Source: HBR Blog Network
by Sarah Cliffe
I spoke with contributor Don Sull, who teaches strategy at MIT and the London Business School, about the tension between scholars who put sustainable competitive advantage at the center of strategy and those who argue that some industries are changing too quickly to allow for sustained performance. Here’s our edited conversation:
Who’s right — the “sustainable advantage” traditionalists or the “transient advantage” challengers?
They both have something useful to say. Let’s borrow some language from political philosophy and think in terms of thesis, antithesis, and synthesis.
Okay – what’s the thesis?
Start with Michael Porter. His most brilliant insight was that companies compete on a bundle of connected, mutually reinforcing activities and resources. That bundle allows the company to create value in a way that can’t be imitated. (Ikea, for example, has figured out how to get customers to pay more than you might expect for furniture that they have to assemble themselves…thus keeping IKEA’s costs low. There’s a very sophisticated, interlocking set of choices behind the advantage they’ve created.) The people who came along later and talked about competing on competencies and resources – these are all extensions of Porter’s thinking. So that’s sustainable strategy.
It’s trendy to say that sustainable competitive advantage is dead. Empirically, this is simply not true. Microsoft is in the supposedly volatile technology sector. They’ve missed almost every technological breakthrough of the past decade — and yet they earned $237 billion in operating income from 2001 to 2013 working off a strategy that was in place in the mid-1990s. It’s easy to get caught up in the hype. Sustainability still matters.
But there are plenty of businesses that appeared to be unassailable at one time that turned out to be vulnerable.
Right, which brings us to our antithesis. Another group of people had a key insight – let’s call it the opportunistic view – which is that another way to create economic value is to seize a new opportunity. Firms often use an innovative technology or a new business model to seize the new opportunity and they typically disrupt someone else’s business in the process. So this view is often associated with innovation or disruption. The core, however, is creating value by seizing new opportunities.
It’s easy for people in academia to take rhetorical shots at each other over this divide. But by and large managers understand that they need to do both things – create a difficult-to-imitate competitive position, but also seize new opportunities, find new ways to compete.
That raises a key question — how do you balance the two needs?
Here’s where we get to the synthesis. There have been several important insights. Michael Tushman and Charles O’Reilly introduced the idea of ambidexterity. It’s incredibly difficult for a company to both exploit an existing advantage and explore a new one. So it makes sense for one business unit to focus on the incumbent business and for a mostly separate unit to create a new business — with both units answering to the same corporate head. There’s a lot of good evidence that this approach works.
Another approach is to run a portfolio of businesses. GE, Johnson & Johnson, and Samsung all do this successfully. Over time, you move into new businesses and out of older ones. A good chunk of the economy runs this way. When done well, it works.
HBR ran an article by Todd Zenger recently that was interesting, claiming that you can use your mutually reinforcing system of activities and resources as a platform to catch new opportunities. He has a nice analysis of how Disney does this. It’s similar to what Chris Zook and James Allen have said about adjacencies: you find opportunities that fit your core.
Then there’s the horizons view – which is a very practical approach. It says that you focus some resources on sustaining your business, some on incremental change, and some on disruptive businesses. LEGO is a great example. The CEO has 100 people working on the core business, 20 or so on a slightly wider range of opportunities, and fewer than a dozen on innovations that could fundamentally disrupt the company’s business model.
The corporate change literature fits in here, too, though it gets away from the strategy/innovation debate. These are the people who claim that Polaroid should have seen what was coming and turned itself around. But this is incredibly difficult to do if you are running a single, focused business. I won’t say nobody’s done it. But a lot more have failed than succeeded.
The bottom line, then?
The key to success in today’s volatile markets is strategic opportunism, which allows firms to seize opportunities that are consistent with the bundle of resources and capabilities that sustain their profits.