Time to re-think your business: “Competitive advantage” no longer exists

social media raceBy Dr. Milind Lele, {grow} Community Member

“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?

milind leleDr. 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.

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  • Dr. Lele, oh how I love this blog post and hope many will engage because to a sales person, this is crucial to winning opportunities.

    Firstly, if you try to satisfy everyone, you’ll end up satisfying no one. So, competitive advantage is all about what specifically you do that makes you unique (valuable) within your specific market and more importantly, market segment and specific customer. Is it product, service, marketing ?????? or all of the above. Is it penetration with social media activity or generally adopting new ways to get the message out??

    We’ll, IMHO it’s all of the above with one very, very specific additional thought. “Declarative Differentiation”. Every business (think customer) is different, even if they are in the same market and fundamentally sell the “same” thing, What one must understand clearly is what is it you provide that uniquely addresses the specific and important customer needs/wants that drive their buying decisions. Once you’ve reached that point, segmentation of markets to find those prospects who have the same unique issues is much easier. And, the outcomes are far more satisfied and happy customers (along with bigger deals and less “price” commoditization).

    The beauty of effective social media execution is that it helps quickly define, identify and address those “best” customers/prospects. Not only by being explicitly aware of the “now” but also to see the trends going forward to stay on top of evolving markets/opportunities.

    Specifically, regarding Blackberry, this is an interesting case study (dear to my heart) about “milking the cow (without feeding) till it died”. Email and phone capabilities are their biggest differentiation, no question (arguably they were the best email client and the best mobile “phone”). But, what they missed is that email use has significantly declined over the past few years from the number 2 smartphone use demand (next to phone) to number 5 (phone declined as well). They missed this market shift. The impact of Social Media killed Blackberry because they did not understand (or accept) the declarative reasoning behind the shifting demand for smartphones. Then, once their natural enemies created products that addressed email and phone (on top of the SM functionality), there was (is) no recovery.

    So looking forward to other comments to this post!!!!

  • Milind Lele

    Steve: Thanks for sharing your thoughts and kind words about the post. You hit it on the head with “… Uniquely addresses the specific and important customer needs.” The key word here is “unique”; if you’re the only coffe shop within 20 minutes in a crowded location, you’re going to be successful (at least as long as people drink coffee). You don’t HAVE to be good (but it helps), you DO have to be unique.

  • Kristine Allcroft

    In the world of social media, I think the term “thought leadership” has replaced “competitive advantage”

  • A thought provoking post. I was wondering what you thought of Rita Gunther McGrath’s The End of competitive Advantage?

  • Milind Lele

    I haven’t looked at it thoroughly, but on first glance very similar to what I wrote in my book, Monopoly Rules, in 2005!

  • Absolutely. Your analogy is a great one. You also won’t get everyone who wants a “drink” but you will get all of them who want coffee.

  • Teresa Chow

    So we’re back to “unique proposition”. I see a difference between “competitive advantage” and “unique proposition”. The fundamental question that defines “competitive advantage” is “who are your competitors?” Get that wrong, the self-assumed advantage is also wrong. Unique proposition is more focused on what a company can offer to its customers that no other company can and such capabilities are unique to that particular company.

  • Milind Lele

    Teresa: My position is that “unique” or “competitors” don’t matter. if you are the “Only” coffee shop in town, it doesn’t (reallY) matter if you serve mediocre coffee. I either drink your coffee or suffer. What’s interesting is that many companies are profitable because IN THEIR CUSTOMERS MINDS they are the only game in town. For example, people drive past Dunkin Donuts to pay more at Starbucks!

  • Teresa Chow

    Point taken. Then market condition plays a deciding role. If the market favors a particular player, either on grounds of government policy or supply and demand, thus making the favored player the only game in the market, it will be profitable regardless.

  • Professor Lele,

    Don’t you think there is competitive advantage in size today? We keep seeing examples of Kodak, Blackberry, Nokia, Blockbuster, etc, who lost their competitive advantage, but we rarely hear about companies such as Wal Mart, Microsoft, Exxon, etc. who have maintained their competitive advantage over the years. How have they done it?

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