The Future of Competitive Advantage
By Doug Stephens
As you prepared for work today, did you do so with the belief that your company was working to save humanity? If you’re like the vast majority the answer would be a resounding “no”. But my intention here is to convince you that your company does in fact, have the power to do just that. The power to save humanity.
But you’ll be relieved to know I’m not going to present my argument as a moral pleading. Your company, like most, exists to generate sales and profit. And that’s a good thing. So instead, I’m going to present you with a business case. One that lays out not only how your company can change the course of humanity but more importantly that it may have little choice but to do so. Because without knowing who you are or who you work for, I can say without reservation that your retail enterprise has something in common with every other in our industry. And that is that you compete.
Today more than ever before, regardless of of what you sell, you have competition. And for about the last 80 or so years the primary avenues of competitive strategy have been tactical things like customer service, selection, convenience, price and product exclusivity. When those haven’t worked, some companies have turned to other means like mergers and acquisitions. But for the most part, the lines of competitive advantage were clearly drawn and understood.
The New Era
But I am here to tell you that today we stand on the cusp of an entirely new era of competition. One in which we will see these current and comfortable competitive pillars crumble, give way and be replaced by a new (and much needed) set of competitive pillars. Pillars that are already being laid in place.
For example, if in 1994 someone had told you that by 2024 competitive advantage would mean that retailers begin producing their own fuel sources, you’d have thought they were crazy. However, as I write this, Amazon is doing just that. In a partnership with Plug Power, Amazon is now using an electrolyzer in its Aurora Colorado warehouse, turning water into green hydrogen. Hydrogen that is being used to power the hundreds of forklifts and tow motors at work in that facility. It’s all part of the company’s push toward the goal of net-zero carbon emissions by 2040. But before you jump to the conclusion that Amazon is simply doing a solid for the environment, it’s important to understand that while the price of green hydrogen today exceeds that of carbon-based fuels, that is projected to be reversed by as early as 2030, with green hydrogen becoming not only more efficient but also more cost effective than carbon-based alternatives. An innovation that, at scale, will afford Amazon a formidable, long-term cost advantage over its rivals.
More remarkable perhaps is that in this one move, Amazon has managed to do three important things; it’s introduced an asymmetrical competitive tactic that steps outside the norms of conventional retail strategy, thereby throwing its competitors a knuckleball. Secondly, it’s built the potential for a long-term advantage in the sense that producing hydrogen is not simply something competitors can easily replicate or reverse engineer as doing so requires an intrinsic organizational mindset and learning curve. Thirdly, and perhaps most importantly, it’s a tactic that contributes to repairing a broken societal system – that of course being the damage done to our natural environment by fossil fuels.
And this all got me thinking.
How It Started
The retail world we see around us today in all its enormity, is not accidental. It didn’t just magically happen. Rather, it is the direct product of a unique and historic set of societal systems that were established almost 80 years ago beginning in 1945, on the heels of the second world war. That is where the fuse for today’s retail economy was lit.
With fascism defeated, the fresh breeze of democracy swept across most of the developed world. Bipartisan governments in allied nations worked steadfastly to reconstruct their economies and the lives of returning soldiers. It was a period that saw unprecedented investments in education, training, housing, job creation and domestic industry.
In my home country of Canada so many military vets returned from war and enrolled in higher education that the campus of the University of British Columbia had to install converted army huts to house the overflow of students. Government subsidies such as family allowance – cash payments to families with children – were established. Free government hospitalization benefits were legislated and loans for small business startups flowed freely. Investments in the growth of domestic industry fostered historic numbers of jobs with rising wages, benefits and worker protections.
And Canada was not alone. Similar levels of support for postwar reconstruction played out in almost every allied nation, ushering in an era of mass prosperity and opportunity.
By the 1960’s the prospect of attaining higher education, home ownership, family creation and job security had become basic expectations for most. Sustained government investments in public education were creating an unparalleled flow of students into universities and colleges, capitalism leaned into the middle-class raising the fortunes of the average worker, public investment favoured domestic industry and growth, and productive, bipartisan governments earned the trust of the vast majority of citizens. People could see their government actively working on their behalf. Sure, there were policy differences among conservatives and liberals, but they were minor compared to the collective political will to improve the lives of the average citizen.
The year 1962 alone saw the birth of retail giants like Walmart, Kmart, Kohls and Target.
