To thrive in 2025 requires a solid foundation in which to continually deliver and innovate. If you believe your current portfolio of products or services will be a competitive advantage for long, you are mistaken.
The capabilities used to achieve your current performance hints at the chances of you doing it again. A trend of successful offerings in the market is a company’s leading indicator. The biggest threats to your company are your competitors outpacing your capabilities, novel technology, and new entrants to your market.
NVIDIA and Tesla entered established industries with the same technologies within their new industries but with different ideas of how to configure their business and products. For example, NVIDA turned the 3-D graphics industry’s new product development on its head with 6-month releases instead of the traditional 18 months; 3 teams staggering their 18-month releases. In addition, they pursued GPU technology and created their own software drivers resulting in a unified graphics platform[1].
There are only two competitive positions for a company, lowest price provider or product/service differentiation. Those in between the competitive positions are constantly having to look for ways to entice buyers. They battle to find the right mixture of quality, cost, and delivery. Their value proposition is quality over price plus a timeline detractor (V = Quality/Price – Delivery). This comes from a process improvement mindset, an internally focused viewpoint.
Differentiators focus on value as a solution. An outward focus that searches and solves for unmet wants and demands. Quality becomes Qualities. The characteristics, features, and benefits that solves the problem. Here Price is encouraged to be increased because Qualities define the market expectation. Delivery has a great deal less effect because there is little to no competition or substitutes are considered inferior.
Culture, innovation, and capability are foundational to achieving your unique value proposition. All organizations can benefit from the accumulation of expertise. The longer you stay in business the greater your capabilities and knowledge should be. It is worthwhile to know that working knowledge of cospecialized assets and capabilities are held within your culture.
Culture
People reflexively adopt similar attitudes, beliefs, and customs when they join others in a common purpose. It does not take long and once these set in they become sticky and hard to change. Cultures are difficult to decipher but easy for someone to become a member.
A firm’s objectives and how it intends to pursue them are partially held within its culture. It is for this reason that leaders can struggle with fully understanding how value is created. What complicates the relationship between leaders and the company culture is cultures can seem to work in your favor and against you at the same time.
I have found that by not making culture the focus of any initiative, you stand a much better chance of the culture adopting the best capabilities and attitudes. While you cannot control a culture, you can influence its development to improve performance.
Tips on how to nurture your culture:
Promote the reason people would want to work for your company. It could be why customers buy from you, your organizational identity (internally or externally), or the opportunity for personal growth.
Develop employees with the requirement that new abilities, knowledge, and skills must also benefit the company and ultimately customers. Job rotation is one method but can be overused diluting competency.
Understand the difference between internal and external forces affecting your culture. There is no reason as a leader you should let internal factors negatively affect your employees. You may get surprised with issues but never let them become a trend.
Realize you cannot control a culture. Also, by focusing on a culture to change it creates more barriers than it is worth. Cultures will adopt or develop attitudes and capabilities to meet new challenges. It is up to leaders to influence better choices.
Improve people skills. Policies and decision-making have broad implications, but it comes down to the individual interactions that persuade or reinforce desired behaviors. Leaders being present when an employee decides to do it the old way or a new way is crucial.
Take inventory of the formal and informal policies. Formal policies provide insights into a culture’s values and beliefs. Informal policies surface with uncertainty and ambiguity.
Innovation
Michael Porter discovered there is a frontier to productivity with every competitor able to achieve the same level of efficient output. Innovation on the other hand has no boundaries. In fact, not only do product/service, business model, and technological innovations provide significant differentiation, prices for the other products in the market will be lower. This is now playing out in the chip market. Over the past several months Intel has been cutting prices in response to NVIDIA’s[2] dominant position.
Competition also increases with innovation, at least until the market chooses a dominant design. Tesla has increased BEV competition by revealing the demand and profitability for BEV’s[3]. Additionally, the price of lithium batteries has been steadily declining[4].
Today’s successful leaders view their organizations as evolutionary and know how to dynamically manage competencies. A big part of their job is the analysis of capabilities.
The evolutionary and competence-based theory of the firm focuses on the problem of innovation, learning and steady competitive advantage and surveys the firm in the light of its own history[5].
So, how do you decide the right innovation to foster and the capabilities needed? Start with your company’s abilities to innovate and learn, as well as your current and potential competitive advantage(s). Clearly define your competitive advantage so you can tie performance back to specific activities.
