Success was never permanent, but never more so than today. A new study quantifies just how quickly high-flying companies fall back into the pack, with some plunging to the depths of their industry sector in record time. However, with the right mind-set and strategic approaches, the competitive advantage of some companies persists.
Terms such as ‘volatility’ and ‘disruption’ are often used to describe a world in which competitive advantage is increasingly difficult to maintain. The extent of such volatility and disruption is quantified in a Boston Consulting Group study that examined the performance record, relative to their competitors, of 20,000 companies over a period of 40 years. The researchers looked specifically at the decay rate of sector leaders — that is, how quickly top performers lost their advantage over the average performers in their industry.
Let’s take the example of a company whose annual total shareholder return (TSR) for a company reaches a level that is 20% higher than the sector average. However, in the following years, the company’s advantage has a 50% decay rate. In other words, the company watches its advantage decrease by 50% every year: the 20% TSR advantage is cut in half the first year to 10%, cut in half again the following year to 5%, and cut in half to 2.5% the year after that. With a 50% decay rage, the company’s TSR falls in three years to barely above the average TSR for the sector.
Several decades ago, the decay rate for leading performers in a sector (that is, those in the top 20% of the industry) was not as dramatic as 50%. From 1980 to 1985, for example, the decay rate for the best performers was approximately 15%, which meant that high performing companies might slowly, over a number of years, lose their advantage over the average performers.
For the past 15 years, the ability of companies to sustain their performance advance is dramatically different. On average, top performers have shown a 100% decay rate in TSR. The BCG researchers also confirmed that the shareholder metric, which could be influenced by such factors as changing shareholder expectations, is not skewing the results. Companies fail to maintain their advantage over the sector average on other metrics such as revenue growth, EBIT margin and return on assets.
In an age when competitive advantage was built on nearly immovable assets, including size and capital, sector leaders sustained their advantage. With dynamic competitive factors such as innovation and new technologies making the difference today, no competitive advantage is safe for long.
he data is unflinching. Of the companies whose performance results over five years (2008-2013) put them in the top quintile of their sector, an astounding 83% would tumble from their perch in the following five years (2014 – 2019), showing a 100% decay rate. However, the remaining 17% would only suffer a meagre 5% decay rate during those same years.
Given the almost frenetic volatility of the digital age, how can some companies maintain such an advantage? The researchers argue that these companies — Apple being one of the marquee examples — constantly search for new sources of competitive advantage. The researchers outline four paths to defying, in their terms, “the gravity of average performance”:
Change your mindset. No competitive advantage, no matter how strong it may seem, is immune to sudden industry disruption. Don’t sit back and wait to be knocked down; pre-emptively look for the next best thing.
What are you measuring? Growth and market share figures help for the present but don’t prepare the future. A better metric: how much of current revenues are based on recently developed offerings vs. offerings that were developed further in the past? If the ratio between favours recently developed offerings, the company has a better chance of maintaining its success.
Use two sets of strategies. Strategies focused on the present, such as fine-tuning the delivery of offerings, should cohabitate with strategies focused on the long term, such as the development of new offerings based on emerging technologies.
Develop new organizational capabilities. Organizational capabilities that support collaboration, diversity and organizational learning are required for the experimentation and development of innovating offerings that build future success.
Fighting the Gravity of Average Performance. Martin Reeves, Kevin Whitaker & Tom Deegan. Sloan Management Review (January 2020).
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