From Competitive Advantage to Collaborative Advantage
I believe we’re at a turning point in history.
For decades, the seemingly indisputable goal of business has been to create Competitive Advantage.
Indeed, Competitive Advantage can plausibly be described as the most influential idea in the history of business ideas so far. Michael Porter, one of the concept’s great pioneers, is the most cited writer in the history of writing about business strategy. Right now, while you read this article, countless meetings will be taking place around the world in which business leaders are talking about the Competitive Advantage they seek to build or enhance.
But have we now reached a turning point from which creating Competitive Advantage may no longer be in our best interests? In the 21st Century, as rising levels of uncertainty, interdependence, and complexity threaten to overwhelm competitive strategies, could there be a more powerful alternative to help us grow our organizations more effectively?
Might the assumptions embedded in the idea of Competitive Advantage and the models used to create it actually be holding us back, even when we are not consciously choosing to adopt them? And if so, could overturning these assumptions and overcoming the cognitive biases we may have inherited from the dominance of the idea of Competitive Advantage help us achieve outcomes that are better for our businesses, better for our customers, and better for our communities?
Competitive Advantage teaches us to marshal our firm’s resources to create a customer offering that is in some way better than the offerings of rival businesses. While that may seem a sensible approach, I propose that it can fall apart when:
- Most value is created in the spaces between us rather than just inside our business.
- Success comes from supporting others and sharing in the value we can create with them rather than by just being better than our competitors.
- Customers are active creators of their own value, not just passive recipients.
Exploring these questions has led me to develop a radical alternative to Competitive Advantage which I present in my book, Collaborative Advantage: How collaboration beats competition as a strategy for success.
The book is intended as a practical guide to help business leaders to transform their businesses by harnessing the fuller value-creating potential of the broader eco-systems in which they operate and of their customers as active creators of their own value.
Collaborative Advantage can help us:
- Achieve greater results with fewer resources
- Mobilize staff, customers, partners, and stakeholders around a common purpose that engages the support of everyone you need.
- Nurture innovation; reach more customers or beneficiaries; build greater loyalty; generate higher income; and forge more ambitious partnerships.
The book builds on my experience running the Agency of the Future to help leadership teams to understand and define their organizational purpose differently in the light of Collaborative Advantage and remove the upper ceiling on what they can achieve by de-coupling their potential for growth from the level of spending they can invest and by more fully unlocking the value of the relationships they can build.
It also draws from insights I’ve gained from supporting thousands of acts of collaboration through Pimp My Cause, a social venture that helps marketers get better at marketing by supporting charities and social enterprises with their marketing capabilities.
A driving belief of my work has been that the set of problems marketers are usually given to solve is much smaller than the set of problems that marketing and the tools of influence can be used to address. Never has this been more the case than in today’s world where the most important challenges facing business and society are problems that no one person, organization, sector, nation, or even region can solve by acting alone. Our dependence on cooperation for our very way of life to be maintained highlights the importance of any discipline that can help us achieve greater influence and build better relationships.
My hope is that Collaborative Advantage may help us to restore human purpose and our innate capacity for cooperation, to the heart of the particular form of stories that we tell ourselves in the form of organizational strategies.
In order to form the right narratives to solve our business and social problems, we need to start by asking ourselves and others the right questions. Such questions can help us to overcome the cognitive biases that fifty years of creating competitive advantage have left behind. Such questions include:
- How can businesses grow more quickly by better harnessing the fuller value-creating potential of the broader business eco-system in which they operate? And of their customers as active creators of their own value?
- How can society better address social challenges by more strongly harnessing the human agency of the groups we are most trying to support?
- What methods and strategies will help us accelerate these processes and overcome the most meaningful of the challenges we face?
For an insurance provider, this could involve finding ways to help customers better content with risk or perhaps avoid having accidents in the first place; for a pharmaceuticals company this might be about investing in technologies that enable us to better manage our own health and wellbeing and unlock treatment options that match our own life preferences; or for an aid agency, this could involve better understanding what people caught in a disaster can best do to help themselves and each other find safety and then re-build their lives and livelihoods.
