Where’s the advantage? In traditional business strategy, the answer was easy: build a wall. The companies with the highest and strongest walls would win. In the Big Shift, that answer becomes less credible. Walls work in stable worlds but they can actually become obstacles in more rapidly changing worlds. In the exponential world we’re entering, walls may be replaced by networks as the most promising sources of advantage.
I’ve become increasingly interested in how strategy will evolve in the Big Shift as revealed here and here. In this posting, I want to focus on the implications for how we think about competitive advantage. There’s no question about it – traditional sources of competitive advantage are eroding as revealed by our own analysis of long-term return on asset trends in the US economy and the well-known study of the rapidly shrinking lifetime of the successful companies that make it onto the prestigious S&P 500 list. What used to protect us from competition is becoming less and less effective.
How did we build advantage in the past? We built walls. The walls took many different forms, but the key was to block potential competitors from entering our markets and taking our customers. One of the best ways of doing that was to acquire some proprietary knowledge, ideally something that could be protected with patents and copyrights. Even better if we could harness economies of scale that would reduce the number of companies operating in our markets – the economies of scale would become high walls that even the most intrepid challenger would find intimidating to scale.
These walls worked very well in stable times. Once built, they were durable and reliable. Companies could then focus all their time and energy on driving greater and greater efficiency into their operations to increase profit margins. Life was good.
But the times they are a’changing. The walls are becoming less and less effective in keeping competitors out. If the walls are based on proprietary knowledge, the accelerating pace of change means that proprietary knowledge is becoming obsolete at an accelerating rate.
If the walls are built around economies of scale, we’re seeing a variety of options opening up that can help new entrants overcome this barrier. For example, with contract manufacturing, a new entrant can leverage a promising new product by relying on the scale manufacturing capabilities of others. Similarly, new entrants can find ways to reach potential customers at scale by leveraging global market platforms – they no longer need to build their own scale-driven distribution channels.
So, does that mean that the potential for competitive advantage no longer exists? Far from it. It’s just that the sources of advantage are shifting in ways that most companies don’t yet understand, much less effectively harness.
In a more and more rapidly changing world, the key source of advantage will reside in the ability to become a concentration point for knowledge flows so that we can learn faster and gain the insight required to more effectively harness the long-term forces that are reshaping our global landscape.
I originally wanted to call this new source of advantage “bridges” because it provided such a visual contrast to walls, but there was a problem. Bridges, at least the physical ones that we know, have a key limitation – the more people who want to cross the bridge, the more crowded it gets, and eventually it turns into a parking lot, blocking any movement.
What we need are bridges that are capable of infinite expansion. More importantly, we need bridges where, the more people who use them, the more valuable the bridge becomes. What we need, in effect, are networks, capable of infinite connections, building bridges that can expand in all directions. So, I’m going to refer to the new source of advantage as networks, but primarily because they represent a new kind of bridge.
Recently, I wrote about networks as a new form of “net worth” for individuals, but it turns out that networks are also emerging as a key form of net worth for companies, even though not explicitly measured on the balance sheet.
Finding and occupying influence points
So, what’s required to become the concentration point of an expanding network? In an earlier blog post, I identified these concentration points as “influence points” and explored what the attributes of the most powerful influence points are likely to be.
Influence points matter. If you don’t understand what the emerging influence points in your relevant market arenas are likely to be, you’re in trouble. It means you certainly will not be effectively targeting them and, perhaps even more importantly, you will not understand what the implications will be if someone else occupies those influence points.
And here’s an important point: if you intend to build and occupy an influence point, there’s significant urgency.Influence points are driven by network effects which means that, once someone manages to occupy an influence point, they will be very difficult to challenge. That’s a key source of their advantage. So there really is not an option of being a “fast follower” if you want to harness this new form of strategic advantage. If you’re not first to critical mass in an emerging influence point, the game is likely over.
And just to be provocative, leaders who adopt the feminine archetype are going to be much more successful at building and occupying influence points. Leaders who adhere to the masculine archetype will be drawn to those walls and face considerable challenges if they venture beyond those walls and try to cultivate networks. It’s one of many reasons that I maintain that the feminine archetype will ultimately prevail in business over the masculine archetype.
