This week we launched my newest company, Outthinker (www.out-thinker.com), a New York-based advisory firm. We help companies make better use of their money and find hidden opportunities inside and outside of their organizations. Part of our mission is to provide research and information about current trends within business competition.
Surviving in the New World
For the past ten years we have been studying the patterns that lead companies to breakthrough performance. By dissecting the strategies of companies like Dell, Southwest Airlines, and Wal-Mart, who over the course of the 1990s radically disrupted their industries, we found some surprising similarities in how these companies engineered breakthrough growth.
Our research showed that these breakthrough companies shared a unique view of their markets. Because they saw things differently, they acted differently. Because they acted differently, they won. Physicist Thomas Kuhn showed that science does not evolve linearly but rather it periodically undergoes revolutions when paradigms shift.
After conducting a rigorous top-down analysis of 9,000 publicly traded companies, we were able to isolate the 100 most competitive companies of the decade. These were 100 companies that for the ten years ending in 2004 consistently outperformed their peers in terms of revenue growth, profit (EBITDA) margin, and shareholder returns. Across industries and geographies, these breakthrough companies adopted surprisingly similar playbooks when engaging their competition.
What we’ve learned: A new paradigm shift is underway
Each time we apply the research, we update it, seeking out fresher competitors to learn from. What most often led to breakthrough performance in the decade ending 2004 may not be as applicable today.
This is surely of no great surprise. The nature of competition has radically changed since 2004. Product lifecycles have shortened, outsourcing has restructured business sectors, social media and real-time marketing have become mainstream, and competitors are crossing industry borders faster than ever before.
However, we believe a new paradigm shift is underway. A new crop of business heroes like Google, Apple, and Facebook are leaving once-admired companies like GE, BP, and SAP behind.
Many well-schooled business strategists argue the success of such companies is unsustainable. Certainly some of these stars will fall, but we believe the inability of traditional analytical tools to satisfactorily explain the success of some of these newcomers should lead us to question our tools, not the quality of their successes.
Google’s success, for example, cannot be assigned to irrational investor exuberance as some argue. The company has reaches $24 billion in annual revenue, generates in excess of 40% EBITDA margins, and has averaged 20% return on equity (ROE) over the past five years. That standard business analysis tools cannot adequately explain this success is a classic indicator that a paradigm shift is underway.
To address this paradigm shift, we spent the past six months revisiting our initial analysis. We isolated 20 companies that have delivered extraordinary performance relative to their peers over the past five years to calculate which strategic patterns are working today. These companies–including Apple, Oracle, Research in Motion, and AT&T–produced 40% revenue growth on average, seven times that of their peers, and were three times as profitable as their competitors in terms of EBITDA margin.
By comparing these breakthrough companies to their closest peers, using a process called “narrative analysis,” we were able to dissect how their strategic playbooks differ from their peers’. In all, we analyzed 686 strategic narratives. By isolating their most significant differences, we were able to gain insight into how today’s winners see the world, choose strategies, and win.
What we found is that companies who hold on to strategies and perspectives that worked at the end of the 1990s and into the early half of the 2000s risk being left behind.
We specifically concluded that:
1. Traditional sources of competitive advantage are expiring
2. A new playbook is emerging
3. Winners are outthinking their competition
Traditional sources are expiring
In the past, companies have primarily built competitive advantage by achieving customer captivity, securing preferential access to resources, building economies of scale, and adopting best practices. However, today’s winners actually cite economies of scale and best practices less often than their losing peers.
Given the increasing ease with which smaller companies can “turn on” significant scale (e.g., by outsourcing production and back-office functions) and given the speed with which best practices are now being copied, then it isn’t surprising that these two traditional sources of advantage are expiring.
A new playbook is emerging
Today’s outthinkers are embracing a radically different approach to building competitive advantage. They are increasingly supplementing traditional sources of competitive advantage with a new set of strategies. Three key differences between winners and losers stand out:
1. Winners are more comfortable coordinating outside resources and entities rather than trying to own them.
2. Winners create what we call a “two-front battle” by strategically linking unrelated activities and often attacking client needs across multiple industry borders.
3. Winners think longer term about strategic relationships (e.g., with clients and partners), often entering as a guest and gradually establishing a trusted position and power.
Winners are outthinking their competition
These key differences in playbooks point to a broad shift in paradigm. This shift extends beyond the competitive tactics of most firms. Trying to guess Steve Jobs’ or Sergey Brin’s next move is to miss the broader phenomenon underway right now. At its core, it is about relying less on physical, permanent sources of advantage and instead adopting a mindset focused on answering the following key question: What it is that my competitors will choose not to do or copy even though they can?
The above is an excerpt from the white paper “How Outperformers Outthink the Competition” published by Kaihan Krippendorff and Nadia Laurinci. To read the entire article, click here. You can also see a blogcast on this topic here.