Productivity
Productivity is a leading indicator of market growth. You can improve your ability to compete if you understand how to ideally employ labor, capital, energy, materials, and outside help. The best competitive advantage comes from knowing how to improve these factors of productivity, as well as, reconfigure assets, and develop capabilities. Simply put, your ability to continually create innovative solutions.
The U.S. Bureau of Labor Statistics measures economic productivity and its major contributors, KLEMS: Capital, Labor, Energy, and purchased Services. They also track Total Factor Productivity (TFP), which measures productivity gains (or losses) that cannot be explained by changes in KLEMS. The unexplained KLEMS changes represent the ability to innovate. For example, Figure 1 shows the value-added trend for the motor vehicles industry and its major inputs.
You can see how each input contributed to Value Added during the 2008 recession. Interestingly TFP is the least dynamic factor of the industry’s productivity (Value Added). While automotive industry production has been steadily growing, it lacks groundbreaking innovation. EV’s are good but the concept has been around since the 1930’s. This YouTube video shows auto production from 1950 to 2022. It seems that access to markets has been driving the industry, not innovation.
The reason for me bringing this up is not to encourage going down the ‘rabbit hole’ of economics. My point is that making things like process improvement the focus of initiatives is not a competitive advantage.
Innovation drives competition and competition influences innovation.
Why? Because a competitor will solve the next big market mystery and develop the ability to produce a solution efficiently. Your improved processes will end up supporting a market substitute or alternative. Process improvement is necessary but should not take focus from innovation that differentiates.
Capability
Understanding the changes in capabilities is a necessary step to understanding dynamic capabilities. Dynamic capabilities are:
“…the firm’s ability to integrate, build, and reconfigure internal and external competencies to address rapidly changing environments.” – Teece, Pisano & Shuen (1997)
Business capability analysis can provide insights into the current performance of a firm and help discover potential offerings[6][7]. Below are capabilities to analyze:
Differentiation over time
New Product frequency and value
Talent acquisition and retention
Adaptability to industry and economic shocks
Efficiency trends
Effectiveness
Compound improvements in offerings
Capital usage
Supply chain resilience
Read more about how to get the most out of capabilities here: Leadership, Capabilities, Strategy
Things to Consider
Developing Your Own Way
A question I am constantly asking leaders is “Why the focus on productivity as a strategy when those capabilities should be embedded within the organization?” By requiring productivity to be a basic capability, more time can be spent on innovation. One way to accomplish this is to make quality, cost, and lead-time standards part of:
every employee’s job
the institutional knowledge base
incentives
the measurement system
If your culture is lacking productivity know-how completely, you can form an ad-hoc team of experts to embed the needed knowledge, skills, and abilities. The initiative should be considered a project with a clearly defined purpose, charter, specific capabilities to embed, who will have the capabilities, and an exit strategy.
Another way is to hire an Industrial Engineer to work with teams on an as needed basis. I have found that you can achieve far greater success when enablers collaborate with those doing the value-added work instead of for them. As an ad hoc team member, they can enhance the team’s ability to keep costs and lead times low while achieving the required quality. This ensures your culture learns and retains productivity know-how.
There are no easy answers to finding the best way forward. You must begin with your unique set of capabilities, business model, organizational design, and resources. The next step is to measure the gaps between your current situation and your purpose and strategic choice. The challenge is improving how you create, deliver, and capture today’s value, make progress towards your strategic position, and improve on your promise to your customers.
The Trifecta of Effort
I have mentioned before how purpose and strategy should be the focus of most of your organization’s efforts. I say most because there are times where maintaining the status quo is not only necessary but desired.
Achieving a triple win is when purpose, strategy, and day-to-day efforts establish your unique value proposition (Figure 3 below).
As a leader, if you are not guiding efforts towards refining all three, it is time to step back and ask yourself why. These should be the focus of adopting and developing capabilities.
To achieve and keep a competitive position requires consistent differentiation while driving best practices to a formal routine. It is about how well you and your company drive innovation repeatedly.
[1] Rumelt, Richard, Chapter 15, Good Strategy Bad Strategy: The Difference and Why It Matters, Crown Publishing, 2011, pgs. 222 – 235
[4] Tesla’s Entry into the U.S. Auto Industry, Donald Sull and Cate Reavis, MIT Management Sloan School, 5/1/2019, pg. 22
[5] Balázs Kállay “Evolutionary and competence-based theories of the firm”, Journal of International Studies, Vol. 5, No 1, 2012, pp. 38-45.
[6] https://www.adaptiveus.com/blog/technique/business-capability-analysis/
