Today’s Businesses Don’t Win on Strategy. They Win on Trust.
New research reveals that being trustworthy is the key competitive advantage of today’s economy
By : Greg Satell; for MEDIUM
While writing my book, Mapping Innovation: a Playbook for Navigating a Disruptive Age, I interviewed several prominent innovators (one of them recently won a Nobel Prize). Though I expected them to be difficult and mercurial, I found myself surprised by their kindness and generosity. They were nothing like the hard-charging “innovator” stereotype.
Leadership research by management science professors Andrew Hargadon and Robert I. Sutton — on companies including IDEO and Hewlett-Packard — sheds some light on this pattern of behavior. According to Hargadon and Sutton, great innovators are essentially “knowledge brokers” who place themselves at the center of information networks. In order to act as that essential conduit, they need to build trust.
A recent report from Accenture Strategy, which analyzed over 7,000 companies, found this effect to be even more widespread than I had originally thought. According to the report, trust “disproportionately impacts revenue” — more than any other single factor about a company. To compete effectively in today’s marketplace, business leaders must build deep bonds of trust through a complex ecosystem of stakeholders.
In Michael Porter’s landmark book, Competitive Advantage, the Harvard professor argued that the key to long-term success was to dominate the value chain by maximizing bargaining power among suppliers, customers, new market entrants, and substitute goods. The goal was to create a sustainable competitive advantage that your rivals couldn’t hope to match. Many of the great enterprises of the 20th century were built with this in mind. Companies like General Motors under Alfred Sloan and IBM under Thomas J. Watson (and later, his son Thomas Watson Jr.) so thoroughly dominated their respective industries’ value chains that they were able to control the market for decades.
Competitive advantage is no longer the sum of all efficiencies, but the sum of all connections.
Clearly, much has changed since Porter wrote his book nearly 40 years ago. Today, we live in a highly networked world. Competitive advantage is no longer the sum of all efficiencies, but the sum of all connections. Business strategy must focus on widening and deepening links to resources outside the firm.
Now, firms like General Motors and IBM need to manage a complex ecosystem of partners, suppliers, investors, and customer relationships. These relationships depend on trust. If one link is broken anywhere in the ecosystem, the others will weaken as well — and business will suffer.
The Accenture study was not originally designed to measure the effect of trust specifically, but overall competitive agility. It looked at revenue growth and profitability over time. Then it incorporated metrics measuring sustainability and trust to draw a larger picture of a company’s ability to compete.
The analysis is wide-ranging, incorporating over four million data points. It also took into account sustainability data from over 50,000 sources to come up with a quantitative “sustainability score” for each company. This score included a proprietary measurement of trust across customers, employees, investors, suppliers, analysts, and the media.
When the analysts began to examine the data, they found that trust metrics disproportionately affected a company’s overall score. For example, a consumer-focused company that experienced a sustainability-oriented publicity debacle lost an estimated $400 million in future revenues. Another company that was named in a money laundering scandal (a major breach of trust with consumers) lost $1 billion.
In today’s severely competitive environment, a major “trust event” — when consumers suddenly question their faith in your team and product — can hamstring operations for years, sometimes permanently.
What constitutes a “trust event” differs by industry. When we think of trust, we tend to think of consumers. With social media increasing the velocity of information, even a seemingly minor incident can go viral and cause widespread outrage — and send customers flocking to competitors. Yet as I dug into the report’s data more deeply, I found that trust matters in different ways for different companies. For example, in manufacturing, media, and insurance, the cost of a trust incident was fairly low. In industries such as banking, retail, and industrial services, the impact could be five to 10 times higher.
The industries most sensitive to a trust event seem to have more complex ecosystems. For example, a retail operation needs to maintain strong relationships with hundreds — and sometimes thousands — of suppliers. Banking, another highly trust-sensitive industry, is a complex ecosystem that depends on the cost of capital. A drop in trust can send costs surging.
Further, in virtually all business to business industries, companies must stay on the cutting edge of a highly interdependent web of goods and services. That requires highly collaborative partnerships with other companies to share knowledge and expertise. Once trust is lost in the business-to-business realm, it’s devilishly hard to earn back and competitors gain an edge.
The trust problem is amazingly widespread. Accenture found that 54 percent of firms in the study experienced some kind of “trust event.” They can originate anywhere: a careless employee, a data breach, a defective product, the list goes on.
“It’s not so much a matter of preventing a trust event,” Jessica Long, who helped lead the study, told me. “The world is a messy place and things happen. The real difference is how you respond and the resiliency you’ve built up through forging strong foundations in the crucial components of competitive agility: growth, profitability, sustainability, and trust.”
Think about Apple, which encountered a number of trust events during Steve Jobs’ tenure. However, because Jobs so clearly demonstrated his commitment to “insanely great” products, the company’s customers, employees, and partners were arguably more forgiving than they would have been with any other company. Or consider, more recently, what happened when two men were arrested in a Starbucks location in Philadelphia. Because Howard Schultz has built a reputation for fairness — he supports his employees in attending and graduating college, for example — and because he acted decisively, the impact was far less severe than it could have been.
The best strategy for building trust is to be trustworthy yourself.
Perhaps the best way to prevent against “trust events” is to build a culture of empathy. When I interviewed innovators for my book, I was most surprised by the fact that many seemed almost as interested in me and my project as I was in them. I could see how this would make others feel more forthcoming toward them, and how it could inspire collaboration. These innovators embodied the trust they cultivate in their companies. Their curiosity gave them the kind of access that led them to solve problems no one else could.
The same is true for profit-seeking companies. The best strategy for building trust is to be trustworthy yourself. Think about how your actions affect customers, employees, partners, and other stakeholders — and treat their success as you would your own.