June 2023 | 

Competitive Advantage Insights from Nicolaj Siggelkow

Is Competitive Advantage Luck, and Other Insights from Strategy Expert Nicolaj Siggelkow

Tempted by the possibilities of embracing big data, AI, or sustainability? In a recent Wharton@Work interview, management professor and vice dean of Wharton’s MBA program Nicolaj Siggelkow discusses how these new developments offer opportunities for creating a competitive edge. But he stressed that any new strategic choice needs to be built on a solid foundation, which is why the core concepts of the longest-running Wharton Executive Education program, Strategy and Management for Competitive Advantage, which he directs, have remained the same.

Wharton@Work: You have been teaching strategy to executives and MBA students for decades. It’s clearly a perennial topic, but how has it changed over time? Why are companies still struggling with it?

Nicolaj Siggelkow: At one level there is nothing new. Differentiating yourself by creating, maintaining, and sustaining a competitive advantage is not a fad. It’s not going away. You still need to create a bigger gap between willingness-to-pay and cost, and that's your competitive advantage. But how to do it certainly has changed. Connected Strategy [a framework developed by Siggelkow and Wharton professor Christian Terwiesch for creating business models that exploit new technological opportunities], for instance, is new. And there are recent technology developments out there that enable us to create competitive advantages in different ways. That’s the two layers of the program. There is a foundation, which is fundamental principles of strategy that you need to learn and understand, and then there are innovations, new technologies, and new developments that enable us to think about new ways of creating a competitive advantage.

W@W: If you believe business headlines, luck accounts for a lot of success, whether being in the right business at the right time or having a solution that serendipitously finds a problem it can solve. How important is it in creating a competitive advantage?

NS: The question of luck comes up often, and it would be silly to argue that it never plays a role, or that opportunities don’t sometimes randomly arise. But what luck provides is a window of opportunity. The question is, can you actually take advantage of that window? And once you have taken advantage of it, are you able to extend that lucky break into a sustained advantage? If everything was up to luck, we wouldn't see any persistency in profitability. Every year would be random, with returns fluctuating between highs and lows. But that's clearly not what we see in the data. Some firms are able to outperform over a longer period of time. That’s not luck. There are some general principles of strategy that allow firms both to take advantage of good luck and to be less affected by bad luck.

W@W: Was that true in the COVID-19 crisis? Did you see a difference in performance between companies that have a strategy built on those foundational principles and those that don’t?

NS: When we compare the 2008–09 financial crisis to COVID-19, firms in general weathered the latter much better. They understood the importance of cashflow and maintaining operations in a certain way because they had gone through that previous crisis and learned what to do better and how to respond. So yes, good and bad luck happen. But there is learning that goes on that allows some companies to take better advantage of good breaks and determine how to buffer against bad breaks.

W@W: What about new technologies? How can companies incorporate them strategically?

NS: Let’s look at one of the shiny new toys today: big data. Many companies are now gathering a lot of data, but the problem is that they don't really know what to do with it, or even what kinds of data to collect. They pursue it because it’s new and everyone else is doing it, but they don’t know how it will work, so they get frustrated. It doesn’t lead to real results. Instead, they need to start by understanding the foundations of competitive strategy, the foundations of their customer needs and customer journey.

It takes some work and some structure to get to the point of knowing what kind of data you need, and a solution or solutions you can create. Building on the fundamentals of strategy for competitive advantage, your solution needs to be particularly valuable to you because it’s embedded in your system of choices in a different way than it would be for your competitors. That underlying logic can be applied to new domains, including big data, AI chat, and sustainability.

W@W: You mentioned sustainability. Some companies view it today either as something nice that they might want to get involved in, or something that doesn’t concern them. In terms of strategy, does that make sense? Can it be avoided?

NS: I recently started teaching a session in Strategy and Management for Competitive Advantage on environmental sustainability. It comes towards the end of the program because then I can refer to and build on both the core competitive strategy and connected strategy material that we've covered. We can explore how to think about environmental sustainability not just from an efficiency angle, but from a strategic angle, using it to create a competitive advantage.

From an economic perspective, we have to think about it; we don't have a choice. It’s one of those big changes and challenges that come to firms periodically. In the 1990s, it was globalization. All of a sudden, competition became much more global, and we needed to think about where we put our factories and our R&D labs. Companies couldn’t ignore it.

Then around 2007, connectivity, digital transformation, and the internet became really serious. The iPhone was out, and a whole bunch of new applications were possible. Again, firms couldn't just say they didn’t want to deal with it. Environmental changes are the next big wave. Whether you believe in it or not, you can’t ignore it: the natural environment, customer tastes, employees, and investors are all changing.

So it’s coming from many different angles and in many different ways. It’s not a straight line, but neither was globalization or digitization. But it's clear to me that we are on a path that will require a tremendous amount of change, which means that there's a tremendous amount of challenges and opportunities for companies. Sustainability is very much a business issue.

W@W: When you say these issues present opportunities, do you mean they can be a source of competitive advantage?

NS: Think about how connectivity suddenly created new ways of thinking about how to create a competitive advantage and at the same time created a challenge because new companies came in and disrupted markets. The same thing is happening now, but with a new set of issues around sustainability. That's why I felt it was important to include this session in the program, because I truly think it is going to influence strategy going forward.

We are at the beginning, but most companies are at least thinking about it. Almost all Fortune 500 companies now have a sustainability report. But in many companies, it’s just a special assignment. They’ve got a chief sustainability officer, or a department that thinks about sustainability. That's how we started out with digital: companies added an e-commerce division and didn’t think about it further. It’s natural to start small, but that's not where we will end up. Again, it's not a straight line. But sustainability can’t be ignored. Companies who see the opportunity can right now get ahead of that development.