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Competitive advantage

10 March 2010

Two fascinating books on the troubled media industry have appeared recently. I have written a great deal about Google lately so I will comment on Ken Auletta’s Googled later. Reading The Curse of the Moguls by Jonathnn Knee, Bruce Greenwald and Ava Seave is a bit like coming across Machiavelli’s The Prince for the first time: on the one hand it’s a brilliant critique of how badly the industry is led, but on the other, much of its case rests on the authors’ conviction that competitive advantage is synonymous with barriers to competitors and holding customers captive

This post is mainly about why I disagree, but anyone who cares about the media industry should read their book to understand why so much of it has gone so badly wrong. Pursuing spurious synergies and size as an end in itself, and acquisitions as a means to achieve both, the leaders of Time Warner, Viacom, Vivendi and Comcast have destroyed rather than enhanced shareholder value. Knee, Greenwald and Seave make the case for the prosecution with forensic skill and they savagely debunk myths like Content is King, First Mover Advantage and the cults of convergence and growth. Their analysis of how media firms almost invariably pay too much for acquisitions – which accounts for much of the industry’s poor financial performance – is particularly juicy.

Where we part company is on the question of what makes businesses successful in the long-term, the basis of sustainable competitive advantage. This will probably always be fiercely debated, not least because some pundits even deny its existence. Knee, Greenwald and Seave offer a simplified version of Michael Porter’s thesis: “competitive advantage and barriers to entry are the same thing”. They are not alone in seeing business as a continuation of war by other means, and war of a rather mediaeval kind, mainly about building the biggest fortresses and the deepest moats.

Barriers to competitors and other strategic assets are of course immensely important – all lasting industry leaders enjoy them. My objection is to denying the importance of other factors. In my research for Winners and Losers I examined seventeen organisations who established lasting leadership in markets they had created. In every case several success factors were clearly critical, from the ability to recognise and adapt to changes in the competitive environment to strong brands and the cultivation of human capital. I argue that all long-term leaders need eight attributes in addition to those that made them successful in the first place. Not all of them are necessarily sources of competitive advantage, but all are essential in some form.

A crucial one is forming close, ideally binding, relationships with customers, one of the most important barriers to competitors. But this need not mean making captives of them. Outstanding firms engender loyalty by pleasing customers so consistently that they are not tempted to go elsewhere. Apple and Google are two outstanding contemporary examples, but so are Waitrose and Nordstrom in very different, more mature markets. Their customers positively enjoy going to these stores and trust them very much more than they do their competitors. Frederick Riechheld of the Bain consulting group, a highly analytical organization not greatly given to mushy ideas, has shown that in markets where intellectual capital is important, the most successful businesses are those that pay most attention to encouraging loyalty. In industries like financial services, customer loyalty is as important an indicator of long-term corporate performance as short-term profitability.

Few firms can rely exclusively on loyalty to bind their customers closely. Apple and Google, to name but two, are well aware of the strategic assets that help them to lock customers in and competitors out. But to argue that these are the sole sources of their competitive advantage would be perverse. These companies are successful primarily because they are so good at what they do and they are obsessed with keeping their organisational capabilities highly distinctive. Capabilities is a word Knee et al prefer not to use – for them they’re merely a facet of operational efficiency. Yet every successful organisation has at least some distinctive capabilities. In the case of market creators they are nearly always the main source of its initial competitive advantage. (See extract for more.) In our era of accelerated creative destruction the single most important attribute of organisations that establish lasting leadership is the capacity to renew organisational knowledge and develop new capabilities.

Knee & Co do occasionally acknowledge the concept without actually using the word. They talk of Michael Bloomberg building an organisation that would thrive after he left, a franchise that did not rely on his talent. What could that be other than strong organisational capabilities? Even those firms whose competitive advantage owes an enormous amount to one or more strategic asset – Coca Cola’s brand and distribution network, Wal-Mart’s business model which dominates so much of the US retail landscape, Microsoft’s hold on the desktop, BSkyB’s rights to Premier League football – could not afford to sit back and collect the rents. All of these thoroughly professional businesses have continuously enhanced their capabilities and in some cases extended them. EBay on the other hand has concentrated more on eliminating competition and exploiting its customers’ captivity than on developing new ways of offering value to them. Not surprisingly many have gone elsewhere.

