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The 6th Dimension of Competitive Advantage

high jump photoThe previous blog entry is incomplete.

There is a sixth dimension for ever-increasing competitive advantage. This sixth dimension is a firm’s capabilities to improve. Along this dimension, there is an infinite supply of possibilities, thus firms do not compete in a state of scarcity. However, a firm must provide the environment and the tools conducive to sustainable improvement.

A firm’s culture (accepted behavioral norms) must support all employees in their pursuit of the implementation of improvement ideas. And improvement methods must be ingrained in daily habits at all levels of the firm from the frontline to the executive suite. All employees should be “on alert” to continually seek out, find, and implement improvements with positive financial benefits. A firm has the accountability to establish channels for the thousands of improvement ideas to be vetted, integrated, and executed with a high degree of coordination.

The truly advantaged firm develops or adopts innovative ways to improve at least one step ahead of its competitors. The concept of first to market applies here. The first among industry competitors to successfully implement an effective improvement method will gain significant advantage. The first to find the holy grail, a truly sustainable improvement method, will achieve long term sustainable advantage.

So, 6 dimensions exist for ever improving competitive advantage not just 5. The sixth being the capability to improve in advance of all others.

Ever-Improving Competitive Advantage: Hitting the 5 Dimensions

Mario Andretti Watkins Glen 1974A firm exists in competitive environments along several key dimensions. Each dimension (or metaphorically, a competitive marketplace) has its own set of competitors acting in their own self-interests. In each dimension, the players compete for scarce resources (customers, marketshare, industry profit share, people, investments, etc.). A firm improves by increasing its competitive advantage along each dimension. These 5 key dimensions are:

  1. Customers
  2. Financial capital
  3. Talent
  4. Extended value chain or value network
  5. Community

A modern approach to improvement:

  • Covers all dimensions simultaneously.
  • Is integrated, holistic, sustainable, high impact, and a whole slurry of other buzzwords
  • Allows improvement ideas from everyone within a firm to fit somewhere, which draws in full participation (“Full Force Improvement”)
  • Has a goal to enable a firm to constantly ever increase its competitive advantage (as in any Olympic athlete who continually strives for better performance)

To gain ever-increasing advantages, a firm must be, or must be perceived to be, more attractive than the competition.

  • Customers
    • This is what people usually think of when they hear competitive market.
    • A firm competes with other firms in the same industries.
    • More attractive offerings (products, services, innovation)
    • More attractive value proposition (benefits versus cost)
    • More attractive long term relationship
  • Financial capital
    • Here the firm competes for limited investment dollars from investors and creditors
    • Competitors include those seeking any number of investment alternatives for investors: stocks, bonds, commercial paper, cash, etc.
    • Gain advantage by providing more attractive financial returns than alternative investment vehicles available
    • Being more attractive in the stock market drives up stock price
    • Being more attractive in the credit market increases access to capital and lowers the cost of capital
  • Talent
    • The competitors are other employers that require the same skills, experience, and knowledge that a firm requires.
    • The other employers can be from similar, adjacent, or different industries.
    • Competitive advantage includes providing a more attractive work environment, richer total compensation (salary, benefits, wealth creation), and other elements that make a firm a “great place to work”
    • For example, firms like NetApp (Fortune’s 2009 “Best Place to Work”) have an advantage in attracting the best talent.
  • Extended value chain or value network
    • The extended value network includes business partners on both the supply side and the demand side: suppliers, service providers, channel partners, and so on.
    • Good partners are in short supply and a firm gains advantage by being a more attractive partner than other players in the market.
    • Example, Dell is one of the leading channel partners for hard disk drives. Drive manufacturers constantly compete to have their drives picked for the next PC that Dell assembles.
  • Community
    • A firm can gain competitive advantage over others by demonstrating stellar corporate social responsibility.
    • Communities desire firms with a strong sense of CSR.
    • Firms can realize significant tax benefits from state and local governments.
    • CSR also impacts other dimensions such as talent (the feel good factor).

An effective and sustainable improvement approach must be directed towards continually gaining competitive advantage along the 5 key dimensions. A firm can never rest nor ignore others in its ecosystem. The firm must marshall its employees and those in its extended value network to execute strategies for Full Force Improvement.

