business career entrepreneur success

How choices prevent change

I don’t know if you’ll agree but, strategy seems to be all about understanding your competitive environment and then positioning yourself for success in that particular environment by creating a competitive advantage and more economic value in a changing environment. which means that if you make the right choices and you develop well you’ll be succesfull. Well, at least until the world is changing and your competitive advantage is not that sure.

The problem is that you already made choices, a lot of them. And the most important are about the two types of competitive advantage: low cost or differentiation. Of course, you can also try to achieve both, which some say it’s impossible. And, to be honest, in this equation you should also take into account what is the scope of your company. Is it a niche competitor with limited products and services, local distribution and with access to a small segment of customers or is that a broad competitor selling a broad array of products to a large or global market, with access to a large segment of customers.

There is no one strategy better than another, and usually the financials of successful companies tell a different story with the same results if we take a look at gross margins, overhead costs, volumes sold and asset turnover. The only problem seems to be when a company decides to do both or when changes of strategy are too often and the company straddles between one approach or another never finding the correct approach on its way of exiting the market. JCPenney, Pierre Cardin and Gucci did this and survived, but most didn’t.

One particular bad way of trying to defend competitive advantage was the airline industry when the low cost companies hurt sales of legacy companies. They tried to fight back with low cost companies that all failed because they tried to use a part of what low cost is keeping old practices, for example still offering food for a price or keeping the seat reservation practice. The results were something else than low cost companies, and the hybrids failed.

The reason this happened is that competitive advantage involves an integrated self-reinforcing system of activities. The new  company or the new approach has to be different not just to use some of what competition does to be successful. Your choices have to interconnect, one choice you make enhances the value of other choices, one capability you develop creates stronger capabilities elsewhere and, if they fit well, they create competitive advantage and they are difficult to copy.

And to take Walmart as an example difficult to copy even if their strategy is clear because of historic choices it’s important to not that they did choose everyday low price strategy, little national advertising, focused in rural locations, satellite technology to connect with headquarters, creating dense network of stores around distribution centers and frugal travel policies and no regional offices before becoming what they are, and this is difficult to copy in the exact social and economic context.

Each choice reinforced  all the other choices, and if a competitor would try to copy parts of the choices that gave the competitive advantage would not work.  Taking one thing or another would not achieve the same competitive advantage, and because of causal ambiguity rivals don’t even understand how those activities fit together and what caused what. If you create a self-reinforcing system this would be extremely difficult to copy.

So this is how choices prevent change. If a a company made different choices or even it was not around in a certain social and economic context, it will be difficult to copy. But this is also a problem when the company that works and that has built an amazing value chain finds that its competitive advantage is under threat. Imitation, substitution, holdup practices alongside with the fact that management does not understand change, all threaten competitive behavior.

As the IBM versus Dell shows, having the best production capacities and the best distribution network with a retail network to match them was not easy to adapt to a model that didn’t sold computers over phone and built them from parts. The choice that IBM made was to not upset and lose its corporate business which eventually didn’t see a lot of difference and chose other than IBM when computer industry developed. Previous choices, made difficult adaptation, and this led to loses.