For decades now, both consultants and academics have been arguing that the world has become so fast paced, so hypercompetitive, so complex, so ambiguous, and so uncertain, that the death knell has sounded for strategy’s central concept of sustainable competitive advantage. Competitive advantage has become fleeting, easily disrupted by actors both inside and outside an industry.
The common prescription for competing in the absence of competitive advantage is the concept of strategic agility or adaptability, which involves rapid pivots, self-disruption, and abundant experimentation. Success, in this worldview, often entails mimicking the lean startup, strategically maneuvering with nimbleness and flexibility.
Perhaps. But personally, I find it hard to agree with this prescription. Look at the big corporate success stories of the new economy: Apple, Google, FedEx, Amazon, Alibaba, Mittal, Facebook, Costco, Starbucks, and Express Scripts. Can you really say that these companies are not profiting from a sustained competitive advantage?
My bigger concern, though, is that this intense debate about the death of competitive advantage promotes a profound misunderstanding about strategy. Sustainable competitive advantage is an important strategic concept, to be sure. And creating a sustainable competitive advantage can even be a corporate goal. But it is not a firm’s ultimate strategic goal.
So what is? My contention is that the true object of strategy is to sustain value creation, which demands a capacity to relentlessly create and capture new value. The difficulty with setting a given market position or competitive advantage as your strategy’s goal is that its direction-giving guidance is effectively dead upon your arrival. It fails to reveal what’s next.
Rather than merely having a path to a given competitive advantage, firms need what I call a corporate theory — a theory that provides ongoing guidance that reveals a succession of paths to new competitive advantages, new sources of value. This corporate theory has three components. It offers:
Foresight into an industry’s future evolution.
Insight into what is distinctive and uniquely valuable among the assets and capabilities of the firm.
Cross-sight into how various combinations of currently owned and externally available assets and opportunities can be combined to create value.
When you have a well-crafted corporate theory, it becomes clearer to you what your next strategic move or competitive advantage will be. Each of these moves can be seen as a test of your theory. If the move works out and creates value, then the theory it tests is validated.
As I’ve described elsewhere, years ago as an undergraduate I toured the Xerox PARC research facility and observed much of the same technology that Steve Jobs had famously observed about eight months prior to my visit.
But what he saw and what I saw could not have been more different. I saw some cool technology. He saw key elements vital to testing and composing his emerging theory of value creation. This theory prompted a succession of strategic moves with outcomes that continue to deliver vast amounts of value for Apple shareholders. Similarly, remarkably valuable strategic experiments have flowed for decades from a corporate theory that Walt Disney composed many years ago. While not all have proven valuable, most certainly have.
This is very much like scientific progress. Scientists design experiments to test a theory, and the more thought-through the theory is, the more likely it is to be validated. Experimentation around less-thought-through theories produces more failures. This may be acceptable if your goal is to simply create and test new theories (which is often how academics compete) but there’s no doubt that experimenting on underdeveloped theories is more wasteful than experimenting on well-developed theories. And in business, where strategic experiments involve large investments and real jobs, experimentation uninformed by theory is a hugely value-destroying process.
It’s here that I really take issue with the agility school of thought. The prescription boils down to this: In a world where sustainable competitive advantage is harder to come by, you need to experiment more in order to find it — rapid experimentation, therefore, is the cure. Moreover, their advice to move, rather than think, seems to accelerate as the complexity of the strategic landscape intensifies. Essentially, the philosophy seems to be: “If you don’t know where you’re going, any path will do.”
I can see that this kind of advice resonates with executives. Most see themselves as “doers” rather than thinkers. But additional thinking is needed more than additional doing. The more complex and varied a terrain, the more valuable a map. In a simple competitive landscape, everyone can see the strategic solution and success is about winning the race to the top. On a complex terrain, however, those with a guiding theory will be more likely to identify new positions of competitive advantage.
The bottom line? The difference between strategic successes and failures has far more to do with the quality of the theory that’s behind a company’s strategic experiments than with the pace of the experimentation. Sustaining value creation, by extension, requires better corporate theories — not faster-paced pivots.