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Adaptive business and competitive advantage

Richard Parker
This is a post by Richard Parker

Research, Strategy, Marketing, Insights

June 10, 2020

You’d have to have had your head in the sand for the last few weeks to have missed the shed-load of opinion out there on what will and will not change long-term due to COVID-19. My view is that less will change than we think (cough cruise industry, cough). But whatever your opinion, what’s clear is that nobody really knows, and the one thing that businesses can do right now - apart from be responsive - is be more adaptive. 

This isn’t new thinking. Back in 2011, the Harvard Business Review stated: 

"Sustainable competitive advantage no longer arises exclusively from position, scale, and first-order capabilities in producing or delivering an offering. All those are essentially static. So where does it come from? Increasingly, managers are finding that it stems from the “second-order” organizational capabilities that foster rapid adaptation. Instead of being really good at doing some particular thing, companies must be really good at learning how to do new things."   

The basic thinking was that as the world became more unpredictable, businesses could no longer rely on the traditional sources of competitive advantage and instead would need to focus on being more nimble and adaptive. And COVID-19 has definitely accelerated the unpredictable. 

So what does this mean for marketers? 

Well what is doesn't mean is throwing out decades of learned knowledge with the bathwater. We know distinctiveness works. We know differentiation works. We know fame works. We know behavioural economics works. And all of this will still work. These aren’t shibboleths so much as truths based on timeless human psychology.  

But we do need to be much more adaptive in the way we use this knowledge.  

This means getting our data houses in order (if your data isn’t organised around data-as-a-service principles, it really should be!). It means re-thinking the way we set budgets (zero-based budgeting is gaining traction because lots of businesses which have gone dark can switch budgets back on in a more granular way and test impact).

It means a greater focus on experimentation – experimentation around media channels, messaging, experience. It means re-thinking what an ‘effective’ campaign looks like - after all there is no such thing as a like for like period any more, and it’s nigh on impossible to adjust for coronavirus. 

But to do all of this, it means businesses need to get better at reallocation of resources. McKinsey research  shows that 83 per cent of senior execs recognise that strategically shifting resources is perhaps their best lever for growth, more even than M&A or operational excellence.

But the average reallocation of capital year to year is an only 8 per cent, and a full third of businesses reallocate just 1 per cent of their capital annually!  The same piece of research found that 90 per cent of CAPEX allocation is highly correlated with last year's CAPEX allocation.

Basically, instead of pulling on what they themselves  acknowledge is their most important lever, most execs leave resourcing to run on. And if your resources are the same as last year, chances are your activity will be the same as last years’ too. 

What is the effect of this inertia?

Well the companies that do actively reallocate resources deliver, on average, a 10 per cent return to shareholders, versus only 6 per cent for what McKinsey call a 'sluggish' reallocator. That’s a massive difference. 

So if you haven’t done it already, now could the time to put resource and budgets into new ideas and new thinking. After all, we might not know what the next few months will bring, but the chances are companies that can be more adaptive will recover fastest.