Don’t look now but business strategy orthodoxy has taken a terrible hit. For years the mantra of every “strategic” consultancy and of MBA programs throughout the universe has been “sustainable competitive advantage.” Michael Porter’s ideas of the late ’60s took off like wildfire and almost obliterated every other thought about business strategy. Over the years, the business gurus have published books and conducted seminars that have repackaged and restated Porter’s simple premise ad nauseam—flavors of the week included different colored oceans, growth/share matrices, reinventing the company (when it’s only done once), serving all stakeholders, core competencies, searching for excellence and a multitude of others. The first problem here is that the focus of virtually all of these restatements of Porter’s idea is upon profit as the end goal. Porter and all of his followers set profit as the fundamental goal of the business. There have been some other things added, such as market share, but these have usually been seen as surrogates for profit.
Now don’t get me wrong, I am not against profit—in fact, I prefer it over the alternative. Companies cannot stay in business without it, that’s a fact. But when profit is the goal, as opposed to being a result of execution, shortcuts are taken and silver bullets are sought. For instance:
- Companies turn to cost cutting during a sales downturn, to preserve profits. At the time the firm should be investing—either in new personnel or in marketing or in R&D—the focus is on not spending money. This approach is also called “eating your seed corn” because spending cuts for the pure sake of reducing spending severely limits the growth potential of a firm for the future. Preserving profits without preparing for growth is a short-term survival tactic, not a strategic decision.
- Firms acquire older products that are underpriced to re-set the price and earn higher profits. Although this can be done as a way to fund new product research, it is often done to fund new acquisitions of similarly situated products, which is fine in the short run but not a long-term business strategy. It can create wealth in the short term but in the long term, without the commitment to reinvest in new products and innovation, just moves money from one pocket to another.
This focus on profits as the goal, as opposed to the reward for achieving the goal, is inherently short sighted, and therefore non-strategic (by definition). This problematic point really comes to light when you return to Porter’s gold standard: The sustainable competitive advantage. Companies tried, and were encouraged and coached, to seek out ways to insulate themselves from competition, and thereby gain that “advantage.” The problem with the concept is that in an economy or marketplace that is the least bit innovative, a truly sustainable competitive advantage cannot exist. It is a logical and practical impossibility. Okay, there is one exception: The government can create and protect a sustainable competitive advantage. Patents can be a competitive advantage, but they can only be sustained so far (although Lord knows a lot of time and effort has gone into sustaining patents a little longer).
At the other end of the industry, generic drugs are handed a competitive advantage that no other product enjoys in any free market: Mandatory generic substitution means that upon patent expiration a brand becomes almost worthless. A drug brand can lose over 90% of its sales in the first month or two of generic availability. Contrast that with Kellogg’s Corn Flakes which, despite having generic competition for over 100 years, still holds over a 90% share of its market, which is a more typical situation without government interference. Kellogg’s is shielded by fantastic brand equity, their work to keep the brand relevant, and the fact that in their market the price disparities are much smaller. The structure of the pharmaceutical market denies brand equity and forces price divergence—where is the sustainable advantage in that?
The traditional “big pharma” firm is built upon the myth of the sustainable competitive advantage. For years the industry listened to the gurus who, following Porter’s lead, decided that the economic concept of entry barriers—in economic competitive theory, barriers to entry are obstacles that make it difficult for a new competitor to enter a market—were the same as a sustainable competitive advantage. This seemed to hold true for decades, but over time some of the largest firms began to have problems. Formerly big names in pharma became smaller and many were swallowed up by other firms, many that at one time had been quite smaller than those they acquired. Firms such as Upjohn and Lederle, which had been household names, merged with or were acquired by companies that had been much smaller, and those newly combined firms were then acquired (in this case both by the same firm). But how could this happen if these firms—giants in their industry—were supposedly protected by barriers to entry and long-term competitive advantages?
The answer to the question is simple: There is no such thing as a long-term competitive advantage. The very idea behind the theory—at least as practiced by those who followed Porter’s writing—is that with some inherent form of protection a firm can be shielded from competitive forces and simply enjoy its privileged position. But that view is quite myopic not only because the company that has been convinced they have such an advantage can get a little too comfortable with that assumption, but also because of the underlying belief that business success comes from that special “advantage,” these businesses can then ignore the most important thing for any business. That is Peter Drucker’s admonition that, “There is only one valid definition of a business purpose: to create a customer.” When the focus is on maintaining an advantage and not on creating and keeping customers by providing products they want and need, you are simply missing the mark. Long-term success comes not from maintaining some elusive structural advantage, but from knowing your customers and giving them what they want and need.
Today we have large firms seeking to acquire the smaller firms that do understand their customers and meet their needs, but once acquired that customer focus is often lost inside these larger organizations—where the focus is less on customers and more on managing assets. When the focus of a company is on serving the customer by meeting their needs, their advantage comes from forcing their competitors to keep pace with them—to “out serve” them. This drives innovation and results in a satisfied market. When the focus is on anything else, the result is the loss of customer loyalty and the absence of any inherent advantage. The company that focuses on its assets (products) is vulnerable to the firm that focuses on its customers and meeting their needs. That is a competitive advantage!