Read an Excerpt
CHAPTER 1
Competitive Advantage
Building a Supply-Based Framework
ADVANTAGE: any state, circumstance, opportunity, or means especially favorable to success, interest, or any desired end.
BUILD: to construct (something, especially, something complex)
by assembling and joining parts or materials.
If you don’t have a competitive advantage, don’t compete.
—Jack Welch, former CEO of General Electric
‘‘Our strategic goal is to deliver sustainable competitive advantage through supplier selection and management.’’ The words rolled off Carlo Soave’s tongue (as they had rolled off mine many times before) as he addressed a
P&G Purchases’ training class for new purchasing hires in Brussels, Belgium.
At the time, Soave was the Purchases vice president for the Fabric and
Home Care global business unit and overall leader of chemical sourcing for all of P&G. (Today he is a nonfamily CEO of a family-owned Italian nonwoven fabric producer, Albis.) Five concepts come together to define the business problem posed by ‘‘sustainable competitive advantage.’’ Let’s examine them one by one.
Concept 1: Sustainable Competitive Advantage
It wasn’t until later that I questioned what the phrase ‘‘competitive advantage,’’
especially sustainable competitive advantage, really means. Several ideas come to mind including value, capabilities, and innovation, and how they relate to marketplace competition. While researching this book, I quickly discovered there is no universal definition of competitive advantage and a more important, no agreement on the term ‘‘sustainable competitive advantage.’’
Some say that all competitive advantage is temporary and as MIT Sloan
School of Management professor Charles Fine once said, the faster the industry
‘‘clockspeed’’ (rate of change), the more temporary it is.
As with many strategic concepts, sustainable competitive advantage emerged in 1985 in Harvard professor Michael Porter’s discussion of basic competitive strategies, although he neither discussed nor defined the concept in depth. Its meaning evolved to focus primarily on a company’s distinctive a mostly internal, intangible capabilities like management skills, core competencies a ability to innovate, plus some tangible assets like financial strength a physical capital, and externally visible intellectual capital (patents, trademarks a etc.). These capabilities were viewed relative to which capabilities or resources one company has that its competitors do not.
Thus, a simple definition of sustainable competitive advantage becomes
‘‘an advantage that enables your business to survive against its competition over a long period of time.’’1 Easily duplicated aspects drop out, leaving something that is:
> Unique.
> Superior to competition.
> Sustainable.
> Applicable to multiple businesses or situations.
> Hard to copy.
These attributes allow a disproportionate contribution to shareholder value, open doors to new opportunities, and include implicit, not just explicit a knowledge.
While many companies see the customer facing implications of competitive advantage like branding (P&G), customer service (Nordstrom), shopping experience (Target), or shopping convenience (Amazon), it is the unique, difficult-to-replicate, broad application aspect of sustainable competitive advantage that allows supply to be an important source of competitive edge.
Establishing unique relational assets—bonds between firms and their customers, suppliers, and comarketing partners—is one of the most difficult business tasks to replicate. Customer relations are frequently cited as an advantage a but the ability to develop intimate supplier business relationships is extremely difficult, in part because suppliers are typically viewed as part of the firm’s cost structure, not its assets. Too quickly the goal becomes squeezing money from suppliers, leveraging volume to get lower prices. Such financial advantages are hardly unique and can be duplicated. The adversarial mindset that this creates is not conducive to suppliers becoming a sustainable competitive advantage for many companies. Instead, short-term savings equate to temporary advantage. The challenge is sustainable advantage over time, leading to a second major concept.
Concept 2: Value
At P&G, George Perbix, the father of modern purchasing, defined purchase of ‘‘total value,’’ the combination of price, quality, total system cost, supply assurance, service, and supplier R&D, as supply’s real goal. Like beauty, value often lies in the eyes of the beholder.
The traditional measures of supply value are cost, quality, and service.
Academics, consultants, and practitioners alike go on about value chains and the ‘‘value-add’’ at each step along a supply chain. But the everyday low-cost value proposition of Wal-Mart is not the same as the value proposition of a
Target or a Nordstrom’s. So, just what is value anyway and how does it relate to competitive advantage and, in this book, supply-based competitive advantage?
A simple definition results in a basic value equation:
V = P ÷ C
where V is value, P is performance of the product (good and/or service) as seen by the customer, and C is the total cost of ownership from the customer’s viewpoint.
The Numerator: Performance
Performance is more than just how the product works, typically including components like quality, delivery, speed to market, and easy availability along with postpurchase service and customer satisfaction response. It also includes intangible factors like corporate reputation (supply chain ethics, legiti-mate ‘‘green-ness,’’ and overall corporate ‘‘persona’’); emerging customer expectations and needs—the unknown component that ongoing end user research and contact must determine (innovation); and other factors that can truly matter in the course of business.
In January 1995, Kobe, Japan, was hit by a massive earthquake that devastated the city. P&G’s Asian headquarters were located on a small island (Rokko Island) just a short elevated train ride off the coast, near Kobe. The power of the quake cracked P&G’s twenty-six-story building (constructed to earthquake standards) from the ground to its top floor, causing significant internal damage. A number of us, including then Director of Asia Purchases
Jim Dempsey, had left Kobe the afternoon before the earthquake for China a and awakened to CNN videos of the destruction on Chinese television. The rest of the story is Jim’s.2
Dempsey and his key lieutenants booked flights back to Osaka. What they found was devastating. P&G’s offices were not usable. Worse, the quake eliminated all transportation on or off Rokko Island, destroying both the elevated train and the roadway bridge. An enormous number of P&G employees and expatriate families were trapped on the island with no way off. The company was able to rent a small tug boat on which a few leaders, including then
Asian President, current CEO, A. G. Lafley, and Dempsey traveled to the island to attend to their employees.
That’s when a Japanese supplier of contract packaging placed a cell phone call. Its parent company had a small ship and offered to take all the
P&G people, their families, and salvageable possessions/luggage off the island.
The local government (and P&G) had not been able to find any other way off and, given the quake-damaged infrastructure, the situation was becoming critical. The supplier ferried the people and possessions to Osaka in three trips. They made no request for payment. They didn’t just drop the people at the Osaka pier, either, Dempsey recalls. They rented a building and served food and drink to the hungry and tired refugees.
The supplier’s president got up and gave a brief welcoming speech (through an interpreter) that had enormous impact on the P&G people. He
said that he wanted to welcome them, that his company was very happy to help, and that he understood how they felt because his own house was gone a lost in the quake as well. When your organization is knocked out of commission a the ability to get back up and running is critical to withstanding competitors’
situational advantage. The key to staying focused is to have your people and their minds on the business. This supplier provided enormous value on both fronts—rescuing P&G’s people took away many immediate worries, and focus on rebuilding the business could begin.
An interesting aside to this story is that months later, after completing the construction of a Chinese plant for P&G’s business expansion, the business changed. P&G canceled the product launch (for good business reasons).
The supply contract allowed P&G to cancel without penalty, leaving the supplier with an empty plant and significant economic disruption. A newly appointed procurement leader in China, without the background, began to do just that. But Dempsey and several other Asian managers stepped in, related the story, and supported the supplier. As a result, the two companies went outside the contract to reach a fair settlement. Value comes in many forms and can flow both ways.