Knowledge Architecture

Slide3

Not all knowledge is created equal.  Knowledge is one of those vague, global terms of which people assume they know its definition.  Very seldom in conversations about knowledge or learning will someone raise a hand and ask, “Hey, what is knowledge anyway?” unless he is Aristotle or some philosophy major.  One can postulate that there are different types of knowledge.

A hierarchical structure is one method to use to classify knowledge.  We show here a knowledge architecture that has seven levels: null, data, facts, know-how, memories, wisdom, and connections. Notice that the model begins with a state known as “void”. In this state, even the recognition of nothing does not exist.

Each layer of the hierarchical knowledge architecture is separated from other layers by a specific type of insight. Insights differ according to the particular level of knowledge on which they are acting. Seven insights elevate knowledge through the hierarchy: instinctual, definitional, contextual, utilitarian, experiential, reflective, and networked. The progression of insights up through the hierarchy represents increasing sophistication in thinking with “connections” as the highest order of knowledge.

Void + Instinctual Insight = Null

We see “instinctual insight” acting on the void to create null, the first layer of knowledge. This is the base level of knowledge. Null emerges from void as primal instincts create an awareness of one’s environment. This level of knowledge is deemed null because this level is the level at which simple consciousness of existence or non-existence occurs. Expressed another way, null takes on a binary state, 1 or 0. In the void even this simple a consciousness does not exist. Note that null represents the “whole” as within Zen philosophy.

Null + Definitional Insight = Data

We see “definitional insight” acting on the null to elevate knowledge into data. At this level, thought processes give definition to objects and actions in the null. In other words, definitional insight labels a collection of unnamed and unidentified things so that distinctions are drawn between them. Each object or action is now defined and becomes data.

Data + Contextual Insight = Facts

“Contextual insight” acts on data to create facts in the next layer in the hierarchy. Facts represent a richer and fuller set of knowledge than pure data. For example, if we take the word “coffee” as data there is no context for what coffee actually means. Given some context such as the commodities trading market, coffee takes on the meaning of a traded good. If food service is the context, then coffee takes on the meaning of a beverage. Contextual insight allows distinctions be made between data to create different facts.

Facts + Utilitarian Insight = Know-how

“Utilitarian insight” acts on facts to create know-how. How is an object to be used and for what purpose? In our coffee example, utilitarian insight emerges to provide the know-how for what to do with coffee. In the commodities market context, know-how would be how to trade coffee on the spot or futures markets. In the food service context, know-how would be how to prepare coffee for consumption. Without utilitarian insight, coffee has no real value. Simply speaking, utilitarian insight provides the knowledge of utility.

Know-How + Experiential Insight = Memories

“Experiential insight” acts on know-how to create memories. Actions taken or the execution of know-how generates experience that can be remembered and used for improved execution. Following the coffee example, experience in making coffee enables a barista to remember how much foam to put on top of a latte.

Memories + Reflective Insight = Wisdom

“Reflective insight” acts on memories to create wisdom. Reflection works on a “meta-plane” of thinking and takes on a new layer of abstraction in the knowledge hierarchy. Insights are not simply generated on single points of execution but on a set of memories. For example, remembering how to make a latte is a memory but being able to forecast demand in a coffee shop during the course of a day takes wisdom. Wisdom emerges as a person can take a step back to reflect and learn from prior actions and decisions.

Wisdom + Networked Insights = Connections

“Networked insights” act on wisdom to create connections, which represent the highest order of knowledge in the hierarchy. Making connections links related or unrelated pieces of wisdom to generate knowledge that would not emerge otherwise. For example, connecting the preparation of a perfect latte to the film “Seven Samurai” in which one of the samurai has dedicated his whole life to perfect his skills as a swordsman represents connecting two topics that on the surface are completely unrelated. Networked insights create connections that drive thinking further and generate the highest order of knowledge, connections.

At what level of knowledge do you work most of the day? At what level do you believe your colleagues, subordinates, and superiors work? Do you drive yourself to think at higher levels within the knowledge hierarchy? At what level do you believe you can add the most value to your work group or your organization during times of large-scale change?

Knowledge Age Economics

Knowledge Economics

What are the new laws of economics in the knowledge age?  In the manufacturing age, the quantity of goods or services demanded and subsequently supplied determine the price of goods or services.  The laws of supply and demand dictate at what price and quantity the economy operates most efficiently – the point of equilibrium.

