To create value, cannabis companies will need to navigate their way through a maze of possibilities
As outlined in Chapter 2 of our series, building a successful business in the emerging cannabis sector begins with the creation of a coherent strategy for sustainable and profitable growth. However, a winning game plan alone is not enough. A company needs a combination of processes, tools, knowledge, skills and behaviours that rivals can’t match. An enterprise’s competitive position rests on this reinforcing system of differentiated and high-performing capabilities which management can leverage in pursuit of strategic paths.
The blossoming cannabis industry presents a particular challenge to executives as they enter this critical next phase of development; there is so much opportunity in the nascent market, so many directions companies can choose to follow. Irrespective of the chosen path, there are two federal and 13 provincial and territorial regulatory frameworks undergoing rapid and simultaneous change, generating uncertainty for businesses about which capabilities will be essential.
The dynamic nature of the industry is forcing cannabis players to adapt more quickly than traditional companies in other sectors of the economy.
As highlighted in Chapter 1, many cannabis companies see opportunities everywhere and are utilizing their access to relatively inexpensive capital to pursue numerous avenues simultaneously. In so doing, they’re spending significant resources to build or acquire non-strategic enablers that won’t necessarily defend against future competition and drive shareholder returns, but may further dilute their organizational focus.
Rather than pursue a range of enablers, management should instead accurately define the enterprise’s critical capabilities that will drive differentiation and market success. Without taking this time and effort to identify their differentiating capabilities, companies may try to “cover all their bases” by aggressively pursuing investments across the value chain. Other companies may become hamstrung by market uncertainty and refrain from making necessary investments out of concern to not waste resources.
In either scenario, business models are being built without paying sufficient attention to the differentiated capabilities that will bring their strategy to life. As a result, these companies may lack the flexibility necessary to respond to tomorrow’s market and regulatory developments.
Making strategic choices and identifying critical capabilities at an early stage is a difficult process for most business owners because it involves rejecting some opportunities. But this step is essential in the creation of a sustainable and coherent business. Management needs to determine what are critical “must-haves” and what are ancillary “nice-to-haves”, understanding that the latter can eventually be outsourced. It is difficult to be world-class in everything, so identify what is the durable differentiator.
For cannabis companies specifically, some of the questions that can direct investment in core capabilities include:
- How do agricultural assets contribute to our continued competitive advantage?
- What R&D capabilities are critical to driving our innovation agenda?
- What is the most efficient way to manufacture our products?
- How does branding and marketing drive our overall success?
- What is our route-to-market? How do we protect our position?
Once critical capabilities are identified, companies need to build the reinforcing system to create and sustain their competitive advantage.
Selecting the capabilities that are most important to your organization and making them world class will be key to long-term success. These should be kept internal and the focus of strategic decisions. For non-core activities, it will likely be more prudent for management to partner or outsource rather than to build.
One key to success at this stage is recognizing that the cannabis marketplace will remain fluid for some years, so businesses must remain flexible to change.
A new reality
At a time when investors have shown they’re willing to pour billions of dollars into companies preparing for the soon-to-be legalized adult-use cannabis industry, it may be difficult for executives to hold back and apply a critical eye to their enterprises’ true differentiators. Being first to market is not in itself a sustainable competitive advantage. It is essential for cannabis companies today to take a more discerning approach to the deployment of capital, and to focus investment and organizational efforts on building the capabilities needed for long-term success.
In the upcoming Chapter 4 of our cannabis series, we focus on the importance of having the right technology systems as part of the critical capabilities to drive long-term business success.