Strategy and Competitive Advantage

There have been so many books and articles about strategy and what gives companies competitive advantage. As I look back at business history, I struggle to identify many examples of companies that have maintained their dominant position in their chosen industry over an unbroken period of time. There are only a few examples: Microsoft in the operating system segment of the software industry, NTT in Japan, Best Buy in the electronics retail sector, and Walmart in the general retail sector come to mind.

I am sure there may be a few more. But the point I am making is this: The quest for sustainable competitive advantage is really an ephemeral one unless it is thought through in the context or paradigm of existing and emergent competitive environment. Simply put there really is no time immutable driver of Competitive Advantage unless it is developed in the context of the actions of competitors and the dynamic evolution of the industry.

The starting point of this discussion then actually is "What is strategy"? Strategy was described elegantly by Jack Welch as doing what it takes to beat your competition. Without competition, strategy becomes meaningless. When there is perfect competition, strategy becomes less relevant as no individual firm can gain advantage unless the firm redefines the industry to which it belongs. In an industry structure where the firm is a monopoly, the focus of strategy is likely to be on preservation of the firm's monopoly position. Not enough firms however include in their strategy an element of forward thinking that looks at the the factors that gave them the monopoly position and what would happen if those were to change. These include market and non market forces. The automobile industry in India is a great example. Hindustan Motors with its stable of Oxford Morris type Amabssador fleet had 80% of the market share until the Indian government decided to enter into a JV with Suzuki to produce affordable cars. Since the liberalization, Hindustan Motors has struggled to survive with its markest share today less than 10%.

Can strategy be long term? Sure it can be. And long term here is in the five to 10 year time frame. But in order to develop a strategy that long term, firms must have a strategy is embedded in a shorter time frame. In order to do so firms need to think about their competitive advantage. And here I have developed a definition of competitive advantage that is not found in most books on strategy.

Competitive advantage is that which allows a firm to do one or more of the following over its own internal time frame and still make above normal economic profits within that industry:
a) Sell more of its products/services relative to competitors at similar prices
b) Sell its products at a higher price relative to competitors

If a firm cannot do either a) or b) above, it really does not have any competitive advantage over its competitors. A key elements to remember here is the notion of the time frame or the paradigm. What is a competitive advantage today may become irrelevant tomorrow. Case in point would be Sony. Sony's competitive advantage in the consumer electronics industry stemmed from its ability to "minitiaturize" its products. Sure Sony still has this "capability" but the capability is not relevant any more. Anybody can miniaturize now. Companies more often get caught in their own success and dont see the traffic on the side lanes. They only see their own lane.

A good example of a company that does a) well now is HP - it sells more PCs and notebooks than its competitors do. In the internet world while traffic is not a sufficient condition, it is a necessary condition for success. Google gets more traffic than Yahoo. Its ability to monetize this traffic is greater than Yahoo's. It is a great exemplar of a).

BMW is a grood example of b). Rolls Royce is not, nor is Jaguar. Why not? Neither of them make economic profits, leave alone above normal profits. Thus high pricing alone is not indicative of having a competitive advantage - making above normal economic profits is.

The question for strategists then is, what gives a company the ability to do a) or b)? The ability to do a) or b) is referred to as competitive advantage and is embedded in the capabilities of the organization. The capabilities of an organization are the configuration of its processes, its people, its culture, its technology and knowledge that allow it to do either a) or b) or both.