Top economic performers understand their competitive advantage at more granular levels than their peers and use it to derisk and help accelerate growth.
Our recent McKinsey Global Survey of more than 1,250 executives and managers—including 1,002 senior executives—across industries and geographies shows that the majority of their organizations are not actively validating or managing their competitive advantage.1 Companies that are top economic performers,2 however, are much more likely to try to understand, validate, and use their competitive advantage in their decision-making. In this article, we examine what they do and why it matters.
Signs that current competitive advantages are eroding
Eight in ten respondents are at least somewhat confident that their organizations understand their competitive advantage across the markets in which they operate. However, many question how stable it is. The majority also report that their organizations do not truly understand how and why they achieve competitive advantage, nor do they validate it with external data at the market level.
Despite their confidence in their companies’ current understanding of competitive advantage, one-third of respondents believe the nature of their competitive advantage will significantly or completely change over the next five years, including the areas of competitive advantage and the bar required for actual differentiation
An organization’s economic viability is, at its core, dependent on its competitive advantage, and many respondents believe their organizations will need to rethink their core business models in the near future to stay competitive: Seventy-nine percent of respondents expect their organization will need to moderately or significantly change its business model in the next three years to remain economically viable. This implies that the nature of competitive advantage is shifting in those industries.
Respondents see trends from outside their industry, rather than just increased competitive pressures from “the usual suspects,” as the greatest threat to their current competitive advantage. More than 40 percent of respondents cite trends from outside their industry or risks posed by new market entrants, such as tech players, as the biggest threats. By comparison, only about one-quarter of respondents believe the main risk is from existing peers outperforming them on their current areas of competitive advantage—implying that competitive advantages are undergoing changes more profound than a simple acceleration of business as usual.
According to the findings, increased uncertainty is also putting organizations’ current competitive advantages at risk; this uncertainty is limiting their ability to define scenarios that would help them set strategies that defend or extend those advantages. More than half of respondents say their organizations would be unable to address the current degree of uncertainty by using only one or a few distinct scenarios. In fact, 11 percent even say that the context is so uncertain that they could not identify even a broad set of scenarios that would encompass their business context, consistent with other research we have done showing the rise in uncertainty.
Top performers distinguish themselves by better understanding, validating, and deploying their competitive advantage—and these differences offer three practical lessons other companies can apply to help create growth.
- Understand the drivers of your economic performance at a granular level, not at the aggregated enterprise or business unit level. Early signals of an eroding advantage can be averaged away, increasing the odds that a company might be late to respond, which can both drive up costs and increase the chance of losing to better-informed peers.
- Validate your assumptions about your company’s competitive advantage through external data, including data from outside your current competitor set. As the rate of change and uncertainty continues to accelerate and industry barriers erode, assumptions that served you well in the past might be breaking down. Technologies such as AI can make validation a more feasible task than in the past, allowing more markets to be scanned and analyzed with greater frequency. This can prevent an organization from wasting resources on trends in decline and provide data to highlight potential biases and assumptions that might be holding you back.
- Inform your investment decisions with a market-back view of what drives your performance, checking with customers about what they value and are willing to pay more for as the landscape changes at a market level. Understand the difference between a general strength and one that actually wins you business, and use this to inform your resource reallocation to break away from the “last year plus or minus 5 percent” rut that many organizations are stuck in, which erodes competitive advantage and reduces the return on your investments.