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Creating Sustainable Competitive Advantage: It's Not What You Think!

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Tue Nov 22 2016

Creating Sustainable Competitive Advantage: It's Not What You Think!
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Competitive advantage is often sought but rarely found. Yet, a few organizations continuously outperform their peers year after year. What makes the difference: a killer product, insights from big data, steep barriers to entry, brand power, exceptional leadership? Or could competitive advantage be within the grasp of every company—if they understood two critical foundation elements?

In his landmark book Good to Great, Jim Collins talks about the few concepts that, if applied with discipline, help good companies consistently outperform their industry peers and become great companies. The 11 companies that emerged from his five-year study of superior and sustainable performance over a 15-year period were from very different industries: Abbott Laboratories, Circuit City, Fannie Mae, Gillette, Kimberly-Clark, Kroger, Nucor, Philip Morris, Pitney Bowes, Walgreens, and Wells Fargo.

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But a funny thing happened in the 21st century. A large number of these “great companies” are either bankrupt (physically or morally), and few remain at the top of their peer group. Circuit City is gone. Fannie Mae had to be bailed out with government loans in 2008 and is today facing another looming shortage of cash. The share price of Pitney Bowes has declined steadily since its one-time high of $70 in 1999, a victim of explosive new communications technologies catering to the demand for instant mobile communications. And Wells Fargo, once the darling of the troubled banking industry, has recently shown its ugly side when over a four-year period 5,000 employees opened 2 million fake and fraudulent banking and credit card accounts to meet imposed cross-selling goals and collect bonuses. Philip Morris and Nucor are still considered industry leaders, but the rest have drifted into the middle of the pack.

However, two companies not on Collins’s famous list, The Danaher Group and Southwest Airlines, have continued to out-perform their peers in remarkable ways. In the tough and highly competitive airline transportation industry, Southwest Airlines has achieved 43 years of continued annual profitability while becoming the second largest airline in the world for number of passengers flown. Likewise, The Danaher Group has become the most consistently profitable conglomerate, with 125 companies globally, more than $19 billion in revenue, and 21 percent annual returns to shareholders for the past 20 years. These two companies and their continuing success are good examples of what I consider to be two foundational principles for sustainable competitive advantage: 1) a robust strategy execution process and 2) a corporate culture that supports execution and change. In my mind, these two principles are mutually inclusive. That is, each reinforces the other; individually, they have minimal impact on sustainable competitive advantage. And both require leadership and discipline.

Robust Execution Process 

In the 1980s, the Danaher Company had ambitious growth plans and realized that acquisition was its best path. But how do you manage a growing number of very different companies? While most companies acquire a company for its strategic or market fit and then seek to eliminate redundancies, rationalize headcount, and reduce costs, Danaher took a different approach.

Using Lean principles, Kaizen principles, and elements of the Toyota Production System, Danaher developed a version of the Hoshin Kanri process of aligning and governing strategic and operating initiatives to build a robust execution process, now known as the Danaher Business System (DBS).

Danaher adopted this process with absolute commitment and discipline. All employees in every company were trained on how the process works and how to work the process. Its effectiveness as a corporate success foundation is that no matter what Danaher business you are in, you can quickly come to understand any of the other businesses through their DBS maps, which are the same set of templates and processes across all Danaher companies.

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Consequently, moving executives around for their development and future value to the corporation is much easier than in most multibusiness companies. And when leaders from different businesses come together for strategy discussions, they are all using the same set of principles and operating models.

Corporate Culture 

In many ways, corporate culture is analogous to the water in a fish tank. When the water is clean, fish and plants tend to thrive. But let the water go foul, and it has a negative impact on everything. And introducing new fish or plants into a dirty aquarium does little good.

Southwest Airlines has made culture a part of its success formula from the very beginning. It has been able to operationalize its cultural values—expressed as Living the Southwest Way (Warrior Spirit, Servant’s Heart, Fun-LUVing Attitude) and Working the Southwest Way (Safety and Reliability, Friendly Customer Service, Low Costs)—into all aspects of its business, from hiring to training to recognition and rewards to promotions. Employees feel as if it is their company and take ownership for getting things right for the customer.

Many strategies and business initiatives are never fully implemented due to their effect on culture. For example, a new strategy and the logical reorganization that takes place are well thought out and designed to build competitive advantage. Typically, the new strategy is launched with much fanfare and speeches by senior management, along with the new organization chart designed for effective strategy execution. There is a flurry of activity for the first couple of months, and then things begin to slow down.

The problem is not necessarily bad strategy, but poor execution—and the culprit is usually an old culture that is not aligned with the new strategy and structure. However, a culture that is aligned with strategy and organizational structure can be a significant factor in the effectiveness of strategy execution and competitive advantage.

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If you are serious about sustainable competitive advantage, get serious about using a robust execution process and building a culture that enables superior execution.

Join me December 8, 2016 for an ATD webcast exploring these two important foundational principles for competitive advantage in more detail.

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