The paradox of competitive advantage
September 20, 2016
Competitive advantage is considered a magic word, especially in books on strategy. What differentiates you from competitors? And does this differentiation allow you to outperform them? Even more important: can you trust this competitive advantage to be enduring? If others can easily copy you, competitive advantage will be gone before you know it.
In books on strategy, these questions form the core of what is known as the Resource Based View: in order to learn about your potential for long-term competitive advantage, you will have to search for the deeper-lying sources of your competitive edge, such as knowledge, technologies, culture and reputation. The problem could be that many of these deeper-lying assets are path-dependent: they are the result of decisions from the past, gradually accumulated over time, and therefore unique for your organization, yet at the same time difficult to change. This can be problematic, both for companies that have a competitive advantage, as well as for companies that don’t possess one.
The first group of companies must beware of the Icarus Paradox, described by Danny Miller: the things that make an organization successful will eventually also cause its demise. This is not necessarily because organizations cling to current strengths in a stubborn way, blindly trust their brand name, or underestimate changes in the environment, as may have been the case at Kodak. Even firms with a strong propensity to change can become a victim of the Icarus Paradox, as Miller claims: they could carry on too far in their hunt for change, new products, wild experiments and continuous innovation. In that respect Google’s decision to separate its moonshots from its core business is a logical move.
But what if you belong to the second category of companies: those that do not possess a competitive advantage? What can you do? There are at least two options:
1. Read a book about successful companies and copy their success? Little chance. Copying, by definition, will not lead to differentiation. In addition, it is questionable whether you will have the right resources in place. And if those resources are easily accessible to you, they will also be easily accessible to your competitors, leading to a whole industry of copycats.
2. Develop foresight? This is a great skill to have. However foresight is a rare asset. Nonetheless, the most successful organizations of today are those who were the first to see opportunities and were able to scale up and claim an entire new territory without space for competitors, just think about the Facebooks and Googles of today. But for many companies, this strategy will not be the road to success: how big is the chance that you spot that unique opportunity that others don’t see? And what investment in resources is needed to turn that opportunity into success? Finally: how easily can others copy you? If the success is based on ordinary resources, chances are that your advantage will quickly be copied.
Looking at what others do and spotting new opportunities in the market before others see them are interesting, externally oriented strategies. But, paradoxically, an internal orientation could offer the alternative in a quest for competitive advantage. The assets that have been accumulated by you over time may not provide a basis for current success, but they do offer your organization a unique and difficult to copy profile. The challenge is to reuse these existing assets, to combine them, or use them in a new way. In this way, seemingly unattractive resources may offer your company a potential competitive advantage in the future. And this is not limited to the world of business:
Develop a deserted industrial area or derelict harbor on the city border into a trendy hotspot with apartments, restaurants, artistic and creative companies? A mediocre soccer team with weak defense and just a few star players? Increase the number of defenders, adjust the tactics to avoid risks and to optimize the talents of your star players. Ugly games to watch? Yes. Effective? Sure. It can even bring major success in international soccer, as Louis van Gaal demonstrated with the Dutch national team when they secured third place in the soccer World Cup of 2014.
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