Setting the Competitive Bar
How high is high enough?
One of the most important decisions a senior team (with the assistance of the board) will make is to determine the correct height of the bar for competitiveness. Michael Porter’s classic book on strategy makes clear that the goal of strategic planning is to gain competitive advantage, but what exactly does that mean? How much advantage is enough and how can you tell whether the investment in competitiveness is worth the cost? Are we talking about beating the competition next year or over a longer period of time – perhaps forever? While that would be great, what would that require?
The same kinds of questions apply to our personal competitiveness for winning roles or gaining promotions; and for our teams or departments to win resources or achieve influence during the relentless internal political wars that characterize most large organizations. Do we really want to be #1 and are we prepared to make the investments and sacrifices required to do it? Should athletes expect to win gold medals if they only get around to working out once or twice a week?
Before beginning to analyze a competitive situation using Porters 5 forces or Lafley and Martin’s Play to Win framework, it’s important to clarify the goal as well as the commitments one is prepared to make. Are we being realistic or is there a mismatch between our aspirations and perspirations? Setting the bar at the right height and then making certain everyone is on the same page can avoid a lot of wasted energy and resentment later on. Here are some things to consider that might be helpful.
1. Will setting a high bar make a difference? Will anyone notice? How certain are we of the customer’s response?
Often, we find there isn’t a direct cause and effect relationship between coming out with a new product and gaining market share. Customers may be perfectly happy with what we have to offer now, or they may see the new product we spent years of effort and a fortune to develop as “about the same” as everyone else’s, especially if we have to price it above the competition’s. Better isn’t always better.
The correlation is even more tenuous between investments in intangibles like employee engagement, organizational culture or customer service and winning. While these are all good things, do they mean enough to customers for them to quit buying products from our competitors and shift to ours? Would our customers even notice if we spent three years creating a more caring culture?
There are a lot of things we can try to gain competitive advantage but some of them may be more powerful than others. We don’t always know what will matter in advance and find ourselves surprised when our new product sales are ten times more than what we forecast or, on the downside, no one seems to care about the expensive new headquarters building we just opened as a symbol of our market dominance.
2. Is the move worth the investment? What’s the expected return?
Similar questions revolve around the size of the investment we are prepared to make in winning competitive battles. Advertising spend is a good example of this. Initially, Geico set the bar extremely high by being the first to spend over a billion dollars on its advertising campaigns featuring the caveman and gecko. Progressive, Allstate, Liberty Mutual, and State Farm were forced to follow. Today, it seems that players are reluctant to end the advertising wars even though everyone spends so much that it’s not clear anyone is winning. Was the move by Geico worth it in the long run?
Companies don’t disclose the payback from their campaigns but even if they did, no one could accurately determine what would happen if the campaigns were to suddenly stop. Instead, all companies can do is look at their bottom lines to see whether they are still profitable at their current level of advertising spending.
An analogous situation exists in research and development. How much a company should spend on R&D to remain competitive or gain advantage is not a straight-line calculation. A lot can be spent with little return. Each year, R&D leaders are forced to go through the exercise of justifying their budgets based on anticipated returns that may never materialize while CFOs challenge them every step of the way. While it’s obvious that a small company can’t spend on par with a Fortune 500 competitor, does that mean they shouldn’t spend at all? Obviously not. The fact that the little guy sometimes wins makes the case for how hard it can be to tie investments in competitiveness to outcomes.
3. Is it doable? Time, cost, and talent
While the aspiration may be to become #1 in sales, is there a clear path to getting there even with all the resources in the world? Can a competitor become #1 by simply outspending Apple or Nvidia? Even if this were possible, how long would it take and would it be worth the time value of money invested elsewhere? Can the talent war ever really be won by staffing the organization with superstars to overcome the competition? What we see in tech and the financial sector and startups is that money can attract talent but not guarantee success or even that people will stay. Building and keeping a great team takes time and an investment in company culture that provides a path to success but only for as long as the grass isn’t greener elsewhere.
4. What countermoves will it trigger? Are you prepared for the arms race? How long will your lead last?
As in the advertising wars mentioned previously, no matter how innovative the competitive solution, if it succeeds, others will eventually copy it. Setting the bar high and achieving it attracts attention, even if you try to hide your light under a bushel by calling yourself, “The Quiet Company” as Northwestern Mutual did. No matter the clever tagline, a successful strategy will evoke responses from competitors that may one-up your investments.
5. How do you gain consensus?
Because it is so difficult and potentially costly to gain and hold competitive advantage, it’s sometimes hard to get the board and management aligned around a strategy. It would be instructive to see the pitch Geico leaders used to convince the board Geico should be the first billion-dollar spender on advertising. The same goes for making an industry-transforming acquisition like Netflix’s pursuit of buying Warner Brothers, or TSMC’s decision to construct a $165B fab and R&D lab in Arizona, or JP Morgan Chase’s investment in $3B headquarters on Park Avenue in New York. The bolder the move, the more likely it is to have a competitive impact of some kind; but the harder it is to get parties on the same page. It would no doubt be tempting to lower the bar and settle for much smaller moves even though smaller moves might not have much of a chance of shifting the competitive landscape. At least there would be fewer time-wasting and career-ending debates.
6. Are there any penalties for being #2 or 3?
As we watch the trillion-dollar artificial intelligence gamble play out over the next few years, each player will be estimating the down-the-road cost of spending less than whoever ends up being #1. Would it be ok to be #2 or #3 or might there be no scraps left on the table? Will investors continue to back their horse in the race as the stakes required to do so go through the roof? What signs are bettors looking for that will assure them their nag will finish in front? What signals will destroy their confidence and start a stampede toward the exits? Do we have to set the highest bar in an all or nothing mashup or can we be more conservative and still come away in great shape?
Gaining competitive advantage is anything but straightforward and easy. Before you begin your quest, give some thought to your end goal and how to bring others into alignment.