Organisational capabilities are closely related to and depend on talent and human capital. The authors of The Curse of The Mogul are rightly dismissive of much of the tosh talked about talent in the media world, where performers can take their talent where they please. Having stars under contract cannot be a durable strategic asset, any more than any individual executive can. However, talent management is now a critical imperative for every industry, not just media, and often confers enormous competitive advantage. It was Apple’s ability to attract and retain outstanding engineers and designers, even when the company was in desperate straits in the 1990s, that enabled Steve Jobs to reinvent it when he came back to the helm. One of Google’s edges over Microsoft over the last ten years has been its greater attractiveness to talented people. Jack Welch believed that GE’s ability to recruit and retain good people was the crucial factor in its unparalleled long run of success.

Is talent management sustainable in the long-term? In the very long-term, probably not, but then neither is any other source of competitive advantage. Nothing lasts forever – even network effects and switching costs can fade or be bypassed by creative destruction and other discontinuities.

Media moguls may have got many things wrong but they are not the only magnates with inflated egos and faulty vision. One of the industry’s saving graces is that it is not obsessed with financial performance to the exclusion of everything else. Many of them really do care about producing great films and publishing good books. There is no one right way to run a business and no single source of success.

6 comments to Competitive advantage

  • TimDownUnder

    I’ve not yet had the opportunity to read these books – I probably should – but I share your contempt for a narrow view of barriers to entry as the only criteria for success. In my experience really strong barriers tend to breed arrogance and laziness and sow the seeds for eventual failure. It tends to engender behaviour oriented towards protecting the barrier rather than delighting the customer. I can’t off hand think of any strong innovators or purveyors of customer-service-excellence operating from behind strong entry barriers … are there any contrary examples? Is there an exception to prove the rule?

  • Kieran

    I can think of two – IBM in the 1960s launched the 360 series and of course in 1981 launched the PC. And in the 1980s British Airways launched a major effort to transform customer service and succeeded for a while in making itself ‘the world’s favourite airline’. Of course it was only protected in the UK – in overseas markets it had to compete with other national champions.

    I’m still scratching my head trying to think of a more recent exception to the usual depressing rule. Perhaps GE? And maybe Shell and BP? But I don’t really know these industries.

  • TimDownUnder

    Another interesting protected model has occurred to me – the legal profession. The barrier is absolute, the ultimate closed shop, and the individual entry into the profession is tightly controlled. With a daughter just going through that process I can attest to the fact that it is social engineering and individual control taken to the extreme. But the interesting fact is that behind the barrier the law firms compete strongly for business (largely based on relationship and customer service) and they do so to the extent that the privileged few that make the profession have to give themselves up to perpetual late nights and long weekends of dreary work. Strange that the profession does not use the absolute barrier to entry to enjoy a more lazy lifestyle. So of course their success derives from the barrier but it is only then realised through the other more complex success factors.

  • Kieran

    The professions have long restricted entry and run what in other circles would be called closed shops. Why do American doctors earn so much more than they do in Europe? Because it’s harder to get into medical school. The total amount spent in per capita on medical care vastly exceeds the levels on this side of the Atlantic, yet large chunks of the population are without medical care. Something’s sadly wrong.

  • Amy

    I’ve not yet had the opportunity to read these books – I probably should – but I share your contempt for a narrow view of barriers to entry as the only criteria for success. In my experience really strong barriers tend to breed arrogance and laziness and sow the seeds for eventual failure. It tends to engender behaviour oriented towards protecting the barrier rather than delighting the customer. I can’t off hand think of any strong innovators or purveyors of customer-service-excellence operating from behind strong entry barriers … are there any contrary examples? Is there an exception to prove the rule?

  • Kieran

    See my comment of 16 March above for some possible exceptions. There’s no doubt though that competition is the best spur.

    Of the two books, I’d recommend Googled over The Curse, unless you’re very interested in the US media industry. Ken Auletta is a very thoughtful writer with no axe to grind. He wrote a fascinating piece about disruption in publishing in the last issue of the New Yorker.

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