Manufacturing Age Economics – Physical Assets

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In the information age, the laws of supply and demand still apply.  In a true knowledge economy, knowledge and information are demanded and supplied. The economic system finds equilibrium. However, there exists a fundamental difference between economies based on physical assets and those based on knowledge assets.

Knowledge Age Economics – Knowledge Assets

Slide2

The shape of the knowledge demand curve follows the same path as the manufacturing demand curve. The more one piece of information is demanded, the more value the market will place on that knowledge asset (directly proportional).

The shape of the knowledge supply curve, on the other hand, does not follow the same principles as the manufacturing supply curve.  For a manufacturing supply curve, the price of a physical asset decreases as its supply increases (inversely proportional).  For a knowledge supply curve, the price, or value, of a knowledge asset increases as its supply increases (directly proportional).

The knowledge supply function in this economic model is based on three principles.

  1. The more information on a subject that exists, the more it is valued.
  2. Knowledge follows a law of conservation. As knowledge is consumed, it does not disappear as a physical asset does. Rather, knowledge has infinite duration. (Side note: In physics, this law is known as the conservation of information. There also exists the information paradox which some physicists have argued exists at the singularity of a black hole. As matter collapses in a field of infinite gravity, does the information stored in atoms disappear?)
  3. As knowledge is utilized, more knowledge is generated.  Two pieces of knowledge come together to form new knowledge. The production of knowledge is an infinite, self-perpetuating process.

Equilibrium in the knowledge economy is achieved when the supply curve perfectly overlays the demand curve. As a result, an infinite number of equilibrium points occur.

What are the shapes of the supply and demand curves for the output of your industry?  What are the shapes of the supply and demand curves for the output of your business? Do you or your organization develop and distribute knowledge that follows the knowledge supply curve? Have you fully leveraged the new paradigm of supply in the knowledge age?

Harmony in Economic Transformation

yingyang

Segregation of Work and Integration of Knowledge

Economic tides are shifting.  Industries based on physical assets are losing the economic high ground to industries based on intellectual assets.  We are in a time of massive, large-scale change and transformation – a transformation where we have one foot in the manufacturing age and one foot in the information age.  Major changes drive our transformation including the deployment of advanced technologies, the emergence of true global enterprises, and the uncertainty of the world’s political environment.

Different strategies and operating methods are required for maximizing economic value in the information age than in the manufacturing age.  The tried and true method of the manufacturing age is the segregation of work, also known as the division of labor exemplified by Henry Ford’s assembly line.  As we accelerate through the information age, time will show that the segregation of work by itself is no longer the ideal method for maximizing economic value.  In the information age, market leaders will successfully integrate knowledge through collaboration, utilization of transparent information technologies, and the leverage of strategic resources in a firm’s value network.

During the present transformational era, we have a duality of mission given the duality of existence in both the declining manufacturing age and the emerging information age.  The integration of knowledge must coexist with the segregation of work in order to achieve true maximization of economic value.  Senior executives must lead organizations into a new paradigm of information transparency, shared accountabilities, and communal benefit yet balanced within a culture which still values individual excellence.

Transformations do not just happen.  Leaders must manage their organizations through the uncertainties. Especially now in an era of mass consolidation, downsizing and restructuring, senior executives run the risk of rushing to a false “safe harbor” promised by the operating models of our past.

What is your current operating model and where is it headed?  How many of your people work in segregation of one another?  How many contribute to the integration of knowledge?  How will you manage harmony between the segregation of work and the integration of knowledge?  Where do you find equilibrium?  How do you spend your day?

Risk and Change

Risk-Change Matrix

People love control and abhor chaos.  Yet most of our daily lives are filled with uncertainty and change.  The first step to maintaining a sense of order amidst the chaos is awareness of change and awareness of the type of uncertainty (risk) with which you are faced.  An understanding of the current state of your environment will inevitably benefit you in your quest for control.

To aid awareness of the chaos-control state of your environment, we can use the simple matrix shown here.

Type of Environment

Type of Risk

Static

Dynamic

Deterministic

1. Certain, stable state

“Business as Usual”

3. Certain, changing state

“Transformation”

Stochastic

2. Uncertain, stable state

“Non-linear”

4. Uncertain, changing state

“Chaos”

Risk is broken down into two types: deterministic and stochastic. Actions and decisions in a state of deterministic risk produce outcomes that are linked to past and present known behaviors in the system. In other words, future system behavior can be predicted with certainty based on the knowledge of previous outcomes. We label this state’s risk as “certain” but one must realize that this is an extreme case. Nothing is ever certain but to serve the purpose of this matrix we assume that this deterministic state can exist.