If we ask ourselves better questions we open the door to finding better answers
Forward-thinking leaders in all of these fields are already starting to address these opportunities. Insurers such as the Direct Line Group are investing in ‘gamifying’ safer driving and smart technologies that enable road management to better adapt to changing conditions in real-time. Pharmaceuticals companies such as Sanofi are creating Chief Patient Officers to put patient preferences rather than clinician convenience at the center of treatment options; groups such as From Local to Global Protection are seeking ways to re-invent aid as a process of helping people to actively help themselves rather than leave them as the passive recipients of aid dispensed to them through large international organizations removed from their own capacity to respond.
If we ask ourselves better questions we open the door to finding better answers. The book is dedicated to making this easier and supporting leaders in removing the upper limits on the successes they can achieve by better harnessing the value-creating potential all around them.
The origins of competitive advantage
The origins of the idea of Competitive Advantage overlap with the origins of the idea of ‘strategy’ as a pursuit in business in the first place and with the provision of the first strategic advisory services.
They were born in the 1960s in an early era of globalization in which domestic manufacturers were finding, often for the first time that overseas businesses were entering their markets and attracting their customers. In such conditions, it is not surprising that the metaphor of ‘competition’ could seem so compelling.
The pioneers of Competitive Advantage were primarily financiers, including Bruce Henderson (founder of the Boston Consulting Group), Ed Bain (founder of Bain & Company), Fred Gluck (former chief executive officer of McKinsey), and Michael Porter (Bishop William Lawrence University Professor at Harvard Business School).
They used finance’s understanding of internal analysis and control mechanisms to help business leaders to better manage and control their portfolio of business units and better understand how to allocate resources across them.
And this may explain why to this day the major strategic advisory firms tend to be dominated by financiers. Of course, I would argue that in our ever more interconnected world as we create ever more of our value through our external relationships and relatively less of our value through the resources we own, manage and control, marketing and the tools of influence should play a more central role in the development of strategy. Perhaps this is understood by the strategy firms now buying up increasing numbers of digital and creative agencies!
What the critics say
A clear pitfall in the goal of creating competitive advantage is that it can quickly become a zero-sum game. If I’m looking to compete with you my natural instincts are to do the same as you, but to try to offer more for less. The trouble with a race to the bottom is that you might just win!
Critics have also pointed out that competitive advantage is all about maximizing shareholder value: so where does that leave everybody else? And since many of the businesses that make the most positive social contribution and are also the most profitable, might that not even be the right approach to benefit shareholders?
Financial analysts have demonstrated that the length of time you can hold on to a competitive advantage has diminished at an ever-accelerating rate* ever since the idea was first introduced. So it may not be the long-term strategy it was hoped to be.
The authors of the influential Blue Ocean Strategy series** argue I think quite convincingly that the biggest disruptions likely to hit you probably don’t come from your direct competitors anyway, so basing strategy on your position relative to your competitors may leave you blindsided by more significant developments.
* See for example the study by Robert Wiggins of the University of Memphis and Tim Ruefli of the University of Texas, Sustained Competitive Advantage: Temporal Dynamics and the Incidence and Persistence of Superior Economic Performance, 2002.
** W. Chan Kim and Renéé Mauborgne, Blue Ocean Strategy (Harvard Business Review Press, 2005).
Walter Kiechel III’s Lords of Strategy tells the story of strategic consulting as practiced since its inception in the 1960s and essentially explores the history of competitive strategy through the lens of its leading theorists and practitioners. But what fascinated me about the book was an admission made in its final chapter that brings the basis of the entire industry into question, challenging the basic foundation on which it is built:
‘The tightly bounded company so long at the core of strategy’s deliberations increasingly seems a limited assumption. The twenty-first-century version of the discipline will have to do more to help if, or when, the dominant verb becomes not compete but something like co-create.’
