Monday, June 7, 2010

Relax? Don't Do It for Competitive Advantage

In the 1982 Boston Marathon, world record holder Alberto Salazar outsprinted fellow American Dick Beardsley to win the "Duel in the Sun", one of the most memorable races in marathon history. Interviewed years later Beardsley said his undoing had been "taking a breather" immediately after he and Salazar had negotiated notorious Heartbreak Hill, the last of the four Newton hills just four miles from the finish of the grueling Boston course. Beardsley recounted how he glanced to his side as the two men crested Heartbreak and saw his rival coasting down the hill, obviously recovering after the tortuous climb through Newton. Beardsley likewise "eased off the gas" in his words until the two men reached the bottom of the grade. At that point both runners kicked up the pace and began the frenetic two mile sprint through downtown Boston that culminated in Salazar pipping Beardsley at the tape in Copley Square. In his interview Beardsley told how in hindsight he should not have relaxed after scaling Heartbreak Hill but should have kept his "foot on the pedal". By doing this Beardsley believed he would have built an unassailable lead on Salazar and would have won the duel in the sun.

Would history have been different if Beardsley had kept his foot on the gas? We'll never know. It does however conjure up an interesting parallel with today's economic landscape and, specifically, the reactions of different business organizations to changes in this landscape. For example, throughout this most recent economic downturn supply chain executives in private sector companies have faced tremendous pressures to protect profits in the face of falling sales through the aggressive pursuit of reductions in all supply chain-related costs. In the public sector it has been a similar story as state governments, faced by steeply declining tax revenues, have needed to drastically curtail expenditures on many state programs. During this period numerous supply chain organizations have delivered outstanding cost savings results that have helped companies stay profitable and states avoid the need to eliminate many essential government services. These success stories have been due to the effective implementation of a broad range of supply chain best practices including strategic sourcing, demand management, and process improvement to name just a few.

As we emerge from this recession and rebounding customer demand eases margin concerns it would be natural to assume that organizations could safely "ease back" on the cost reduction pedal (just as Beardsley did after Heartbreak Hill) and redirect effort towards the customer-facing activities that impact quality and service. Companies making this assumption, however, may be missing a golden opportunity to achieve unassailable competitive advantage over their competitors. By continuing to apply cost management best practices during economic growth periods a company could potentially accelerate away from its competition in terms of operating margin performance. The company with superior operating margin will, through its increased contribution to retained earnings, be able to invest a greater proportion of its revenue in product development activities. Since product development dollars as a percent of sales is a metric that has been empirically associated with share and profitability growth, any strategy that accelerates a company's operating margin advantage relative to its competitors will also accelerate its overall competitive advantage in the marketplace. By keeping firm post-recession pressure on the cost management pedal an organization gives itself an excellent chance to build a healthy lead over its less enlightened competitors in all key areas of strategic, operational and financial performance.

Likewise, public sector entities can also enjoy the benefits afforded by a continued focus on cost management in the post-recessionary period. State governments with procurement departments that maintain a strong strategic sourcing focus, for example, will be able to do "more with less" and expand the reach and effectiveness of their current programs and services without the need to automatically increase tax revenues.

Just as Dick Beardsley can never be certain that doing things differently would have secured him the Boston Marathon in '82, no company can take any business strategy to the bank until events have played out. Numerous other bumps in the road can rise up and unseat the surest rider. But by placing bets on strategies that have empirically yielded superior returns - and those based on maximizing product development investment fall into this category - you will undeniably reduce the probability of ever having to look back and regret your own lost duel in the sun.