Competitive Advantage - The Human Capital approach

I was asked recently to describe how an organization can use its human capital to create competitive advantage.

I fell into the trap of using Porter’s descriptions and other schemes of describing what it is and how to achieve it and while I was talking I saw eyes glazing over and people losing interest very quickly. I had to find another way to describe competitive advantage and quickly.

The ‘usual’ definition of competitive advantage goes something like this (from QuickMBA):

When a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. The goal of much of business strategy is to achieve a sustainable competitive advantage.

Michael Porter identified two basic types of competitive advantage:

• cost advantage
• differentiation advantage

A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, a competitive advantage enables the firm to create superior value for its customers and superior profits for itself.

That’s an awful lot of big words that really don’t provide a lot of actionable information, especially if you are trying to understand how to use people to create sustainable competitive advantage.

I hit upon the following definition and example and these seemed to stick fairly well…these aren’t mind-blowing but they were effective. My definition:

In order to gain competitive advantage, you must do something different than your competitors in such a way as to make it difficult (hopefully impossible) to imitate.

The above definition was easier for the audience to understand but they still wanted an example to help clarify and solidify what it really means to gain competitive advantage.

After thinking for a few minutes, I came up with the following example….maybe its not the best but it definitely helped the audience get a good grasp of how to use their human capital to create sustainable competitive advantage.

Suppose you’re the owner of an American football team and you’re trying to find a way to ensure that your team wins. What do you do?

Do you…

• Spend millions on the best technology?
• Spend millions on a new stadium?
• Move your team to a new city and hope it works out?

These things might help attract a larger fan base and perhaps bring you more revenue but will they help you win? In football, the superfluous things such as technology,stadiums, etc mean nothing if the team is a losing every game. People won’t pay to see your team play if they lose. So what do you do?

You hire the best coaching staff and players that you can. Your coaching staff spends months (years?) ‘training’ and coaching these players to create a cohesive team that works well together. The coaching staff understands the strengths and weaknesses of the individual players and develops offensive and defensive schemes to take advantage of the strengths and hide the weaknesses.

Now…any other team can imitate the plays that your coaches develop. They can try to imitate the coaching style and the players…but they will fail. Unless they take your players/coaches from you, they will never be able to fully imitate your team.

Your competitors can always try to hire better people and develop better schemes but if you are doing your job as the owner of the football team you should be constantly evaluating your team to ensure that you have the right people with the right training in the right places to ensure success.

The ability to create a unique team is one of the most cost-effective ways to create real sustainable advantage in the marketplace (and in my opinion, the only way).

You can try to use technology, marketing or other approaches but unless you develop those approaches internally they will not provide sustainable advantage because your competitors can use the same approaches to match your every move.

Using the people within your organization to create advantage is one of the most overlooked methods in business today. In most organizations I’ve been a part of, the organization try to mold people to fit the organization rather than create an organizational model that fits the strengths and weaknesses of its people.

I’m planning on expanding on this topic a bit more in later posts by discussing a theory called the Resource Based View of the Firm. This theory states that by creating resource immobility and resource diversity, a firm can create sustainable competitive advantage. Check back for more.