In many ways, Collaborative Advantage can be read as an answer to this challenge.
Collaborative Advantage: Outside In
The book presents the Outside In framework that can help you to better harness the value-creating potential of the broader business eco-system in which you operate and of your customers as the primary creators of their own value.
The Outside In framework involves five steps:
- Step One Find Common Purpose, the most crucial and the most fundamental step. This consists of identifying what it is that you enable people to do better, framing it in a way that is attractive for them and orientating your whole organization around enabling this pursuit. This step unlocks powerful calls to action and sows the seed of a new story that will ultimately re-define what your organization is, why it exists and the contribution it can make to the lives of its customers and other stakeholders.
- Step Two Create Opportunities through the design of useful and interesting ways for people to engage in the specific pursuit you have identified in Step One. Whether you supply products, services, or other offerings, what matters most is how people use what you deliver and the role it plays in their lives or work. Enhancing this experience is a powerful route to success.
- Step Three Engage Participation to create an environment conducive for the kind of pursuit that you have defined in Step One and enabled in Step Two. This is about defining the rules of your ‘game’, creating different roles – for example, for different stakeholder groups or for people with differing levels of interest and commitment to play – and creating the social customs, habits, and rituals that support people in participating in your offerings alongside each other.
- Step Four Iterate and Accelerate by developing a deeper understanding of your early adopters in order to be able to better address their needs and to use their influence to reach a broader mainstream.
- Step Five Build Partnerships by identifying partners who can help you to grow faster and further than you could alone. The book explores the types of partnerships that can create the most value for your business and explore how to make them work best.
Collaborative Advantage articulates a way of doing business that can be both more profitable and make a more significant contribution to customers’ lives, as well as to the communities they live in. It can be used to bring fulfillment to the aspiration expressed by Richard Branson in the Global Transformation Forum in 2017 that a business should be ‘an idea to improve people’s lives’.
It is not against free markets nor does it deny that customer choice is a powerful driver of the value creation process. On the contrary, the approach not only accepts that observation, but goes much further by showing how even greater value can be created when consumers and the full range of a business’s stakeholders not only make their own choices but also have the opportunity to go beyond that to become active participants and contributors to the success of the business.
Collaborative Advantage and the Bottom Line
Benefits to the bottom line of creating Collaborative Advantage can include:
- Bringing clarity of purpose to galvanize everyone in the organization and to mobilize partners, collaborators, customers, and other stakeholders.
- De-coupling the potential for growth from the limitations of current resources by creating value through mechanisms of influence as well as control.
- Better leveraging the influence and assets of a broader range of stakeholders and contributors.
- Improving the capability to respond positively to surprising events and opportunities.
- Identifying disruptive business models.
- Accelerating the processes of learning, innovation, and growth.
- Overcoming dependence on a potentially linear, expensive, and rigid internal value chain.
- Lowering the cost of customer recruitment through more positive peer-to-peer influence and by making marketing activity more directly useful and less costly.
- Lowering the cost of customer retention through increased customer participation and loyalty.
- Increasing customer satisfaction, customer loyalty, and customer lifetime value by working with customers as active participants in the business.
- Reducing the cost of innovation and increasing its success rate by working with the people it is intended to serve.
- Building more ambitious partnerships.
The overall impact on the bottom line of building Collaborative Advantage and achieving these benefits can be to increase the net present value of future cash-flow. This is the metric used by financiers to measure the total value of a business.* And this can be achieved because the approach of building Collaborative Advantage better supports and activates the true nature of the value creation process.
Competitive Advantage was born from a classical view of value creation as a linear, enclosed process that is now giving way to an alternative understanding of how value is truly created as a more complex, evolutionary, and unbounded process† that can better be harnessed by creating Collaborative Advantage.
* The net present value (NPV) or net present worth (NPW) is a measurement of the profitability of an undertaking that is calculated by subtracting the present values (PV) of cash outflows (including initial cost) from the present values of cash inflows over a period of time.
*This article was first published in 2019