How Long Does Competitive Advantage Last? Check the Date

Order-to-delivery sat in the mid forties. Healthcare textiles, 2014, a few weeks after I arrived, and I asked why.

The director who owned supply planning and scheduling gave me the answer. Mexico production, a US destination, a third party between them. Then:

"We are getting the product in a third of the time than we would if we were getting from Asia, and I don't think we can bring it lower with our current resources or process."

She was right. I have written before about how the number had been proven once and never reopened.

That is true and it is not the interesting part.

Read her sentence again. There are two conditions in it.

The first is the benchmark. Asia. Not Asia in the abstract, but Asia as it was that year, at that freight cost, at that transit time, under that trade regime.

The second is the clause at the end. With our current resources or process.

She was more careful than anyone gave her credit for. She answered a question about the present and she named both of the things her answer depended on.

And the business heard a fact.

Her answer went into the operating vocabulary of that company as a property of the business. The conditions stayed outside, in the world, moving, with nobody assigned to watch them and no date on any calendar when someone would check.

That is the whole subject of this issue.

Last week I said this one closes the trio and asks the question underneath all three. What you have that is worth defending, and whether it still holds against the terrain in front of you.

Range Compass. VRIO and Horizon Scanning, frameworks 14 and 16, chapter five.

I taught both of these in the last two issues and I am not going to teach them again. What I want is the thing that only appears when you set them next to each other.

Why these two

VRIO gives you an object. A sentence about what you own that a competitor cannot easily have.

Horizon Scanning gives you a field of view. What is moving that has not reached your numbers yet.

Chapter five makes a claim about the second one that I think is the most underrated line in it. Operational excellence gets copied. Technical capability gets copied. Seeing something before your competitors do is one of the few things that survives that.

The book says it and moves on. I take it one step further.

If scanning holds up when everything else gets copied, then it is not a practice sitting next to what you own. It is one of the things you should be running the four questions against. So these are not two items on a list. One of them is an entry in the other one's register.

Four years later, same company

In 2018 I took a general manager role in that same business.

Not a new market. Not a new industry. The same healthcare textiles operation I had walked into in 2014 and spent four years learning from the inside.

I took it on the belief that the revenue was recurring. Hospitals need linens, linens wear out, linens get replaced.

Three things were already true in that market when I said yes.

Replacement was cyclical, not steady. Systems bought in large installation events and went quiet between them.

Synthetic fabrics were pushing product life from twelve months toward twenty-four. Every extra month is volume that never arrives.

And RFID was going into more and more of those systems. Once a hospital tags its inventory it stops losing it, and loss replacement had been a primary driver of demand.

None of it was hidden. All of it was findable in an afternoon.

Now the part where the excuse is not available to me.

I had the language. I finished an executive MBA in 2013. I could have written the four VRIO questions on a whiteboard in 2018 without looking anything up.

Having the vocabulary is not the same as believing what it describes. After four years inside that operation I still had not absorbed the actual claim, which is that a competitive position is not a fact you establish once. It is a reading, and it keeps moving whether or not anyone takes it again.

I was looking at the work. Four years in one business does that to you. I was not looking out at the market, and I was certainly not looking at whether the way we were built was keeping things from reaching me at all.

She at least had a benchmark. I had four years of familiarity and mistook it for knowledge.

What each one misses alone

VRIO on its own gives you a verdict on today, arrived at honestly, that goes stale without changing appearance. Nothing about a correct answer tells you when it stopped being correct.

Scanning on its own gives you a collection. Interesting things, gathered carefully, with nothing to test them against. Every trend looks equally important when you have no register of what you actually own.

Both running unsynchronized is what happened twice in the same building, four years apart, to two people who were each right about what they could see.

The part that cuts against me

In April, Michael Mauboussin and Dan Callahan at Morgan Stanley updated a paper Mauboussin first wrote in 1997, on how long a company keeps earning returns above its cost of capital. Fifty-four years of US public companies. The average decay rate came out at 0.21, and inside their model a rate of 0.20 works out to about five years of differential returns.

Be careful with that five. The measured part is the 0.21. The five years is what it implies inside a valuation model, not a stopwatch on anybody's moat.

Now the part I did not expect.

Persistence stopped falling. It slid from the 1950s through the end of the century, then went back up in the 2000s and stayed up. US public companies are staying listed longer than at any point since the 1970s.

My own book says competitive edges wear down faster than ever. On this evidence that is not supported, and I would write that line differently now.

Then read their sample. Public companies. Financials excluded. Minimum sales of two hundred fifty million dollars. And their finding that large companies have held higher persistence than small ones since the mid-1980s.

The average did not improve for everyone. It separated.

Which is this issue in one move. The reassuring trend and the alarming trend are both real, and neither one is about you. They describe a distribution you are somewhere inside, and the trend cannot tell you where.

One move this week

Take one sentence your business says about why customers choose you. The one in the pitch, or on page two of onboarding, or the one that comes out smooth because you have said it four hundred times.

Find two things.

When was it last tested. Not asserted. Tested.

And what has to stay true out in the world for it to keep being true. Name the conditions the way she named hers. A benchmark against a specific alternative. A cost that sits where it sits. A rule that has not changed yet.

If nobody can tell you when it was last tested, or nobody owns watching the conditions underneath it, you do not have a problem yet. You have a sentence with an expiration date and no one reading it.

Now step back

That closes chapter five, and it is worth taking one step up from it.

Three issues. Where you are actually looking. What is coming that has not landed yet. What you have that is worth defending, and for how long.

Three separate instruments. Almost every operation I have been inside owns one of them and runs it well.

The book has a name for the state where all three run together, and I have been holding it back until this issue on purpose.

Strategic fluency.

Not one instrument used well. Three, wired, on the same clock.

That also closes Act III, and this series. Next issue is the last one, and it goes where chapter six goes. What happens to all of this when part of the thinking is done by a machine, and who is accountable for the output when it is.

She was more rigorous than the company that stored her answer. She named her conditions out loud and nobody kept them.

Oscar

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