One key byproduct of all this optimism, growth and economic security was babies. Lots and lots of babies. And by the early 1960’s the biggest portion of the largest generation in history was between 5 and 15 years old. The crest of a wave that demographers would later label the baby-boom. A population explosion that would ignite the beginnings of our modern retail industry. From appliances, apparel and toys to lawnmowers, piano lessons and pets, families wanted and could afford more of everything. Consequently, the retail industry burst at the seams!
The year 1962 alone saw the birth of retail giants like Walmart, Kmart, Kohls and Target. Outside the United States a similar level of explosive growth in spending manifested with hundreds upon hundreds of brands being born, many of which remain household names to this day. New shopping malls, strip plazas and stores were built to accommodate the sea-level change in family spending. Retail had only one problem and it was a good one to have. That being keeping up with demand. It was a truly remarkable period of retail growth that reverberated well into the late 1970’s and early 1980’s.
So, if you’re a retailer who’s been around for more than a few decades, you were the direct beneficiary of this remarkable period. Because of it, you have been provided with a steady stream of trainable, educated workers, rising disposable incomes, burgeoning domestic growth and job creation as well as the political stability afforded by a productive and trusted democratic system of government.
How It’s Going
Flash forward to today and the picture has changed. Once strong bi-partisan government mandates have been replaced with increasing tribalism, partisan dogma and invective. Agreement is scarce, even on the most bread and butter issues. As a result, politicians have little of consequence to show for their time in office, which has led to a widespread lack of trust in politicians of all ideological stripes. Even more shocking is the growing lack of public confidence in democracy as a governing structure. More than a third of Canadians, for example, claim to be dissatisfied with democracy. A metric that rises to a staggering 60 percent in the United States – heretofore a country self-described as “the world’s longest standing democracy”.
In a few short decades, we’ve gone from a world where education, home, family and material possessions like automobiles were packaged expectations, to today where young people are having to choose which of these they will forgo.
Much of this distrust in our politics is rooted in economics. Because we’ve come from an era where if a retail company did well in any given year, frontline workers might receive a tidy Christmas bonus. To today, a place where any available bonuses are reserved for executives and shareholders. A place where wages no longer rise with or above inflation but have lagged woefully behind inflation since the 1990’s. In Canada for example, the median annual wage of approximately $54,000 hasn’t budged in more than 30 years, when adjusted for inflation. A condition experienced to similar extents in most developed economies. In short, capitalism ceased to work for the average worker and began dispensing almost all of its gains at the top of the food chain.
In a few short decades, we’ve gone from a world where education, home, family and material possessions like automobiles were packaged expectations, to today where young people are having to choose which of these they will forgo. Which they will have to give up on.
Take housing for example. While wages for most have stagnated, real estate values in most major global cities have skyrocketed, forcing many to leave the dream of home ownership behind. That’s really bad news if you’re The Home Depot or any other home improvement retailer.
Birth rates too are plummeting as many young people either delay or forgo the cost of childrearing entirely. A catastrophic trend if you happen to sell baby clothes, formula or strollers.
Rising fuel and insurance costs are putting automobile ownership out of reach for many, which spells disaster if you happen to sell auto parts or build toll roads.
In sum, we’ve gone from a place where the swelling tide of capitalism raised all the ships to a system that offers only yachts for the wealthy and life rafts for the rest.
When I attended university in the 1980’s, you could cover your post-grad tuition with a part-time job. Today a full-time job and tens of thousands in loans barely buys a B.A. as tuition increases have far and away outpaced both wages and inflation. In large part because government investment in public education has all but dried up, forcing most Western academic institutions to ratchet up tuition costs while entreating more students from wealthy international families to pick up the tab. Thus, education is now a privilege available primarily to those who, it can be argued, need it the least and out of reach for those in our society who would benefit from it the most. But the punchline is that even if you manage to scrape together an education, it likely won’t prepare you for the dynamic and fast-changing work environment you’re entering. Indeed, a shocking percentage of executives surveyed today say that graduates often lack even the most basic academic skills to prepare them for their careers. The upshot is that unlike the 1950’s, 60’s and 70’s, college and university enrolment today is dropping, as kids question the pain-to-gain ratio of higher education.
From call centres to computer programming and even fast-food ordering, we’re now offshoring even the most menial and low-paid jobs to anyone willing to work for less than a living wage.
