The business world is full of buzzwords, but these two are especially common: competitive advantage. What’s less common, however, is agreement on what creates competitive advantage. 

Matthew Semadeni, Ph.D., a professor of strategy at ASU’s W.P. Carey School of Business, says the answer is simple: people.

“The last source of competitive advantage is people,” he says. “Everyone has access to similar technology – your business partners, your competitors. But there is no long-term strategic advantage outside of people.”

When it comes to managing those people, well, that’s more complicated. “The people issue is really tricky, and a lot of firms struggle with it.”

“The last source of competitive advantage is people.” – Click to tweet

Semadeni, whose research and consulting focus on competitive strategy and innovation, says a large portion of business expense in the United States goes toward human capital.

“Companies are spending an enormous amount of money on people, and rightfully so, because they can be a source of competitive advantage,” he says. “But many companies are not getting the true value for their human capital investment. And that’s often due to problems in company culture.”

When he discusses strategy and culture, Semadeni frames them as puzzles vs. mysteries. “Puzzles are straightforward and static,” he says. “We just need more information to solve them. It’s almost algorithmic in the way you approach them.

“On the other hand, mysteries are very dynamic, with lots of moving parts. Answers can be contingent on factors that are changing. More information doesn’t help you and can even make matters worse,” he says. “Dealing with people definitely puts you on the mystery side.”

Semadeni focuses much of his teaching on those mysteries.

Out of alignment

When culture and strategy clash, there are outward manifestations. Semadeni says that some include:

  • High payroll cost relative to others. “You have to pay people a lot more in organizations with a toxic culture.”
  • Less agility. “Those companies can’t move very quickly. The culture doesn’t give you much flexibility.”
  • Less information sharing and collaboration. “You’ll see fewer new ideas and innovation.”
  • Less loyalty, so higher turnover. “Organizations in freefall turn over the C-Suite several times. People are coming and going too quickly to solve problems.”

Organizations may be able to endure these problems in the short term, such as during an economic downturn when workers are more hesitant to leave their jobs or take risks. “But as the economy improves, people will leave in droves,” Semadeni warns.

“This accelerates that push to the bottom, because just at the moment growth is possible, people are abandoning the organization right at the moment performance could turn around.”  

“If you treat a mystery as if it were a puzzle, or vice versa, then you won’t get a solution.” – Click to tweet

Semadeni says mass layoffs are another indicator a company is out of alignment. “Rather than pruning the tree, you see wholesale layoffs of 5 to 10 percent of their workforce. These large-scale layoffs are often a management failure, an indication they let mediocrity persist.”

‘Embrace the cultural advantage’

So why is the people aspect of organizations such a mystery? Part of the problem is that business schools and courses can overlook it when teaching about strategy.

“If you think about the curriculum in business schools, we spend a lot of time teaching profits-based topics like finance, accounting and operations," Semadeni says. “They are puzzles to be solved, and students like that because they want a right answer,” he says. “On the other hand, if you treat a mystery as if it were a puzzle, or vice versa, then you won’t get a solution. You’ll just spin your wheels and waste a lot of resources.”

“Competitive advantage requires an organizational culture that reinforces the strategy, and a strategy that reinforces the culture.” – Click to tweet

Current and future leaders need to learn how the human aspects, such as motivation and the nature of work, can affect strategy. Fortunately, business schools are acknowledging this more often, and top-level business leaders are paying more attention to human capital, rewarding and incentivizing it.

Organizations that “seek and embrace the cultural advantage” are the ones that will gain a competitive advantage, he says. As an example, Semadeni points to GE’s efforts at leadership development. “They spend a lot of time developing leadership through rotations, rigorous performance evaluations, and other programs. By doing that, they have a robust stable of in-house talent at the ready to pursue new opportunities whenever they arrive.”

“The culture reinforces the strategy,” he says. “And the strategy reinforces the culture.”