The most influential and singularly worthwhile portion of my business school education was my sessions in Bruce Greenwald’s class, Economics of Strategic Behavior. Twice a week we thrashed through case studies of firms like Coca Cola, Dell, Wall-Mart, and Coors. However, at the end, Greenwald concluded the class with the same sentiment that he concludes his book, Competition Demystified:
“It is true that many firms may have the potential to enjoy competitive advantages is some markets….Still these triumphs are infrequent, no matter how brilliant the plan and flawless the execution….However, strategy is not the whole story. An obsession with strategy at the expense of the pursuit of operational excellence is equally damaging. There is simply too much evidence of the variability among strategically identical firms, and of the speed with which performance can be improved without any changes to the larger economic environment, to discount the importance of management.” To often success is attributed to competitive advantages that are assigned in retrospect. There always seems to be a barrier to entry that is used to explain a company’s success. When in reality, we know it is always about the golfer and not the clubs. (I don’t like golf, just the analogy.) It is important to map out the competitive landscape, but the greatest barriers to entry are executional in nature: product quality and differentiation, sales, team talent, and innovation. I’m not arguing for the entry into commodity markets or other flawed strategies – simply that there seems to me to be an obsession with what really amounts to attempts to build assurances against competition. For years we said that Coca Cola had barriers entry, but a shift to healthier diets allowed juices, bottled water, and energy drinks to emerge forcing Coke to diversify. Microsoft was said to have had the greatest of all barriers to entry: network externalities through compatibility till file interoperability and web-based computing put that “lock in” to bed. In this market, Microsoft had the “barriers,” but Apple had the operational excellence. The past decade shows near 1000% growth in AAPL and -50% growth in MSFT:
Can you really think of any cases where success wasn’t truly attributed to great product and innovation? And when those dual pillars start to crumble, so too does the company’s supposed barrier to entry? I can’t think of any of the pantheon of great companies that started with what we would define as a barrier to entry. It’s only in retrospect that we invent these barriers, such as “economies of scale,” which you can scale as you scale. No one needs massive scale day one; you can build scale with demand. In fact, the greatest barrier to entry is probably adaptability, which in and of itself defies the fixed notion of barrier. Remember when Starbucks had barriers to entry? It turned out that as product quality and experience declined coupled with a weakening economy, the wining attribute in the coffee market changed to value.
Why didn’t Starbucks execute immediately on a value proposition? Why not switch to $1 cups of coffee? I would trade their barriers all day for Greenwald’s “operational excellence.” Isn’t the real barrier to entry operating and competing ferociously? We know that all fertile markets or “gold mines” invite competitive farmers and prospectors. The question is not what are your barriers to entry but rather – how will you compete?
