…in the new economy, the speed and means by which advantage grows and declines are becoming increasingly diverse. This is why business leaders in the new economy need to be able to manage across different business models with the agility of a decathlon athlete.

Source:   Renewable Competitive Advantage

A renewal-oriented culture encourages managers to question “the way we do things around here” on an ongoing, systematic basis. In the new economy, willingness to explore, test, and expand the rules of the game should be in the formal job description of managers.

Source:   Renewable Competitive Advantage

Renewal advantage is not based on endowments, handed down from outside, over which you have little control. Neither is it based on luck, outcomes you did not create, don’t control, or do not understand. Renewal is not a crapshoot. Nor is it a game of narrow-mindedly extending past behavior forward. For successful companies – the management of guided obsolescence through economic time – matters a lot.

Source:   Renewable Competitive Advantage

Ask yourself these basic questions: (a) What makes you special? (b) What is your organization ultimately capable of when stretched? (c) What will you never be able to do, no matter how hard you try? (d) What role is left for your corporate headquarters? Or should you leave your diverse businesses alone to run themselves?

Source:   Renewable Competitive Advantage

The stronger and more vigorous your company’s isolating mechanisms are, the more prices stabilize or even rise. As the isolating power of your capabilities weakens, the amount of time that you have to recoup profits from innovation declines. Prices fall more rapidly. Product advantage becomes more temporary. Economic time speeds up.

Source:   Renewable Competitive Advantage

In terms of theory, slow-cycle markets are a grouping of different types of mostly “natural” monopolistic advantages. Standard-cycle markets map most closely onto oligopolistic rivalry, or “life with the four-hundred-pound gorillas”. Fast-cycle markets can be thought of as most like Schrumpeterian competition, “the chase after the innovator”. So in this sense economic time is a simple organizing device with which to compare a range of possible renewal opportunities and to know whether they are changing.

Source:   Renewable Competitive Advantage

…failure to quip yourself to think in terms of multi-speed competition – what we call Economic Time – can reduce your effectiveness to that of a horse and buggy driver facing the onset of the automobile.

Source:   Renewable Competitive Advantage

Simply put, in the short run strategy follows structure. In the long run, structure follows strategy.

Source:   Renewable Competitive Advantage

The growth engine of every company has distinguishing competitive mechanics, its own dynamic signature that gives clues as to how value for it is created, destroyed, and potentially renewed. The reality is that customers don’t come first – neither do companies. Each gains its meaning from its relationship with the other. Through Economic Time we see the dynamic forces rooted in these processes of value creation: how managers perceive environmental threats, learn and meet customer needs, and react to one another.

Source:   Renewable Competitive Advantage

Slow Cycle Economic Time: The key to renewal [of competitive advantage] lies in gaining advantage that is proprietary, slowly changing, and essential to the functioning of a market. As a unique point of supply and demand, slow cycle renewal efforts more or less automatically resist competitors’ attempts to duplicate them. Product advantage is secured within the company and confined to it. Competitors cannot effectively gain a foothold with the company’s customers, even where they find the company’s advantage attractive.

Source:   Renewable Competitive Advantage

Standard-Cycle Economic Time: Companies in this second renewal class are found midway on the spectrum of Economic Time. They are typically mass-market companies, market-share oriented, and process focused. What distinguishes their success is their ability to replicate the same usage experience for customers with no surprises. Standard-cycle management styles are a descendant of traditional business thinking.

Source:   Renewable Competitive Advantage

Standard-cycle companies are oriented toward serving large numbers of customers in competitive markets. Demand patterns are repetitive and relatively stable. Still, economic time moves faster for these companies because their capabilities are less specialized. Competitors have greater ability and incentive to duplicate them, improve upon them, or render them obsolete. In this way their isolating mechanisms as less powerful than those in slower-cycle time.

Source:   Renewable Competitive Advantage

We came to describe the management style needed to renew standard-cycle companies as one Scale Orchestration.

Source:   Renewable Competitive Advantage

[Fast-cycle markets]: With the forces of value creation and destruction operating at high speed, the pursuit of advantage takes place in its fastest, most unrestrained form. This is why managers find their journey in the fastest cycle markets to be marked by a continuous gale of creative destruction, as the economist Joseph Schumpeter emphasized.

Source:   Renewable Competitive Advantage

In terms of theory, slow-cycle markets are a grouping of different types of mostly “natural” monopolistic advantages. Standard-cycle markets map most closely onto oligopolistic rivalry, or “life with the four-hundred-pound gorillas”. Fast-cycle markets can be thought of as most like Schrumpeterian competition, “the chase after the innovator”. So in this sense economic time is a simple organizing device with which to compare a range of possible renewal opportunities and to know whether they are changing.

