Competitive Strategy
There Are
toby RogerCompete Still Only Two Ways
L. Martin
April 21, 2015
Photo by Andrew Nguyen
Back in the early 1960s, the great Boston Consulting Group
founder and strategy theorist Bruce Henderson asserted that
there was only one way to successfully compete: gain a relative
market share advantage over all competitors so as to have lower
costs than all of them. The payoff is that it puts the firm in a
position to drive those relative costs even lower as competition
unfolds due to the learning curve advantage.
One then became two in 1980, when Michael Porter pointed out
that there is another way to compete: differentiation. His view of
the generic strategies for advantage gained considerable traction
both in classrooms and boardrooms.
To someone like me, a micro-economist by training and at heart,
the idea that all competition can be classified in terms of these
two generic strategies corresponds well to the fundamental
demand dynamics that companies face.
Theoretical Appeal
In the world of business generally, there are only two demand
conditions a firm can face with respect to an offering: a flat
demand curve or a downward sloping one. (Yes, one might argue
that for some luxury goods in some situations, demand can rise as
price rises, but it is the exception that proves the rule.)
In the former case, customers see the value to them of the firm’s
offering as indistinguishable from those of other competitors and
hence the firm is simply a price taker, at whatever level the
market sets. In such a market there was, is, and always will be
only one generic way to gain competitive advantage and that is to
have the low-cost position among those making offers to
customers in that market. Of course, there are myriad ways to put
oneself at the bottom of the delivered cash cost curve in such a
market, but they all deliver the same competitive advantage: low
cost.
The other situation is one in which the firm faces a downward
sloping demand curve — by which if the firm charges a higher
price, the demand for its offering is lower and if it charges a lower
price, the demand is higher.
Why does it have that characteristic? It is because customers think
to varying degrees that there is something about the firm’s
offering that is distinct from other offerings; to them, it is not “the
same” as those of competitors. In making a purchase decision,
therefore, they make a trade-off between the perceived value of
the distinctiveness and the price. Those who value the
distinctiveness more are prepared to pay a higher price.
This situation can give rise to a
INSIGHT CENTER
successful differentiation
The New Ways to Compete strategy if the firm is able keep
Strategies for staying ahead. more or less the same costs as
less differentiated competitors
and can convince customers that
it is meaningfully different from the competition. As with cost
leadership, there are myriad ways to achieve differentiation
advantage. However, in such a market, there was, is, and will
always be one fundamental kind of competitive advantage.
So the idea that there are just two ways of competing is
theoretically compelling based on the underlying
microeconomics. But has anything changed since 1980 to
fundamentally alter the implication of those economics? Let’s
look at the main features that distinguish competition today from
previous decades:
Increased Ferocity
No one can deny that attacks against both the low cost and
differentiation advantages of incumbents happen more quickly
and are fiercer than they were as of 1980. Global competition,
better access to capital, and greater information transparency has
made it harder for firms to maintain their competitive
advantages. This is why you get people arguing that we are
witnessing “The End of Competitive Advantage.”
But anyone mounting that argument has some problematic data
to explain. For example, in 1996 I helped Porter on an HBR article
called “What is Strategy?” The article chronicled the strategies of
a number of companies that as of 1996 had already achieved
impressive advantage — Southwest Airlines, Progressive
Insurance, Vanguard, and IKEA. Another nineteen years later,
their competitive advantages are going strong. It seems
implausible in the face of that (and myriad other) data to
maintain that competitive advantage is no more.
New Business Models
The second argument that people mount in claiming that strategy
today is different is based on the fact that there are many cool new
business models for achieving competitive advantage that weren’t
around in 1980, especially in the software/Internet arenas.
Are the models actually that new? Lots of them are “two-sided”
markets or platforms in which the firm gets paid for putting two
other groups together. Think eBay, Match.com, or Uber. But two-
sided markets have actually been with us for centuries. In fact, if
you read academic work on the subject, many authors will use
credit cards as a major example. What’s different today about
platforms is just that they are much easier and cheaper to scale
with the help of the Internet.
I’ve noticed that many people equate “two-sided market” with
automatic competitive advantage. A couple of students who
wanted me to invest in their start-up (which I often do) pitched
me an investment a couple of months ago. I told them I wouldn’t
take up the invitation because I couldn’t see that their idea would
create competitive advantage. “Of course it has competitive
advantage,” they protested. “It is a two-sided market.” But the fact
that a platform is two-sided doesn’t mean that it doesn’t face
competition — perhaps of a superior variety.
The Rise of the Ecosystem
The third feature of the modern economy is that firms are
increasingly finding that their competitive advantage comes from
collaboration with other firms and individuals rather than solely
through their own efforts. This is where all the talk about
“ecosystems” comes from. But once again, although it may be
getting more popular as an approach, it is not something entirely
new. Japan has had keiretsu for a long time. What’s more, the
fact that companies may obtain competitive advantage through
building ecosystems doesn’t change what the competitive
advantage is that they obtain from building them: either the
ecosystem enables their differentiation or generates a cost
advantage.
For me, the bottom line is this. Yes, some things have changed —
competitive advantages have become more fragile, and there are
new recipes in the strategy cookbook to bake low cost or
differentiation advantages. But in acknowledging that, it’s
important not to lose sight of the fact that there are still just two
fundamental forms of competitive advantage. The leaders who
understand this clearly, I think, will prosper most in the coming
years.
Roger L. Martin is a former dean of the
Rotman School of Management, an adviser to
CEOs, and the author of A New Way to Think
(Harvard Business Review Press, 2022).
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