Where we once invested in our own domestic businesses and products, today we travel far afield in search of lower and lower prices, racking up monumental trade deficits in the process. For the last 30 years China has been the world’s factory. For the next 30 it will be India. After that Africa and any other place where modern slavery remains acceptable. And if it were only goods being imported it might not be so bad. Today it’s also labor. From call centres to computer programming and even fast-food ordering, we’re now offshoring even the most menial and low-paid jobs to anyone willing to work for less than a living wage. In return we’ve decimated a once-robust middle class, filled our oceans with plastic and our closets with petroleum-based garbage that will be out of style next year.
And for retail, there is no longer a trusted, bi-partisan, democratic structure working for the common good. No more equitable system of capitalism raising the prospects of the average consumer. No more robust and widespread domestic investment or job creation and no more steady stream of bright, educated workers filling the ranks of our industry. Retail has become a job reserved for those who are either just passing through or have nowhere else to go.
Crisis Meets Opportunity
At this point, you’re probably not feeling tremendously inspired. But you should be. Because what I have just laid out before you, while dismal and dire, are actually the pillars of the new era of competitive advantage. Pillars that a small fraction of enlightened companies are already working to incorporate into their strategies. Because these businesses have awakened to a profound reality. That the era of corporations selfishly extracting value from our societal systems is over. Not because of some sort of new corporate consciousness but rather because these systems have nothing left to give. We’ve bankrupted them.
Consequently, we have crossed over into a new era where competitive advantage will come, not through further extraction of value but rather, through contribution of value. An era that will be marked by a historic rethink, the green shoots of which we are just now beginning to see emerge in the landscape.
Rethinking Democracy
It might surprise you to know that business has a vested interest in maintaining a healthy and functioning democracy. Because as it turns out, democracy is good for business. As author and educator Donald Savoie put it, “A free-market economy is not possible without democracy, and democracy is not possible without healthy public institutions.” In other words, democratic institutions create the essential conditions for a free and fair market. A market where anyone with a good idea can succeed and where no limits are placed on their success. Healthy democracies ensure a system of equal opportunity where one need not be the child of an oligarch to occupy the C-suite. In short, capitalism loves democracy and democracy thrives when capitalism works for all.
Therefore, it stands to reason that rather than spending billions lobbying against government, rendering it feckless and ineffective, retailers would better serve their own interests by partnering with government to jointly affect social and economic progress. Indeed, government and retail can and should be friends with benefits. Private-public partnerships afford governments speed to market, a leveraging of corporate expertise and enhanced levels of public trust. For retailers, such partnerships open new business opportunities, enhance brand reputation and mitigate risk by giving them a seat at the table when regulatory measures are developed.
Case in point: CitizenShipper, a US based company best described as an Uber for freight transport, created a competitive advantage by working with the United States Department of Agriculture to streamline the process for USDA animal transport certification for their network of drivers. This allowed CitizenShipper to become the number one pet transport company by marketing the USDA designation as a differentiator. In return, the USDA gained credibility by ensuring more animals are safely transported, earning them enhanced public trust as a government body. This is only one example of how private-public partnerships produce clear benefits for business but also work to restore trust in the effectiveness of our democratic institutions.
Rethinking Capitalism
I never thought I’d live to say this, but Walmart may well be rebuilding the American middle class. From raising starting wages for store associates to offering stock grants to store managers, Walmart has clearly been rethinking its view on capitalism. They’ve realized that unlike 200 years ago, the owner/investor no longer shoulders the majority of risk and is therefore not solely entitled to all residual returns. In today’s public market, with millions of shareholders, each holds only a tiny fraction of the total risk to capital. Put another way, if the Walmart stock in my mutual funds drops by a percent or two it won’t send my entire life into a tailspin. However, if a Walmart in Lincoln Nebraska shuts down it may indeed be life altering for its employees. Today, it is employees who shoulder most of the risk in retail corporations. It’s employees who can lose everything. Fairness would then dictate that employees should receive their fair share, if not the lion’s share of returns on positive corporate performance.
Walmart is not engaging in charity but making a shrewd investment that will pay for itself many times over.
And fairness matters. Studies have shown that equity and fairness boosts employee productivity by at least 25% and employee retention by just as much. Yet distressingly, only 18 percent of workers in a recent world-wide survey feel they are treated fairly by their employers.
All this is to say that by raising the fortunes of its workers, Walmart is not engaging in charity but making a shrewd investment that will pay for itself many times over. But I also believe Walmart has recognized something else. It’s realized that given its sheer size, by suppressing wages it has single-handedly driven a huge swath of the American middle class into the working class, thus stifling the spending power of its own target customers. If it were to stay the course of the old era, those working-class employees would fall further into the underclass. And the underclass is not a great target market.