Source:   Renewable Competitive Advantage

A step in preserving the best of the past while moving toward the future is to think in terms of the laws of competitive evolution. In our studies of economic time we came to see the three laws at work. We termed them convergence, alignment, and renewal.

Source:   Renewable Competitive Advantage

The first law of competitive evolution is convergence. When you successfully innovate, profits follow…Then, just as surely, competitors offer newer products or improved products at lower costs…Profits become low, zero, or even negative.

Source:   Renewable Competitive Advantage

You can slow down convergence through isolating mechanisms but you cannot stop it. Convergence formalizes the idea of economic time that nothing lasts forever.

Source:   Renewable Competitive Advantage

The second law of [competitive evolution] is the principle of alignment. This is the idea that the capabilities of your company and the needs of your customers are dependent on one another. Companies and customers each gain meaning from the requests placed on them by the other. Your company and your customers need one another, are defined by one another, and exist for one another.

Source:   Renewable Competitive Advantage

Ask yourself: Do you think of your advantage as merely sustainable-or as dynamically renewable?

Source:   Renewable Competitive Advantage

Traditionally there have been two primary ways to position products in markets dominated by economies of scale: through cost leadership or through differentiation. As Michael Porter has shown, cost leaders win through the ability to sell at lower prices, while differentiated producers gain from selling higher-priced products that customers perceive have additional value. It can be difficult to excel at cost leadership and differentiation at the same time where two efforts require opposing types of investments. Yet in the dynamic sense, many of the benefits of scale orchestration come when cost leadership and differentiation are combined, a process that we see as differentiated cost leadership.

Source:   Renewable Competitive Advantage

It is straightforward to imagine that lowering the cost or raising the price of products is good. What is more useful is to know how some combinations of these two investments will generate greater profits than others.

Source:   Renewable Competitive Advantage

Related to differentiated cost leadership is what can be thought of as renewable scale, the amount of volume that a market segment will absorb any combination of price and cost. To estimate renewable scale, compare the actual volume likely to be sold in a market with the minimum volume necessary to break even. Where market demand is sufficient to satisfy the investment needs of only one company, that segment of the differentiated cost leadership map will be focused.

Source:   Renewable Competitive Advantage

When markets are focused, renewable scale is too low to make it profitable for large companies to enter and compete for the business in that segment. Thus convergence does not occur. Still scale is high enough for a smaller, focused company to survive.

Source:   Renewable Competitive Advantage

Managing standard-cycle companies is a task analogous to commanding large battleships. It takes a long time to gain momentum and direction. Once established, momentum continues in the same direction unless altered through strong leadership or the actions of competitors. Changes in direction that are desired two or three years from now should be carefully thought through and initiated early on.

Source:   Renewable Competitive Advantage

[In Fast-Cycle markets] Value is idea-driven. Profit cycles are short. There is little that slows down the copying process or retards the fast commercialization of attractive alternatives. Complimentary assets are weak. Isolating mechanisms like scale orchestration, as well as geography, patents, and close customer relationships are rare. Fast-cycle markets and the products sold in them are based on freestanding, portable ideas. Value is high upon introduction but erodes quickly as ideas become commonplace.

Source:   Renewable Competitive Advantage

To borrow a phrase from a Hollywood movie: in fast-cycle markets there are two kinds of companies – The Quick and The Dead.

Source:   Renewable Competitive Advantage

Worldwide, wealthy, educated customers are predisposed to try out new products with little delay. Global capitalism generates ever-rising amounts of capital for investment. Technology can be employed to build or to copy any number of configurations of products, quickly and efficiently. Global communications have transformed international markets into an electronic village where distance no longer matters. Imagine a marketplace where thousands of idea-driven, well-financed companies have quick access to millions of customers who, as they say, “have so much money that they don’t know what to do with it”. These are the building blocks of fast-cycle markets.

Source:   Renewable Competitive Advantage

Fast-cycle products generally share the following characteristics: a) They are freestanding and idea-based. b) They can be copied or improved upon quickly. c) They experience supernormal productivity gains. d) They see economies of scale for a brief period only. e) they originate from uncontrolled innovation. f) They are culturally neutral and innately global, with few physical, regulatory, or geographic barriers.

Source:   Renewable Competitive Advantage

Fast-Cycle markets are unencumbered. Products are idea-driven, technology-or-information-based, valued in their purest forms , unconnected to isolating mechanisms. Knowledge-based advantage is slippery, easily dispersed and copied. Momentum is low, but velocity – the speed at which revenues rise and fall – is high. Thus, fast-cycle innovators can be pushed off their renewal pathways by fast followers in little time.

