Home Leadership CA = RA^2

CA = RA^2

by Ron Piccolo

What can modern business leaders learn from Einstein’s Annus Mirabilis papers, published in 1905? Plenty! At a minimum, CEOs can develop a way of thinking about an organization’s resources and potential for competitive advantage in the way that Einstein imagined a physical property’s mass and potential energy.

Let’s recall…drawing from his theory of special relativity, Einstein noted that a physical system has properties of mass and of potential energy, then proposed the equivalence of these two properties in the famous equation: E=mc2 (E=energy; m=mass; c=speed of light). While far more elaborate explanations exist elsewhere, a layman’s summary of Einstein’s theory might go like this: the energy of a system (E) is a function of the system’s mass (m) as shaped by the speed of light (c2), a phenomenon that allows for universal conversion of mass to energy regardless of the unit of measurement.

So how does this apply to strategy formation and execution? Let’s imagine energy in Einstein’s physics as similar to an organization’s competitive advantage (CA), that which advances the organization relative to others. Einstein’s theory of special relativity refers primarily to how bodies move in relation to one another, just as competitive advantages capture the movements of organizations in competition.

For several decades, organizational strategists have sought ways to accumulate resources (i.e., mass) that afford some sustainable competitive advantage (i.e., energy). This approach has assumed some equivalence between resources (R) and advantages, just as early physicists imagined mass-energy equivalence before Einstein’s revelations (see Isaac Newton). However, this approach to strategy formulation and implementation assumes a relatively stable world, one in which an organization survives and thrives based solely on its existing endowments. This mindset assumes that mass can easily be converted to energy and that an abundance of resources equates to great advantages. However, as Einstein discovered, while energy and mass are indeed related, mass does not convert to energy without light. Resources do not translate into advantages without some meaningful force. For Einstein, that force was a universal conversion mechanism that is independent of the unit of measure (e.g., the speed of light, c2). In modern organizations, that force is adaptation and alignment (A2).

Organizations of all types attempt to develop some competitive advantage by exploiting economies of scale, carving out a viable niche, or levering existing capabilities and resources (see Reeves & Deimier, 2011). That is, organizations accumulate mass. However, globalization, new technologies, evolving consumer demands, and political and economic uncertainties around the world have compromised traditional sources of sustainable competitive advantage. Advantages associated with resources or technologies are often short-lived, best practices are easily copied by competitors, and a strong brand image does not consistently translate into manageable costs or higher profits.

Consequently, we are seeing high levels of volatility in most industries and markets. In 1960, the percentage of companies that fell from the “Top 3” rankings in their industries was just 2%. In 2008, 14% of the top companies fell. Since 1980, the volatility of operating margins across industry has doubled. The probability that an industry’s market share leader is also the profitability leader declined from 34% in 1950 to just 7% in 2007. Clearly, being a leader in a particular industry or market segment is no guarantee that revenues, operating margins, or market share will be stable.

For the new world, adaptability and alignment are the forces that turn resources into advantages. Sustainable competitive advantage may no longer arise from scale, positioning, or physical assets (i.e., resources). Instead, as described by Reeves and Deimier (2011), competitive advantage will stem from capabilities that foster rapid adaptation: (1) the ability to read and act on signals of change, (2) the ability to experiment rapidly and frequently —not only with products and services but also with business models, processes, and strategies, and (3) the ability to manage complex and interconnected systems of multiple stakeholders.

Similarly, organizations will realize energy to the extent that processes, structures, personnel, and metrics for success are aligned with sources of perceived value. As I work with one complex education, health and wellness service provider, we are in the process of crafting selection and training tools, incentive plans, performance evaluation systems, and decision protocols that align with organization’s unique and valuable characteristics. In other words, we are trying to create alignment between strategy and structure.

Here’s our modern reality: nearly every industry is commoditized. Substitutes exist for every product and service. Resources by themselves no longer account for advantages (i.e., mass by itself does not create energy). Competitive advantage will be realized when resources are aligned and properly adapted (CA=RA2). Thanks Mr. Einstein!

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