Rethinking Industrialism
In the 1980’s General Electric was among those leading the exodus of Western manufacturers to Asia in search of lower labor costs. Today GE is repatriating a significant percentage of their production back to North America and creating tens of thousands of good paying jobs in the process. Why? Because they’ve recognized that the supply chain responsiveness and flexibility gained by doing so yields a lower total cost of production. In plain English, they save money by paying more.
But GE, as with Amazon and their hydrogen project, realizes something else. Institutional investors will no longer subject their capital to undue risks brought on by rampant labour offshoring and environmental destruction. The investment community now seeks the safe harbour of companies who maintain tight control of their operations and environmental footprint, two things that become increasingly difficult to guarantee as businesses push their labour, production and logistics further afield. By bringing production and labour home, companies are also recognizing dramatically lower logistics costs, reduced inventory and waste, better quality control, a smaller carbon footprint and better protection of intellectual property – not to mention lowering their exposure to geopolitical instability. All things institutional investors are increasingly insisting upon.
And GE is only one of many companies driving the reshoring and nearshoring trend. A recent study by A.T. Kearny noted that “…American, Canadian, and Mexican nearshored and reshored industrial production efforts are continuing to take market share away from manufacturers in low-cost countries and regions—including mainland China.”
Rethinking Education
Target Corporation is paying university tuition for more than 300,000 of their employees. But don’t mistake this move as a simple act of generosity. Making employees smarter is a smart business move because it does two things. First, and perhaps most obviously it makes them fundamentally more capable and productive at their jobs but secondly, as Target itself has experienced, it dramatically reduces employee turnover, delivering a net cost advantage back to the company.
…we will witness the rise of what I see as being corporate academic institutions, where a Walmart University, for example, will hold equal, if not superior status to Ivy League Universities.
Likewise, Google is now offering programming certifications via Coursera for a mere $49 per month, making affordable and efficient education available to more people without the burden of debt. But in the process, Google is also creating a proprietary talent pool from which to pick new programmers rather than simply depending on the same stream of MIT and Stanford grads every other tech company is vying for. So just like Amazon, Walmart, GE and Target, by creating a competitive advantage Google is also contributing positively to society. Offering people education without the mini mortgage of debt other students are incurring.
I, for one, fully believe that within a decade we will witness the rise of what I see as being corporate academic institutions, where a Walmart or Google University, for example, will hold equal, if not superior status to Ivy League Universities. These accredited corporate academic institutions will provide tuition free, world class education to those who commit to working for the company for a defined period, offering a combination of solid academics and applied and real world on-the job-learning. The net result will be yet another asymmetrical competitive advantage in the form of a proprietary flow of well-educated and highly capable workers filling the ranks of these companies, while their competitors dredge the bottom of the academic swamp. And if the prospect of a Walmart or Amazon University sounds far fetched, it’s worth remembering that our modern public education system had its earliest roots in educating workers to fill the ranks of 19th century factories.
Full Circle
There’s another important aspect to education that I’d be remiss in failing to mention. An educated public is more likely to maintain a healthy and stable democracy. The two go hand in hand, which feeds the virtuous cycle that our society and future prosperity depend on.
The bottom line is this: the future of competitive advantage is not about shaving another tenth of a percent off labor costs by offshoring. It’s not simply a new cool store makeover. And it’s not about replacing people with robots or AI. The future of competitive advantage is a mindset. One based on the clear-eyed recognition that we, as an industry, have reached a critical fork in the road, where there is more risk in adhering to the status quo than there is in rethinking it entirely. As I often say, futurism isn’t about guessing at the future we get. It’s about engineering the future we want.
Engineering Your Future
I began this piece by saying it wasn’t a moral pleading but a business case, and I hope you feel that I’ve made that case effectively. But now I’d like you to put your corporate goals aside and think about yourself. Think about your family and your community. What do you want for them? I suspect it includes a stable political environment, a living wage, an education and the opportunity to thrive. To live in a country that is advancing economically and an environment that is clean, healthy and sustainable.
Well, what if by building these new competitive pillars today, you were also engineering that very future? And what if every executive in this global colossus we call the retail industry felt the same? Just imagine the future we could build.
And if you feel that’s naïve thinking, I’ll offer you this – if the retail industry was big enough and powerful enough to cause the societal damage it has, it is also implicitly powerful enough to repair it. Powerful enough to save humanity.