Source:   Renewable Competitive Advantage

As prices fall, they open up unfamiliar markets with new competitors. Alignment between the company and its customers changes. The focus of competition passes from early adopters, who are predisposed to pay high prices, to fast followers who are price sensitive, and finally late adopters who see the product as a low-priced commodity.

Source:   Renewable Competitive Advantage

The goal of brand awareness in fast-cycle markets in not to encourage repeat business; the goals is to expand the amount of product that can be sold before price erosion sets in. Brand awareness, rather than creating a defensible barrier to entry, sets the stage for competitive entry.

Source:   Renewable Competitive Advantage

Successful fast-cycle companies sustain renewal by adopting, even embracing, creative destruction as their central, ongoing way of doing business. Fast-cycle companies commercialize ideas, transfer resources to ever-newer products, and eat their children faster than their competitors do. It’s that simple and that difficult. Successful fast-cycle companies are high powered engines of creative destruction.

Source:   Renewable Competitive Advantage

Slow-cycle advantages are highly attractive from a strategic standpoint. Products and services operating in slow-cycle markets are shielded from traditional competitive pressures: a) They enjoy stable pricing b) they face few cost-reduction demands c) They experience long-lived profit cycles and d) they survive late delivery, poor quality, and even catastrophic failures.

Source:   Renewable Competitive Advantage

Slow-cycle products naturally dominate their markets. They define their market. They own their market. They are their market. A slow-cycle company operates within a strategic group of one: itself. Market ownership is localized to a factor of the market that the company owns exclusively…Is this monopolistic competition? Of course it is. But these monopolistic advantages can be created legally. As we will see, there can be a complex interpretation of monopoly power in slow-cycle markets. But by and large, slow-cycle advantages are earned the old-fashioned way: through hard work, smart decisions, careful investment, and foresight into new market opportunities.

Source:   Renewable Competitive Advantage

[Types of monopolies that characterize a slow-cycle market]: a) The human capital monopoly b) The bilateral monopoly c) Location, brand, or standards ownership d) patents and copyrights.

Source:   Renewable Competitive Advantage

In standard-cycle markets customers see a final product, a car for example, but not the automobile assembly line. In these slow-cycle markets the unit of production is the relationship with the customer. Thus, the traditional distinction between product and process, and the ability to conquer each, breaks down. Tightly coupled product/process relationships create strong isolating mechanisms, raising barriers to would-be competitors.

Source:   Renewable Competitive Advantage

Winner-take-all markets can experience a form of dynamic lock-in that we term tipping. Tipping is the tendency of a slow-cycle market to tilt all the way towards the adoption of a single product or service. Another expression of the winner-take-all nature of these markets, tipping is encouraged when a market is aided by the emergence of a common factor, such as gate control in airlines or common computer operating system. When tipping occurs, a competitor either wins the bulk of the customers or loses them to the winning company. Tipping, or tilting as it is called by economic theorist Brian Arthur, is an important new branch of economics based on the idea of continually increasing returns.

Source:   Renewable Competitive Advantage

If you continuously evolve your product designs along with changing customer needs and continuously improve your processes, and drive continuous learning throughout your organization – and orchestrate these activities among one another – then you can achieve economies of scale.

Source:   Renewable Competitive Advantage

With a focus on flawless execution, how much opportunity is there in scale orchestra for innovation? Let’s return to our physical metaphor. In a real symphony orchestra, new music is carefully chosen and coordinated with the overall repertoire. New Performers are introduced selectively.

Source:   Renewable Competitive Advantage

Convergence: [About] thirty percent of typical company’s value is set by where its products are located on the convergence curve. For a multiproduct company, the aggregate location of all of its products on the convergence curve shows up as total current profits. Significant also is the speed at which a company’s markets are becoming more competitive. This shows up as the rate of movement of products along the convergence curve toward zero profits. While the rate of movement along the convergence curve will not affect current profits, rate of movement affects sustainability of profits.

Source:   Renewable Competitive Advantage

Short-term strategy in, in a sense, reactive. Being reactive is not bad; in fact it is necessary. It is consistent with the idea of sticking close to customers. Day-to-day policies, tactics, and operating procedures are continually refined in search of better alignment with what customers currently want.

Source:   Renewable Competitive Advantage

In the long term, the process of building new relationships with new customers can take years. Part of the reason is that customers may not know what they want until a company supplies it and starts the parallel customer/company learning experience learning experience discussed earlier. In this way, companies create demand.

Source:   Renewable Competitive Advantage

Understanding does not have precede action. Sometimes it is useful to just do something. Careful analysis, thoughtful experimentation, done with an eye toward bridging the past with the future, is the goal: to gain knowledge of what might be possible. Through market research, and superior ability to select and reject projects, managers learn to place intelligent bets on the future. Willingness to experiment combined with the ability to learn quickly from what you find are increasingly valuable, indeed critical, renewable skills.

