As my colleagues and I developed our model for Return on Innovation, we saw three sources of attractive returns. They are:
1. Differentiation leading to sustainable competitive advantage. The return comes from customers preferring your offer over the competitor’s (more revenues) and paying a premium for it (higher margins).
2. Neutralization of a competitor’s current competitive advantage. The return comes from being able to compete in more sales opportunities than you previously could (leading to incrementally more revenues, but not better margins).
3. Productivity leading to better overall profit margins. The return does not come from any change in competitive advantage but rather from your ability to accomplish the same outcomes with fewer resources.
Note the difference between the first two goals, neither of which correlates to best in class. Differentiation requires you to be unique in class or “beyond the class.” Unless you escape from the norms of the category, you cannot gain sufficient bargaining power to drive increased sales and higher margins.
By contrast, neutralization requires only that you make it “into the class,” that is, meet the minimum market standards for an acceptable performance. Once you have, you can check this item off your list, and your competitor has lost the leverage it once held.
Best in class falls between these two goals. It is not sufficiently differentiated to be unique, and thus it does not create bargaining power. But it goes well beyond the minimum acceptable standard, which means you have spent a bunch of resources beyond what you had to and achieved no economic return for so doing!
That’s why “best in class” is a sucker bet.
In essence, best-in-class projects should be classified as waste. That is, they are competitive advantage projects that aim too low. They do achieve some level of differentiation, but it is not enough to create the bargaining power with customers that leads to higher revenues and margins. In effect they are a form of corporate entertainment whereby teams enjoy the moral authority of a lofty-sounding objective but in fact have no accountability for any measurable economic outcome.
Darwin will not be fooled.