing an existential shift – an inflection point – people within the company clearly understood what the challenge would bring. Unfortunately, they are often not party to significant strategic decisions and their warnings go un-heeded.
We are not being targeted by headhunters for talent
Ironically, when headhunters are circling your organization to try to poach talent, that is a good thing. It’s an even better thing if they are not successful!
The growth trajectory has slowed or reversed
Slowing growth is often a harbinger of long-term problems. As I have long said about Facebook parent Meta, their dubious business practices, lack of transparency and basic ubiquity would eventually undo what was undeniably a successful business model.
Very few innovations have made it successfully to market in the last two years
This issue is one of the dirty little secrets of being very successful. In light of high performance in the base business, it can be all too easy for new businesses to be starved of oxygen and never see the light of day. Nokia’s prescient invention of a device very like today’s table computers is a cautionary tale – risk averse senior management didn’t see the need to commercialize it.
The company is cutting back on benefits or pushing more risk to employees
This is often a sign that company leaders are starting to get concerned about cash flow or long-term expenses. It’s a sure way to get tossed off the various “best companies to work for” lists, and indicates that company management has elected to focus on matters other than their people – which is often an early warning of problems to come.
Management is denying the importance of potential bad news
Richard Tedlow, a business historian, defines denial as “the unwillingness to see or admit a truth that ought to be apparent and is in fact apparent to many others." In his book, Denial, Tedlow cites many examples of leadership reluctance to face the truth, including Henry Ford’s insistence that customers wouldn’t be interested in cars colored other than black. And a recent study found that the longer a Board waits to take decisive action on an underperforming CEO, the harder it is for the company to recover.
Using this idea
The more of these indicators you see, the more likely it is that your business is on the cusp or well into the erosion phase of a competitive advantage. This is a signal that you need to stop whatever you’re doing and take a hard-nosed look at the health of your business. By the time the trouble is obvious to everyone, the inflection point has passed and it’s too late.
Here’s an application idea: Get a few people together from different parts of your business – not the usual suspects. What you want here is diversity of experience and exposure. Download and print out the handy-dandy diagnostic version of the questions described above (NOTE waiting to find out where best to post for downloading). Then take each question and go through the evaluation and answers as honestly as you can. My rule of thumb is that if your team checks “agree” for 5 or more of these thirteen indicators, you urgently need a strategy rethink because the early warning signs are there.
Have the results, they aren’t great, and you’d like to mobilize the organization? Some options: I work directly with senior leadership teams through speaking and workshops, which can be custom designed.
You might also want to consider sending one or more people to my Columbia Business School course “Leading Strategic Growth and Change.” And over at my sister company, Valize, we have a wealth of experience and tools to build sustainable growth capability.
It's December – time to get 2023 set for success!