Stochastic risk is risk that has uncertain outcomes, outcomes that are not necessarily linked to past history of events or occurrences. Probability does play a role in the stochastic state. Expected outcomes can be used in decision making with the understanding that the past does not play a strong predictive role in system behavior. One can look at this state as one of a complex, non-linear system. Decisions and actions can cause completely unexpected system behavior.

Environment is also broken down into two types: stable and dynamic. Stable environments do not change in the short to medium term. Drivers of a business’s state are relatively constant. For example, an industry’s competitors, customers, and suppliers are not undergoing major changes or shifts in relative power.

Dynamic environments are undergoing major changes that could be caused by industry consolidation of suppliers, customers, and/or competitors. Other drivers of dynamic environments are disruptive technologies that enable disintermediation or cause obsolescence of particular products or services.

Looking at the 2×2 matrix formed by type of risk and type of environment, we see four possible states for a business at any one time.

1.   Certain, stable state

  • Future system behaviors can be predicted by prior, historical behaviors
  • No disruptive change is occurring on the business’s landscape
  • “Business as usual” characterizes this type of environment

2.   Uncertain, stable state

  • Future system behaviors cannot be predicted by knowledge of past responses to decisions and actions
  • No disruptive change is occurring on the landscape
  • “Non-linear” characterizes this environment

3.   Certain, changing state

  • Future system behaviors can be predicted by prior, historical behaviors but only on a short time horizon given the dynamic, changing industry state
  • Disruptive change is occurring on the business landscape that might or might not be caused by an executive’s own business
  • “Transformation“ characterizes this environment

4.   Uncertain, changing state

  • Future system behaviors cannot be predicted by knowledge of past responses to decisions and actions
  • Disruptive change is occurring on the business landscape that might or might not be caused by an executive’s own business
  • “Chaos” characterizes this environment and presents the greatest challenge to an executive’s decisions and actions to be taken by an organization

Where do you see your business?  Would others agree with you?  How do you conduct your daily life and under what assumptions about the state of your business? Where are you the most comfortable?  Where are you the least comfortable? Is your business properly prepared to thrive in its current state? What about your competitors?

The 5 I’s of Change

Much has been written about major change and transformation efforts in organizations. But what roles within organizations are actually critical to successfully achieve transformational goals?  The simplistic answer is “change agents”.

But in order to provide a more tangible definition of change agents, here is a taxonomy for the various types of knowledge workers that can be applied when considering the formation of transformation teams.  This taxonomy goes beyond examples of profession and vague, global descriptions of knowledge activities.  The classification of knowledge worker types takes a process view – what knowledge workers do.  Five classifications of knowledge worker comprise the taxonomy: (1) initiators, (2) innovators, (3) integrators, (4) implementers, and (5) instigators.

5 I's PictureAll five roles must be filled by an organization undergoing major transformation and change. A balance must be struck dependent on which stage in a transformation lifecycle the organization moves. Importance must be placed on the “personality profile” of a transformation effort and all its contributors.

Initiators create knowledge through “original thinking” and trigger step-change breakthroughs in new paradigms and new business models for the transformed business.

Innovators modify, refine, and build upon ideas to generate new knowledge that go beyond the initiator’s work.

Integrators aggregate, consolidate, synthesize, and broker existing knowledge to develop holistic, systems views.  These holistic views provide new perspectives and insights.

Implementers apply, utilize, and execute the “know how” within an intrinsic knowledge base.  Implementers unleash the tangible, extrinsic value inherent in knowledge – value that is unreleased until applications are realized.

Instigators challenge ideas, old and new, throughout the knowledge process.  They drive out-of-the-box thinking as well as ground new ideas, innovation, integration, and implementation in the harsh realities of feasibility and viable economic returns.  Instigators say “Yea” and say “Nay.”

So what?  Determine the team personality required for each stage of the business transformation lifecycle.  “Profile” potential members based on individual personalities as demonstrated by past behaviors.  Develop and manage a fine balance of personalities through the change process.  Introduce new members/personalities as required.  Visibly recognize and reward specific team members for playing varying roles.