PART ONE
What Is
Competition?
CHAPTER 1
Competition:
The Right Mind-Set
STRATEGY IS ONE OF the most dangerous concepts in business. Why dangerous? Because while most managers agree that it is terrifically important, once you start paying attention to how the word is used you will soon be wondering whether it means anything at all. Fans of GEâs legendary CEO Jack Welch say their strategy is to be number 1 or number 2 in their business (or else!). For the new CEO of a Fortune 100 company, the strategy is âto grow.â For an energy company executive, the strategy is to âmake key acquisitions.â A software developer says, âOur strategy is our people.â The strategy of a leading nonprofit is to âdouble the number of people we serve.â And then there is Googleâs famous âDonât be evil.â Is that a strategy?
By the time you reach the end of this book, you will appreciate why none of the above would qualify as a âstrategy,â which for Porter is shorthand for âa good competitive strategy that will result in sustainably superior performance.â None of the above formulations tells you what will enable the organization in question to outperform the competition. Some tell you what their goal or aspiration is; others highlight key actions; some single out values. But none of them really tackles the core question, performance in the face of competition. What value will your organization create? And how will you capture some of that value for yourself? That, Michael Porter tells us, is strategyâs job.
Strategy explains how an organization, faced with competition, will achieve superior performance. The definition is deceptively simple in part because the words are so familiar that we rarely stop to think about what they mean. But if you do, you will quickly realize that these terms are loaded. What is competition? How does it work? How do organizations âwinâ? What, exactly, does superior performance mean?
Strategy explains how an organization, faced with competition, will achieve superior performance. The definition is deceptively simple.
Most managers worry about competition. They know that itâs pervasive. They have an uncomfortable sense that it is breathing down their necks. They know that in order to survive they must deal with it. And in order to thrive, they have to find a âcompetitive advantage,â a term rarely used before Porter made it popular. And yet, Porter tells us, one of the reasons so many companies fail to develop good strategies is that the people running them operate with fundamental misconceptions about what competition is and how it works. This is critical because if there were no competition, there would be no need for strategy, no need to come up with a way to âwin,â to outperform your rivals. But, of course, competition is everywhere, even in so-called market âspacesâ served primarily by nonprofit organizations.
How you think about competition will define the choices you make about how you are going to compete. It will impact your ability to assess those choices critically. That is why before we can even begin to talk about strategy, we need to tackle the question of competition and competitive advantage.
Why Not the Best?
Interviewed on the day the ânewâ General Motors went public in 2010, CEO Dan Akerson said his company, now free of its legacy costs, was ready to compete. âMay the best car win!â he told reporters. How often have you heard an organizationâs leaders urging their people to be âthe bestâ? How often have you heard the call to make your company the âbest in its industryâ? Companies proudly proclaim that they produce the âbestâ products, provide the âbestâ service, and attract the âbestâ talent. These phrases reflect an underlying belief about the nature of competition that feels so intuitively correct to most people that it is almost never examined or questioned. If you want to win, itâs obvious that you should be the best. Or is it?
Michael Porter has a name for this syndrome. He calls it competition to be the best. It is, he will tell you, absolutely the wrong way to think about competition. If you start out with this flawed idea of how competition works, it will lead you inevitably to a flawed strategy. And that will lead to mediocre performance.
For most managers, vying to be the best is what competition is all about. This belief is reinforced by popular metaphors drawn from warfare and sports. Management writersâand leaders trying to inspire peopleâare drawn to these metaphors because they are vivid and engaging. They lend emotion, drama, and consequence to business competition. But metaphors can be misleading. Although they highlight how one thing has elements that are like another, they never mean that one thing is identical to another.
In war, there can be only one winner. Victory requires that the enemy be crippled or destroyed. In business, however, you can win without annihilating your rivals. For decades, Walmart has been a winner in discount retailing, for example, but so has Target. Each offers a different and distinctive mix of merchandise, aimed at meeting different customer needs. Walmart is the workhorse of discounters, offering âeveryday low prices.â Target is more of a show horse, appealing to customers who want flair along with low prices. In business, multiple winners can thrive and coexist. Competition focuses more on meeting customer needs than on demolishing rivals. Just look around. Because there are so many needs to serve, there are many ways to win.
