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Adaptability: The New Competitive Advantage

by Martin Reeves and Mike Deimler

We live in an era of risk and instability. Globalization, new technologies, and greater transparency have combined to upend the business environment and give many CEOs a deep sense of unease. Just look at the numbers. Since 1980 the volatility of business operating margins, largely static since the 1950s, has more than doubled, as has the size of the gap between winners (companies with high operating margins) and losers (those with low ones). 

Market leadership is even more precarious. The percentage of companies falling out of the top three rankings in their industry increased from 2% in 1960 to 14% in 2008. What’s more, market leadership is proving to be an increasingly dubious prize: The once strong correlation between profitability and industry share is now almost non-existent in some sectors. According to our calculation, the probability that the market share leader is also the profitability leader declined from 34% in 1950 to just 7% in 2007. And it has become virtually impossible for some executives even to clearly identify in what industry and with which companies they’re competing. 

Given the new level of uncertainty, many companies are starting to ask: 

  • How can we apply frameworks that are based on scale or position when we can go from market leader one year to follower the next? 
  • When it’s unclear where one industry ends and another begins, how do we even measure position? 
  • When we’re overwhelmed with changing information, how can our managers pick up the right signals to understand and harness change? 
  • When change is so rapid, how can a one-year—or, worse, five-year—planning cycle stay relevant? 

The answers these companies are coming up with point in a consistent direction. Sustainable competitive advantage no longer arises exclusively from position, scale, and first-order capabilities in producing or delivering an offering. All those are essentially static. So where does it come from? Increasingly, managers are finding that it stems from the “second-order” organizational capabilities that foster rapid adaptation. 

Instead of being really good at doing some particular thing, companies must be really good at learning how to do new things. 

The Ability to Read and Act on Signals

In order to adapt, a company must have its antennae tuned to signals of change from the external environment, decode them, and quickly act to refine or reinvent its business model and even reshape the information landscape of its industry. 

Think back to when Stirling Moss was winning Formula One car races: The car and the driver determined who won. But today the sport is as much about processing complex signals and making adaptive decisions as about mechanics and driving prowess. Hundreds of sensors are built into the cars; race teams continuously collect and process data on several thousand variables—ranging from weather and road conditions to engine rpm and the angles of curves—and feed them into dynamic simulation models that guide the drivers’ split-second decisions. A telemetric innovation by one team can instantly raise the bar for all. 

In this information-saturated age, when complex, varying signals may be available simultaneously to all players, adaptive companies must similarly rely on sophisticated point-of-sale systems to ensure that they acquire the right information. And they must apply advanced data-mining technologies to recognize relevant patterns in it. 

For example, companies are also leveraging their signal-reading capabilities to make operational interventions in real time, bypassing slow-moving decision hierarchies. The UK-based grocery retailer Tesco continually performs detailed analyses of the purchase patterns of the more than 13 million members of its loyalty-card program. Its findings enable Tesco to customize offerings for each store and each customer segment and provide early warning of shifts in customer behaviour. They also supported the development of Tesco’s hugely successful online platform, which has extended the company’s business model, enabling Tesco to become a store without walls and to offer a broader range of products and services, including media and financial services. To put the icing on the cake, instead of being purely a cost centre, the rich databases and analytical capabilities produce a stream of direct revenue: For a fee, Tesco allows other enterprises to access its technologies and insights. 

Next Section: The Ability to Experiment