Sustainable Sources of Competitive Advantage
This article originally appeared on Fortune.com.
David Paul Gregg invented the CD, which is amazing and changed history. But you’ve probably never heard of him because CDs aren’t difficult to make, and lost relevance over time.
Most things work this way. As soon as a smart product or business idea becomes popular, the urge to copy it and commoditize it is the strongest force economics can unleash. Jeff Bezos summed this up when he said “Your margin is my opportunity.”
The key to business and investing success isn’t finding an advantage. It’s having a sustainable advantage. Something that others either can’t or aren’t willing to copy once your idea is exposed and patents expire.
Finding something others can’t do is nearly impossible. Intelligence is not a sustainable source of competitive advantage because the world is full of smart people, and a lot of what used to count as intelligence is now automated.
That leaves doing something others aren’t willing to do as the top source of sustainable competitive advantage.
Here are five big ones.
The ability to learn faster than your competition
Someone with a 110 IQ but the ability to recognize when the world changes will always beat the person with a 140 IQ and rigid beliefs. The world is filled with smart people who get nowhere because their intelligence was acquired 20 or 30 years ago in a vastly different world than we live in today. And since intelligence has a lot of sunk costs – college is expensive and hard, for example – people tend to cling to what they learn, even while the world around them constantly changes. So the ability to realize when you’re wrong and when things changed can be more effective than an ability to solve problems that are no longer relevant. This seems obvious until you watch, say, Kodak or Sears trying to solve 1980’s problems in the 2000s.
Marc Andreessen promotes the idea of “strong beliefs, weakly held,” which I love. Few things are more powerful than strongly believing in an idea (focus) but being willing to let go of it when it’s proven wrong or outdated (humility).
The ability to empathize with customers more than your competition
Forty-seven percent of mutual fund mangers do not personally own any of their own fund, according to Morningstar. That’s shocking. But I suspect something similar happens across most businesses.
What percentage of McDonald’s executives frequent their own restaurant as a legitimate customer interested in the chain’s food, rather than a fact-finding mission? Few, I imagine. How many times has the CEO of Delta Airlines been bumped from a flight, or had his bags lost by the airline? Never, I assume.
The inability to understand how your customers experience your product almost guarantees an eventual drift between the problems a business tries to solve and the problems customers need solved. Here again, a person with a lower IQ who can empathize with customers will almost always beat someone with a higher IQ who can’t put themselves in customers’ shoes. This was apparent in the recent election, when understanding the electorate’s mood far exceeded the power of traditional campaign strategies.
It’s also why the best writers are voracious readers. They know exactly what readers want and don’t want because they themselves are customers of content.
The ability to communicate more effectively than your competition
Business success doesn’t necessarily go to those with the best product. It goes to whoever is the most persuasive. George Soros may be one of the brightest minds in finance, but he would fail miserably as a financial advisor. Not one person in ten who reads his books understands what the hell he’s talking about.
Most business edges are found at the intersection of trust and simplicity. Both rely on the ability to tell customers what and why you’re doing something before losing their attention.
This is one of the crazy things that gets harder to do the smarter you are. There’s a bias called “the curse of knowledge,” which is the inability to realize that other people with less experience than you have don’t see the world through the same lens you do. I saw this firsthand when a financial advisor told an utter novice grandmother that a higher bond allocation (which she wanted) didn’t make sense “because of the slope of the yield curve.” She had no idea what this meant, and told me experiences like this eroded trust since she couldn’t distinguish her confusion from his obfuscation.
The willingness to fail more than your competition
Having no appetite for being wrong means you’ll only attempt things with high odds of working. And those things tend to be only slight variations on what you’re already doing, which themselves are things that, in a changing world, may soon be obsolete.
Here’s Bezos again: “If you double the number of experiments you do per year, you’re going to double your inventiveness.”
The key is creating a culture that allows you to fail often without ruin. This means not docking employees for trying things that don’t work, and not betting so much on a single idea that its failure could cripple the company.
Amazon and Google, I’m convinced, are successful because they’re better and more willing to fail than any other company. Accepting lots of small failures is the only way they’re able to eventually find a few things that take off.
The willingness to wait longer than your competition
Rewards sit on a spectrum: Small, unpredictable ones in the short run, big, higher-odd ones if you wait longer.
It’s amazing how much of a competitive advantage can be found by simply having the disposition to wait longer than your competitors.
Waiting longer gives you time to learn from, and correct, early mistakes. It reduces randomness and pushes you closer to measurable outcomes. It lets you focus on the parts of a problem that matter, rather than the chaos and nonsense that comes in the short run from people’s unpredictable emotions.
If you can wait five years when your competitors are only willing to wait two, you have an advantage that is both powerful and uncorrelated to intelligence or skill.
Which is about as close to a free lunch as it gets in business.