The sports analogy is just as misleading. Athletes vie with each other to see who will be crowned âthe best.â They focus on outperforming their rivals. They compete to win. But in sports, there is one contest with one set of rules. There can be only one winner. Business competition is more complex, more open ended and multidimensional. Within an industry, there can be multiple contests, not just one, based on which customers and needs are to be served. McDonaldâs is a winner in fast food, specifically fast burgers. But In-N-Out Burger thrives on slow burgers. Its customers are happy to wait ten minutes or more (an eternity by McDonaldâs stopwatch) to get nonprocessed, fresh burgers cooked to order on homemade buns. Rather than enter a particular race with a particular rival, as Porter would put it, companies can choose to create their own event.
Itâs always hard to break a mental habit, but harder still if you are unaware that you have one in the first place. Thatâs the problem with the competition-to-be-the-best mind-set. It is typically a tacit way of thinking, not an explicit model. The nature of competition is simply taken for granted. But, says Porter, it shouldnât be. In the vast majority of businesses, there is simply no such thing as âthe best.â Think about it for a moment. Is there a best car? A best hamburger? A best mobile phone?
In the vast majority of businesses, there is simply no such thing as âthe best.â
Consider a business as prosaic as seating for airport waiting areas. You would think that there would be a âbestâ hereâstandardized seating that is functional and durable. Well, you would be wrong. Different airports have different needs. Some want waiting passengers to shop. They donât want seats that are too comfortable. Some need the flexibility to reconfigure waiting areas. They donât want long rows of fixed seats. Many airports have to watch their spending. For others, however, money is no object. Airports in the Middle East, for example, have been big buyers of luxury designs. Some airports, those that handle a steady flow of deported refugees, for example, value seats built to take extraordinary abuse. London-based OMK makes âprison-worthyâ seating, the industryâs highest standard, using self-sealing polyurethane that can withstand a stabbing without showing the knife scar. So much for the idea that there is one âbestâ airport seat.
Now think about all of the industries in the economy. In how many does the idea of âbeing the bestâ make real sense? In most industries, there are many different customers with different needs. The best hotel for one customer is not the best for another. The best sales encounter for one customer is not the best for another. There is no best art museum, no one best way to promote environmental sustainability.
Nor is there such a thing as an absolute best when it comes to performing functions such as production or logistics or marketing. For a nonprofit organization, there is no best way to do fundraising or attract volunteers. The best always depends on what you are trying to accomplish. Thus, the first flaw of competition to be the best is that if an organization sets out to be the best, it sets itself an impossible goal.
But thatâs not all. If rivals all pursue the âone best wayâ to compete, they will find themselves on a collision course. Everyone in the industry will listen to the same advice and follow the same prescription. Companies will benchmark each otherâs practices and products (see âOne-Upmanship Is Not Strategyâ). Competing to be the best leads inevitably to a destructive, zero-sum competition that no one can win. As offerings converge, gain for one becomes loss for the other. This is the very essence of âzero sum.â I win only if you lose.
If rivals all pursue the âone best wayâ to compete, they will find themselves on a collision course.
The airline industry has suffered from this sort of competition for decades. If American Airlines tries to win new customers by offering free meals on its New York to Miami route, then Delta will be forced to match itâleaving both companies worse off. Both will have incurred added costs, but neither will be able to charge more, and neither will end up with more seats filled. Every time one company makes a move, its rivals will jump to match it. With everyone chasing after the same customer, there will be a contest over every sale.
This, says Porter, is competitive convergence. Over time, rivals begin to look alike as one difference after another erodes. Customers are left with nothing but price as the basis for their choices. This has happened in airlines, in many categories of consumer electronics, and in personal computers, with the notable exception of Apple, the one major company in that industry that has consistently marched to its own drummer.
This inevitable descent into price competition is the business equivalent of mutually assured destruction. And itâs not just the producers who suffer. Customers, suppliers, and employees often become collateral damage as rivals are squeezed for resources and forced to cut costs. When all else fails and pressure on prices has destroyed an industryâs profitability, often the remedy is to limit competition through consolidation. Companies swallow each other up, thus reducing the number of rivals and allowing one or a few companies to dominate the market.