Playing To Win

What End of Advantage?

It’s Time to Look at the Evidence

Source: Roger L. Martin, 2022

I think I’ll throw up if I am told one more time, as if it is gospel, that in the modern world of business, especially in the technology sector, competitive advantage is fleeting. It is time to subject this notion to the scrutiny for which it calls, which I will do in my 17th Year II Playing to Win/Practitioner Insights (PTW/PI) piece: What End of Advantage? You can find all previous PTW/PI here.

Cool Sounding Nonsense

Some ideas sound so cool that they build momentum and gain credibility even if there are more counterfactuals to the idea than evidence for it. The notion that competitive advantage has gone from long-lived in the olden days to fleeting in the modern age is a prime example. It has been helped by playing nicely into a more generalized fallacy, which holds that the era in which we are currently living is more fast-moving and volatile than any prior era. On this front, I love the quote that management theorist Henry Mintzberg frequently shows during his talks:

“It is not too much to say that in these respects more has been done, richer and more prolific discoveries have been made, grandeur achievements have been realized, in the course of the 50 years of our own lifetime than in all the previous lifetime of the race.”

You would think (other than some quirks of language) that this was a quote out of some 2022 Silicon Valley futurist: “Oh wow, it is so VUCA — like nothing before.” But that quote is from 1868, in a Scientific American article waxing eloquent on the technological revolution brought about by lightbulbs, trains, and telephones. Sensible people could argue about whether things were more VUCA in 1868 than they are in 2022 — but regardless of the facts, people in both eras were/are certain of their truth. My belief is that people will always think the current time is more VUCA than any previous time because we know now how all previous times played out — thanks to history books — and we don’t know how what is going on now will play out.

Mangling The Past

However, there is a failproof method for convincing yourself that the current is far different than the past. It is to twist the past into an unrecognizable pretzel. In this case it is to argue that in the past, competitive advantage involved engaging in actions that gained competitive advantage, and then not changing/adapting/improving as the industry and competition evolved and adapted around you. That approach apparently used to work all the time, like clockwork — though there is zero evidence provided for this assertion. And it is further implied that management scholars (unnamed of course) used to advocate for this approach — get competitive advantage and then do nothing — though I have never been able to find one who has written a single word to that effect.

Let’s look at an example of “stable competitive advantage” from the past. Take P&G’s Tide detergent. It was launched in 1946 to be the detergent for a game changing household innovation: the automatic washing machine. Tide had great new detergent technology that was suited for this new form of washing, and P&G cleverly made sure that it was difficult to buy a washing machine in America without it coming with a free box of Tide detergent. The combination of a great product and a clever gambit for gaining trial gave Tide the early lead and that is why big boxes of fluffy Tide detergent powder still dominate the shelves today — because in that era, all you had to do was rest on your laurels.

Oops. You can’t find a single big box of that original fluffy Tide detergent powder in all of America and haven’t been able to for decades. The closest you can get on that front, if you look hard among the bottles of Liquid Tide and tubs of Tide PODS, is a box of compacted Tide powder, which probably contains bleach and is suitable for cold water washing. The reason you can’t find that original is that in the 76 years since its propitious launch, Tide was compacted for ease of transportation and consumer convenience, was converted to liquid for further ease of use and better performance, had bleach added for convenience and still better performance, had softener added for the same reasons, was reformulated to be effective in cold water to save energy costs and help clothes better maintain shape and color, and was transformed into uni-dose pods to dramatically increase convenience and effectiveness. No laurel was rested on at any time during the 76 years.

But this fantasy about competitive advantage in the past creates a wonderful contrast with the present, when if you are to neglect to change, adapt, and improve, as, according to the theory, P&G, Walt Disney, etc. neglected to do in the past, you will be crushed by changing industry definitions, new forms of competition, and technological change. Hence, we have now seen the end of competitive advantage. In the new world, you have got to stop doing what you did in the old world and instead continuously change your strategy — otherwise you will be annihilated.

Checking the Evidence on the Present

OK, so there is zero evidence that competitive advantage was stable and required no effort in the past. Now, let’s look at the evidence about competitive advantage being fleeting in the present. To explore this question, I thought I would look the durability of advantage at the 20 highest market capitalization companies in America — from #1 Apple at $2.8 trillion to #20 Pfizer, a mere piker at $279 billion. Interestingly, seven of the top eight are tech companies — the ones where advantage is, according to the theory, the shortest-lived.

