“Competitive advantage” has been the goal and mantra for businesses for decades. But is it possible today? Was it ever possible?
Competitive Advantage came to prominence in the mid-1980s, when Michael Porter’s book of the same name became a best seller. It gained even more currency when Warren Buffett said “…sustainable competitive advantage is the most important thing (I) look for when evaluating a company.” Thus doubly blessed, managers and investors became fixated on competitive advantage. Virtually every analyst searched for it, every annual report talked about it, and every strategy was about finding it, strengthening it, or exploiting it.
The Dangerous Fallacy
There’s only one problem: Competitive advantage and its twin, sustainable competitive advantage, are illusions. Having a competitive advantage — as defined by its various proponents — has nothing to do with superior performance. A business can be quite profitable and successful without having any observable competitive advantages; similarly, businesses with highly lauded competitive advantages can be unsuccessful, even failures.
What’s worse, it’s a dangerous fallacy because it creates confusion — if not total misunderstanding — about why a company is (or is not) successful. Belief in competitive advantage(s) creates complacency (“We have a competitive advantage, so we’re OK”), inertia (“Our competitive advantages will carry us through this crisis”), misplaced investments (brand investments in commodity markets), strategic myopia (Blockbuster’s focus on its store traffic, at a time when Netflix was stealing its customers).
Did Dell have competitive advantage?
Throughout the 1990s, Dell Computer was the poster child for sustainable competitive advantage through “cost leadership,” specifically its tight supply chain. Academics studied it, Dell boasted about it, and analysts used it to boost Dell stock. Consequently, Michael Dell kept on investing money in cost-cutting and efficiency even as the PC industry was being commoditized, and missed out on the growth opportunities in IT services and mobile devices.
So why was Dell successful? In the mid- to late-1980s, Dell offered buyers — initially engineers and technical people — a convenient, cost-effective way of getting the PC they wanted. Before Dell, if an engineer wanted a PC with additional memory, built-in modem card, Ethernet connection, math co-processor etc., etc., he had to buy the pieces and assemble it himself. Then came Dell, and all the engineer had to do was pick up a phone, tell Dell what he/she wanted and, presto, the PC was there.
Dell was in the right place, with the right product, at the right time. The supply chain and focus on efficiency came later, and had little or nothing to do with why Dell was successful — and profitable — in the first place.
In the late 1990s, the situation changed; many of the add-ons — memory, modem, network card, etc. — had become a standard part of the PC itself. When this happened, there was nothing special about Dell — not even price, as other manufacturers had low prices (think Gateway, Acer, eMachines). Dell was just another player in a commodity market. Yet Dell still concentrated on cost-cutting, believing it must be a “cost leader” to succeed.
What Is Competitive Advantage Anyway?
Surprisingly, despite all the attention, there is no standard definition of competitive advantage! So there is no way to know when, and whether, a business has a competitive advantage.
Michael Porter says competitive advantage means having low costs, differentiation or a successful focus (niche) strategy. Competitive advantage, he argues, “…grows fundamentally out of the value a firm is able to create.” Others have defined competitive advantage as “above average returns”, “activities the firm does which create value and which other firms don’t do”, “a higher rate of return”, “distinctive capabilities” and so forth. But you can’t use any of these definitions (other than low costs, differentiation or successful focus) to know whether a firm in fact has a competitive advantage.
You might say, what’s the big deal? Why do I need a standard definition? Don’t I just know when I have a competitive advantage? Isn’t this just nit-picking? After all, competitive advantage is about being better than the other firms — better products, better brands, lower prices, lower costs, etc., etc.
Is advantage about “being better?”
Intuitively, this makes sense: competitive advantage is about being “better than everyone else”. It appeals to our notions of competition as a race, a sport in which “the better competitor won” — Nadal vs. Federer, FC Barcelona vs. Manchester United, the New York Marathon, the Olympics, American Idol, the Eurovision contest, golf tournaments and so forth. From this perspective, competitive advantage has an intuitive appeal: If my firm is better than the rest, I will make more money than the rest.
Unfortunately, intuition is dead wrong: Competition in business is much different from competition at Wimbledon, the World Cup or the Super Bowl. The rules are not well defined, they can change virtually overnight, and there are few or no referees, umpires or judges.
Consequently, managers obsessed with competitive advantage are, at best, playing last year’s game.
Case in point: BlackBerry. As late as 2011, BlackBerry’s CEO was convinced that their superior email capability — its “competitive advantage” — was key, seemingly oblivious to the growth of apps and tablets. More importantly, “being better than everyone else” offers little or no guarantee about making more money, which after all is the goal of strategy.
How do you define your advantage in the marketplace today? How is it changing?
Dr. Milind Lele is the founder of Tangram Solutions, managing director of Strategic Leverage Consultants, and adjunct professor of strategy and marketing at University of Chicago’s Graduate School of Business.