Strategy is creating a unique value in a unique way. I learned this while working on a project with Michael Porter, the world’s foremost authority on competitive strategy. The video above tells the story. Or you can read this.
If you create a unique product or service by doing things a rival could copy, you don’t have a strategy. You have a temporary advantage that the competition is likely to erode. Conversely, if you do things none of your competitors do to create a product or service they can make through other means, you don’t have a strategy. You again have a temporary advantage, perhaps in differentiation or in lower costs. But it’s likely to fade away.
The implications for business software are profound. When a company buys software that its rivals can also buy, say, to reduce inventory costs or speed up design processes, it gains no competitive advantage. It may become more efficient compared to its old self, but it’s just keeping pace with competitors. This doesn’t mean that companies can stop buying software to make processes more efficient. Far from it. Industry best practice is a rising tide that sinks all leaky boats. But firms should realize that operational effectiveness rarely creates competitive advantage.
So, if buying third-party technology puts companies on a productivity treadmill, what can they do? How can they avoid running faster to stand still? One answer is to customize the third-party software you install so that your implementation looks like none other. It’s tailored to your unique ways of working. However, this kind of one-off deployment raises consulting fees and increases maintenance costs over time because any upgrade or modification becomes uniquely difficult.
Another answer is to build your own technology. This is the path taken by the online giants Google, Amazon and Facebook. Each of them has created proprietary technologies like custom scanners for digitizing books (Google), massively scalable datacenter capacity that can be resold in little bites (Amazon), or a new kind of database (Facebook). However, this option is open to only a select few because it requires extraordinary technical talent which is in short supply. Any company taking this approach has to not only hire in-demand experts but keep them, because few technological innovations remain uncontested over time. Today’s innovation needs tomorrow’s innovation on top to stay ahead. Witness the different kinds of competition for Amazon’s Web Services from the likes of Microsoft, IBM, Oracle, and VMWare.
There is another answer, and this one is open to companies of all shapes and sizes. Use a new generation of software that dramatically cuts the cost and effort of getting a unique perspective on data the moment you realize you want it. It may sound like you can do this with a spreadsheet. And maybe you can with small amounts of homogenous data. But when you want to know what social media can tell you about distribution shortages, you’ve got a question that can’t be answered on the desktop. This is what non-relational technologies like Hadoop, NoSQL databases, and Endeca Information Discovery are all about.
Companies will still buy this capability from software makers, whether on premise or out of the cloud, meaning that it’s available to rivals. But, unlike traditional software which requires you to organize data ahead of time based on how you intend to use it, this new software lets you organize any data at the moment of use, at the point of use. One is a model-first world that excels in standardizing and automating routine processes. The other is a data-first world that excels in enhancing human discretion at the scale of modern organizations.
Which brings us back to strategy. Professor Porter also taught me that strategy is about choice. Sustainable competitive advantage comes from people choosing to create a unique value, choosing a unique way to create it, and choosing and choosing again when the competitive environment changes. A new generation of technology that helps a company get the perspective it just realized it wants on customers, products, suppliers — even its own processes — will reinforce strategy, rather than driving it out.