The legendary investor, Warren Buffett, has been a flag-bearer for many years in moat strategy.
Building a fortress – establishing a competitive position and digging a moat around it – creating a competitive advantage that can be sustained over time.
All the theories for creating a competitive advantage, from the school of Prof. Michael Porter of Harvard, took a similar position. Many executives who are graduates of MBA programs from the best institutions in the world,
have used traditional strategic analysis tools such as the 5 Strengths Model, SWOT Analysis, Resource Based View (RBV), Value Chain Analysis, Strategic Positioning, Competitive Positioning, Playing to Win, and other tools.
Entire theories were built to develop and support the moat's approach.
These tools have worked for decades. Strategic designs from the best consulting companies, conducted over a period of many months and comprised of thick reference books and painstakingly prepared presentations,
delivered by consultants in three-piece suits, all of whom used the same approach.
These books of strategic planning were used to decorate CEO's offices, at best, and as a doorstop, in less auspicious scenarios.
The long process of planning in a dynamic world that is constantly changing, the conservatism of the planning and the use of the same models over and over again, actually created a world in which everything is similar.
If we look at the consumer world around us as an example, what's the difference between 4K TVs from each of the companies in the market? What's the difference between the cellular operators we use for their service?
What's the difference between the various banks where our private and business accounts are handled? What's the difference between the retail food chains we buy from?
In fact, everthing seems to be the same today, as the approaches to strategic planning that all companies use are identical.
But, being that identical approaches achieve identical results, it's not actually possible, by using them, to create a long-lasting competitive advantage.
In light of this, many companies have adopted the magical word "innovation". Even in today's world, companies continue to use academic models that have been developed in the best schools around the world. These include the Blue Ocean strategy – a groundbreaking innovation – and other such catchphrases which, to a large degree, have no practical back-up program for creating a sustainable competitive advantage. Innovation is not a magical word, nor is it a model. Innovation requires a paradigm shift, both business-wise and organizationally. It necessitates an actual search for a new business model but, in practice, most companies are looking for creativity which will enable incremental changes only. The value propositions of innovation are actually intended to create a little more, a little differently, but they won't really lead to a breakthrough.
Sounds radical? Unrealistic? So, let's take a look at the facts… The S&P 500 index launched in 1957 includes, today, 505 companies that reflect the performance of the American and global economy. The index includes companies in various fields and the market value of an average company in the index totals some $48.4B. (For comparative purposes, TEVA's market value stands at ~B $16.5B and the market value of CHECKPOINT stands at ~$15.6B.)
In the book "Creative Destruction" by Richard Foster & and Sarah Kaplan, Foster identified in the study published by INNOSIGHT, the life span of indexed companies starting from the 1950s. If, in the 1980's, the average company remained in the index for 35 years and, in the 2000's, the average decreased to 25 years, the situation has since escalated. The rate is now approaching 30 years average, and if this rate continues, in another 17-18 years only, it will be replaced by a further ~500 companies. Therefore, we could witness a replacement of most of the companies that constitute the essence of the American and global economy that we know today.
If we compare the market value of traditional companies, compared to new digital economy companies – companies that have been established for the past two decades only – it appears that the business world seems to be changing face. The well-worn innovation is no longer something from the future but, rather, something from the past. At best, entire industries are changing face and, in worse-case scenarios, are being stamped out.
Prof. Rita McGrath, who published her book the End of Competitive Advantage in 2013, completely disagrees with all traditional approaches. In today's changing world, many executives ask themselves: "How can I adopt a traditional approach based on abilities, positioning and size advantages when one year I'm leading the market and the next, I'm dragging behind?
How can branches be measured, when their boundaries are obscured?
In a volatile and unpredictable world, how can analysis and foresight be used as a basis for strategic planning?
In Prof. McGrath's approach, in a world where the competitive advantage is liable to disappear in less than a year, companies cannot afford to spend months upon months on long-term strategic planning based on one competitive advantage only. In order to establish their advantage, they need to continuously adopt multiple strategic initiatives of a limited life span.
Strategic planning is more fluid, more based on customer focus, and refers less to branch boundaries in industry. In today's dynamic and competitive world, companies must abandon the fundamental premise of competitive stability. They don't even need to set it as a target. Companies must adopt an approach of change – an approach that encourages the creation of a portfolio of benefits that will enable the company to prosper extensively. Transient advantage is the new norm!
Such a world is based on 8 basic rules:
- Addressing arenas rather than industries.
- Determining key principles and experimenting with new approaches to problem-solving.
- Adopting indices that support entrepreneurship, rather than financial indices.
- Focusing on solutions to the customers' problems.
- Building a system of networking and connections with customers and vendors.
- Avoiding a brutal structural change when defining disengagement rules.
- Determining clear and consistent rules for examining intra-organizational entrepreneurship.
- Checking basic suppositions in different manners and in new ways
In order to cope with the VUCA world, Lahav has developed a unique and innovative
"capsule" method. Within its framework is an interdisciplinary team of experts from the fields of management, strategy and innovation, and a short, intensive and accurate process develops. Together with the senior management team, a strategic plan is tailored to suit the dynamic reality of the organization, the company, or the business unit. This program, available for immediate application, is planned and built by the managers themselves. Thus, a commitment is established by the entire Board and the organization's managers, for its implementation. At the end of this intensive process, instead of thick reference books and long, complicated presentations, concrete targets will be defined for innovation within the organization. Strategy for the encouragement and creation of innovation and entrepreneurship will be developed, as will innovation projects. The projects will be led by the organization's managers and a process will be developed for selecting alternatives for implementation in the organization.
The basis for strategic planning has not changed – it still requires difficult decision-making in order to choose between what to do and what not to do. But expanding selection processes is a necessary condition in the changing world in which we operate, since strategic planning is not performed today in environments characterized by stability. In light of this, the importance of strategic planning increases as complexity escalates, but such planning must be done in other, dynamic, innovative ways that will bring about archetypal changes, together with preservation and leveraging of existing strategic assets.
Is this a magical solution? Absolutely not! But is there another way to survive and prosper?
Two men approach a forest full of predatory animals. The first one is equipped with a machete, food, water, and insect repellent. The second one is kitted-out with the same articles but also brings along running shoes. The first man looks at the running shoes and asks, disdainfully; "When the Beasts of Prey arrive, do you really think those will help you to escape?" The second man answers; "No, but they'll certainly help me run faster than you!"
So, there are no magical solutions for hard work in market analysis and in understanding customers' needs but, even in this world, other tools are required for fast and dynamic planning that achieves results.
Bye for now – see you in your capsule!
This article was first published in Israel's EXECUTIVE Magazine