Competition & Advantages

A subscriber request

Friends,

Seven days ago, as we concluded the MBA course staple that is Prahalad and Hamel’s notion of core competence, I wrote that we today would discuss Michael Porter’s (in)famous five forces. However, they will not be coming to your inbox for another week.

Why, I hear absolutely nobody ask? The reason is a subscriber request.

Over the last few months, we have broken down a number of frameworks and models that, almost without fail, claim to create a competitive advantage (although I have carefully attempted to avoid the term as far possible). Of course, this is rather unsurprising; in the world of strategy, besting the competition in some respect is often considered so obvious as to not even need explicit mention. Many prominent thinkers would go so far as to argue it is the entire point of the exercise.

Yet despite its ubiquity, what is more precisely meant by the locution is very rarely defined. This presents an obvious and indisputable problem; if competitive advantages indeed are the most important dimensions of strategy, it stands to reason that their measurement too would have to be of utmost importance. Measurement, in turn, that would require definition to at all be possible.

It is this conundrum that provoked the original question. The subscriber, who has asked to remain anonymous, had been tasked with creating a founding strategy that would deliver a competitive advantage for a new business venture. Whether it had was a matter of some dispute.

WTF is a competitive advantage?

Unfortunately, as alluded to above, there is no universally agreed-upon definition of the term to be found in doctrine that one can rely on to give verdict. Although this is a prevalent flaw in business discourse in general – the effectiveness movement in marketing, for example, has, as I detailed together with Andrew Willshire in Strategy in Polemy, language gaps so vast one could sail a fleet of adtech company yachts through them – it presents a particularly pressing issue for strategy given the frequency with which competitive advantages are argued to be the very raison d’être of the craft.

There is admittedly a certain theme: ‘superior value creation’. But it does not take much critical enquiry to realize that this merely opens up another set of questions. Value as defined in what terms? To whom? When? How?

To illustrate, value can (as Richard Rumelt notes in What in the World is Competitive Advantage?) be considered a simple sales revenues vs costs equation. Yet ‘cost’ comes with all kinds of issues, not least in relation to scarce resources. Value can also be seen as ‘supernormal returns’ measured by market-book ratios (e.g., ROIC, ROA or Tobin’s Q), but again, just like with cost, each ratio brings its own set of problems.

The question of the baseline against which the advantage exists provides further obstacles; should one measure against shareholder or industry analyst expectations, a narrow set of competitors, the vertical or industry as a whole, or even the general economy? What about the value perceived by buyers, to the degree that one can measure such a thing?

Then, there is the dimension of time. Does competitive advantage mean, so to speak, winning the game or does it translate to having enough distinctive physical, human or organizational resources (more on that in a fortnight) to maintain a beneficial position in it?

Some authors (such as Michael Porter) have argued that a competitive advantage should be judged solely on its strength against competitors during the precise moment the judgment is made, while a sustained competitive advantage should be measured over longer periods of time. But how long is longer? More often than not, the answer appears to be whatever arbitrary cherry-picked interval behooves the present argument. Handy for authors, significantly less so for us practitioners.

Others, such as Jay Barney, have claimed that a competitive advantage arises when a value-creating (your guess is as good as mine) strategy is not simultaneously implemented by any current or potential competitors. Said competitive advantage is considered sustained when the strategy is not simultaneously being implemented by any current or potential competitors and these firms are unable to duplicate its benefits either today or at any point in the future. This line of reasoning is even more difficult to take seriously; it relies on an assumption that whoever is edictally deciding whether the advantage is sustained would be able to not only look into the inner workings of any and all present competitors, but also those who have yet to even be founded!

Round and round it goes

It is, as Christopher Hitchens liked to say, enough to make a cat laugh. Foresight is, of course, very much on par for the course. Almost all interpretations of competitive advantages as deliberately designed by strategic planning view competitive dynamics as more or less linear – easy to understand and predict. In reality, as Burgelman and Grove detail in Let Chaos Reign, then Rein in Chaos, all companies eventually face nonlinear strategic dynamics that overwhelm their capacity for strategy-making. Such dynamics are inherent to the complex adaptive systems in which they act.

I digress.

The larger point is that competitive advantages, on one hand, are argued to be the keys to success and something which one can create and possess. On the other, they are simultaneously only visible in retrospect, thus tantamount to success itself, and by nature temporal. This, as Jeremy Klein also has observed, is entirely circular logic. If competitive advantages are, as Porter says, ‘at the heart of financial performance’, but also synonymous with superior financial performance, financial performance would be at the heart of financial performance.

And the problems continue.

There is the issue of the grounds of competition itself. Beyond the potential dangers of focusing too much on it, some (typically those higher up the organization) will believe the unit of comparison to be firms, with products merely being their ‘expressions’. Others (typically those closer to the customer and conceivably also the customer herself) will hold that the unit of comparison is products and that the competition between firms simply is an aggregation thereof. Each of these interpretations will inevitably lead to drastically different definitions of competitive advantage – and views on what the strategy therefore should do (with a contextual caveat of whether advantages are seen as matters of discovery or invention).

What is the verdict?

I could go on, but I suspect it would probably be superfluous (anyone looking to dig deeper can click the links that I have provided). The more pressing matter is where it all leaves our fellow strategist.

Well, whether their work in fact did create a competitive advantage or not is impossible to say, given that (as we have established) there is no consensus on what the term means. However, we can draw a couple of conclusions that might allow us to prevent similar situations in the future, or at least temporarily limit room for interpretation.

Firstly, any strategists looking to build an advantage should start by defining precisely what it entails, how it will be measured and why it matters. Most industries have dimensions that are thought to be more important than others, and one can either play the game or attempt to change it. Either way, clarity is key. Whether any supposed expert agrees with the definition is irrelevant as long as it works.

Secondly, to the extent possible, one should ignore the notion of sustained competitive advantages – their practical existence is always a lot more fleeting than theory would have you believe. As I have written many a time before, all companies act on a time continuum between inception and demise, and plenty of factors force them to evolve along the way. All advantages that come to exist will therefore eventually cease to exist. One may (indeed should), of course, have longevity in mind, but be careful not to confuse a grand vision with tunnel vision; doing a lot of things well is often better than doing one thing brilliantly and everything else poorly.

A not-so-insignificant but

But there may be a point to doing away with the concept of competitive advantage entirely, as provocative a suggestion as that certainly will be to some. To paraphrase Klein, strategy is chiefly a matter of how actors consciously or unconsciously seek to change firms’ performance, whereas competition is the process by which the performance becomes relative. Although many theories of strategy are more easily understood as theories of competition, they are not the same thing.

While keeping track of what competitors are doing can be a worthwhile effort, incessantly comparing oneself to them can make the organization reactive instead of proactive, and ensure that established technological, economic and cognitive rules remain unchallenged as key success factors for extended periods of time. This can lead to subsequent strategic inertia for incumbents, but also challengers ending up playing games they are ill-equipped to win despite deliberate attempts to avoid it. By instead seeking, for example, continuously improved resilience and profitability, one can end up in a place where the relative positions of competitors become significantly less relevant.

Over the next two weeks, as we cover Michael Porter’s five forces and then the resource-based view of the firm, we will find reason to come back to competitive advantages. With the issues highlighted today thanks to the subscriber firmly in mind, we should be able to add yet another layer of nuance to our analysis.

Until then, I wish you a lovely weekend.

Onwards and upwards,
JP