Choices to be made
To effectively target and occupy an influence point, companies will need to step back and ask the most fundamental question of all: what business am I in? I have suggested in other venues that most companies today are an unnatural bundle of three very different business types: infrastructure management, product innovation and commercialization and customer relationship businesses.
The companies that are most likely to occupy emerging influence points will be those who are tightly focused on either infrastructure management or customer relationship businesses (but not both – they’ll need to pick one). And, by the way, if you choose to focus on the product innovation and commercialization business, you’ll have a much harder time finding and occupying influence points – it’s one of the reasons I believe that those businesses will tend to fragment over time and have relatively high turnover rates.
The value of influence points
Influence points are strategically important because they concentrate knowledge flows in ways that help the owner of the influence point to learn faster and accelerate performance improvement. But, in a more rapidly changing world, there will need to be reciprocity here. If the owners of the influence points simply focus on aggregating, analyzing and acting on the knowledge for their own benefit, they will be increasingly vulnerable to challenges from those who offer to provide more value back to the participants in terms of feedback loops that can help everyone to learn faster, not just the owner of the influence point. There’s an interesting dynamic here: the more rapidly everyone learns and improves their performance, the more valuable the influence point becomes. Reciprocity actually strengthens advantage.
As we become more focused on the potential of artificial intelligence, the strategic value of influence points increases for one simple reason: artificial intelligence without access to lots of data is actually pretty stupid.Influence points become natural sites for the aggregation and rapid refreshing of data. Whoever owns these influence points will have a natural advantage in harnessing the insights and value that can be generated from artificial intelligence because they will have access to far more data than anyone else.
Advantage for individuals and countries
So far, I’ve been talking about strategy from the viewpoint of companies, but the same basic shift is playing out at the level of individuals and countries as well. Think about it. For individuals, the key to success was to accumulate a set of degrees and experiences that would qualify someone as an “expert.” In other words, advantage was built on proprietary knowledge that would insulate you from challenges by anyone else.
Now, it’s becoming increasingly apparent that if you consider yourself an expert, you simply don’t understand how rapidly the world is changing. The key to success going forward is the ability to cultivate rich networks of relationships with diverse people who can help you to learn faster. The strategy for success for individuals in the future will hinge on the ability to become a concentration point for a growing number of relationships – and on the ability to harness those relationships to learn faster.
There’s a similar dynamic playing out for cities, regions and nations. It used to be that your advantage at this level hinged on some set of natural resources or locational advantage (for example, having a coastal area with a natural harbor). That’s less and less true. The cities, regions and nations that are surging ahead are those that manage to become gathering spots for people with rich networks of relationships, and increasingly, relationships that extend well beyond existing geographic boundaries. In this context, I wrote a perspective several years ago that we need to shift our focus from the BRIC countries to the LUSTI countries, precisely because the latter are driven to connect beyond their borders because they were so small.
Walls as a source of vulnerability
So, if the sources of strategic advantage are shifting from walls to networks, what about those who continue to seek to hide behind walls? The walls that were so helpful in providing protection are increasingly becoming barriers to building the sources of advantage that are necessary for success in the Big Shift world. What were very effective sources of protection are now becoming sources of vulnerability. The illusion of protection breeds complacency and blinds us to the changes that are undermining our positions.
Feel the fear. If you’re not afraid, you don’t understand the changes that are playing out in the world around you. But don’t let the fear overcome you. Resist the temptation to hide behind the walls that served you so well in the past. Venture out into unfamiliar territory and find ways to connect with others that are facing similar challenges. By coming together and leveraging a growing array of diverse assets and capabilities, you will discover the ability to cultivate more and more of your potential and turn challenges into ever expanding opportunities.
John Hagel is co-chairman for Deloitte LLP’s Center for the Edge with nearly 30 years of experience as a management consultant, author, speaker and entrepreneur. He is the author of numerous books, including “The Power of Pull,” “Net Gain,” “Net Worth,” “Out of the Box” and “The Only Sustainable Edge.” Previously, he was Global Leader of McKinsey’s Strategy Practice and Electronic Commerce Practice (which he founded and led from 1993-2000). John holds a B.A. from Wesleyan University, a B.Phil from Oxford University and a J.D. and MBA from Harvard University. Learn more about John’s insights here >>