Source:   Renewable Competitive Advantage

Leaders are explorers. But they are also genetic engineers. Strategy can be thought of as organizational DNA, or the code by which your organization replicates itself. DNA, of course, is the genetic blueprint that guides how an organism reproduces itself, how it interacts to maintain alignment with its environment. DNA determines the growth of the organism, its shape, its life span, and what resources it must consume, and in which environment it must exist in order to sustain itself.

Source:   Renewable Competitive Advantage

Strategy has a fashionable nature to it. This simply reflects the fact that popular competitive ideas come and go, like fashions. The drive for market share, popular in the 1970s, was followed a decade later by an emphasis on profitable, smaller market niches. The early emphasis on centralized planning gave way to a widespread interest in decentralization, and still later to interest in the benefits of core competencies. These changes, although sometimes criticized as signs of weakness, are actually deeper signs of convergence and alignment at work.

Source:   Renewable Competitive Advantage

Where your isolating mechanisms are weak, economic time moves fast, so strategies can be imitated quickly. This is another reason why strategy in fast-cycle markets needs to be quick and adaptive. Where isolating power is strong, and economic time moves slowly, strategies will be more difficult to imitate. In this way the speed at which a strategy can be copied mirrors underlying capabilities and the economic cycle time of a market. Or put simply: think about the half-life of your strategy. It’s part of the calculus of economic time.

Source:   Renewable Competitive Advantage

…in determining the extent to which a capability is renewable, it can be helpful to distinguish how capabilities arise. Generally, capabilities can arise from any of the three sources: skills (hard work and investments), endowments (something that is handed to you), or good fortune (luck). While each of these sources can be a source of renewal, the leverage associated with each and renewal opportunities that they present for managers are different.

Source:   Renewable Competitive Advantage

The unfortunate consequence of bad strategy is undervalued assets. The idea of undervalued assets emphasizes that capabilities are suppressed when not deployed in the best possible way. Investors seek companies that achieve the best alignment, where capabilities are leveraged to yield the highest returns.

Source:   Renewable Competitive Advantage

A common threat to renewal is not that managers will select bad projects, but that they will not select enough good projects. As one manager put it, “We can say no to projects and be right 90% of the time, but the other 10% that we never take on can kill our business.”

Source:   Renewable Competitive Advantage

The relative predictability of cash flows of a slow-cycle company should be attractive to creditors. Management can use predictability to bolster arguments for proposing low-risk payout schedules for creditors. A lower level of debt for the company may be possible, in service of relatively high-confidence forecasts of sources of cash flows.

Source:   Renewable Competitive Advantage

A question we hear from managers working across economic time is: “Which economic time zone is better?” Long product cycles, while they appear attractive, are not necessarily better than short product cycles in this regard. This is because the total amount of cash flows and the speed at which they are received represent a tradeoff between the stability associated with longer profit cycles and the speed of payback associated with longer profit cycles. Thus economic time cycles create opportunities – but the speed and means by which cash flows from different economic time cycles create value are highly differentiating.

Source:   Renewable Competitive Advantage

In slow-cycle settings, cash flows can behave like annuities. Slow-cycle company products have stable, relatively certain payback periods. Then, as products are positioned further up in economic time, the velocity and uncertainty of cash flows associated with them increase. Similarly, investments in R&D, manufacturing, inventory, and marketing depreciate faster. The expected return from projects becomes less certain.

Source:   Renewable Competitive Advantage

The capital budgeting process for a standard-cycle company is managed through a hierarchy. Budget approval can require long journeys with reviews at many levels. Consensus over several years is needed to sustain large commitments. In contrast, capital requests for the development of fast-cycle projects should be drafted, reviews and responded to quickly. Market opportunities, and the cash flow associated with them, change rapidly – even during the process of fast cycle project evaluation.

Source:   Renewable Competitive Advantage

What is the historical relationship of your products to volume? How is competitive advantage strengthened by scale, or made stronger by an ever-increasing volume of product produced within the same fixed cost structure? As technological change becomes more rapid, fixed-cost investments age faster economically. The result is that the amount of time over which scale economies can be sustained is shortened. This reduces the importance of scale economies in the industry overall.

Source:   Renewable Competitive Advantage

A productivity measurement related to scale economies is the expected per-unit cost reduction to be had by doubling volume. Shifts in technology can upset historical experience curve relationships, causing productivity gains to increase. Often this increase is passed along to customers in the form of lower prices and faster product introductions. Thus it can be helpful to monitor an industry’s price dynamics for clues to changes in the productivity of competitors. More generally, as productivity gains increase, economic time moves faster, as seen in the semiconductor industry.

Source:   Renewable Competitive Advantage