I think it is fair to argue that if you make it onto that list, you have to be pretty good and possess some sort of advantage. Maybe there is some hype in those valuations (I am looking at you, Tesla), but their value is amazingly high. The median market/book ratio for the group is 6.6, as compared to the S&P500 of 2.8 — a mammoth difference. (Ratios from Yahoo Finance).

To test the theory of the disappearance of competitive advantage, I looked at the duration for which they have followed largely the same strategy with their core offering/suite of offerings. The theory would suggest that that duration would be very short. To test fairly, I took a tough stance to err to the side of underestimation when calculating the duration of advantaged strategy. For example, I counted the Exxon Mobil duration of current strategy as only since the merger of Exxon and Mobil, even though it is arguable that neither strategy changed with the merger. And on Apple, I only counted since the launch of the iPhone, now its biggest product, even though if Steve Jobs were alive today, he would argue that Apple’s strategy didn’t change one iota since his return in 1997, making Apple’s strategy duration 25 years rather than the 15 years I credited it for. And I did a similar thing with Microsoft, starting the clock with the launch of the Azure cloud business, even though the core strategy of Microsoft in personal computer software has been both consistent than not since its foundation in 1975 and cloud still makes up less than 40% of revenues.

If there was a seminal change in strategy, I started the clock at that point, for example for Berkshire Hathaway when Warren Buffett took over as CEO and for NVIDIA when it entered the Graphics Processing Unit (GPU) space that it now dominates. For P&G, I could have counted 185 years because its strategy hasn’t changed markedly since company inception, but I just arbitrarily set duration as the launch of Tide 76 years ago.

Even with these tough judgments, the median duration of these advantaged strategies as of 2022 is a lengthy 36 years — over a third of a century! And that is the end of competitive advantage? Really?

And please, let’s not have the always popular but specious tech-is-completely-different argument. The median of those seven is 18.5 years and going strong! There, duration is understated because some of them (e.g., Facebook and Tesla), while following consistent strategies, just haven’t existed for long and thus have among the shortest durations. But I bet that in five years, the duration for the competitive advantage of these seven tech companies will be 23.5 years.

Revisiting the Argument

The useful question about durability of competitive advantage is not whether it disappeared as a thing: it so obviously did nothing of the sort. The real question is: what did achieving that initial competitive advantage provide the companies? Tide earned the position as the dominant detergent in the early days of automatic washing machines, and because it kept on innovating, nobody has been able to catch up — for 76 years and counting. Same with Walt Disney. Same with Google. Same with Facebook.

The bottom line is that nothing meaningful has changed when it comes to competitive advantage. Competitive advantage is precious. Gaining it earns you the option to continue to stay ahead. It was never a guarantee, and it isn’t a guarantee now. If you stop working on protecting, enhancing, and extending it, your advantage will disappear. But that was always the way and will always be the way.

If one wanted to make an argument about change in the durability of competitive advantage, it is that rather than the demise of competitive advantage, we are seeing an entrenchment of advantage not seen since the trust building (and busting) days of the robber barons (and Teddy Roosevelt) over a century ago. In modern competition, amplified by more formidable network effects, competitive advantage is getting so powerful that if you get a lead, you don’t have to do a lot more to dominate for a generation or more.

Practitioner Insights

The central insight for any strategy practitioner is that you have got to be discerning when it comes to business theories. I argue in my forthcoming book, A New Way to Think, that it is critical for you to become a skeptical consumer of business models. Only then can you own and control your models rather than allowing them to own and control you.

I am sure there are companies out there right now that are changing their strategy with dizzying speed because they have fallen under the spell of the theory that all advantage is fleeting. And when they can’t get any traction, their self-diagnosis will be that they didn’t shift strategy dramatically and frequently enough — and will increase the pace of change until their company expires from failing to stick with anything long enough for it to bear fruit. These executives are owned by their unhelpful model.

On this particular theory, reject the model and follow the lead of every company on this elite list. Invest big in gaining unique competitive advantage — just as has always been the case. And as has always been the case, think every day about how you can stay on top. Listen carefully to customers. Don’t read your own press. Watch for non-traditional competitive threats. Improve and adapt. If you do, when your children become adults, they might take pride in seeing your great company still at the top of its field.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Roger Martin

Roger Martin

Professor Roger Martin is a writer, strategy advisor and in 2017 was named the #1 management thinker in world. He is also former Dean of the Rotman School.