It’s become part of the conventional wisdom. The internet and globalization have combined to render almost every company vulnerable to greater competition than ever. Barriers to entry are withering, innovations are easily copied, and disruption is everywhere. To take an extreme example, Rita McGrath told strategists in an HBR article to just give up on sustainable advantage altogether and work on gaining only temporary boosts.
But is business really so competitive – not in a few prominent industries, but in the economy as a whole? The macro numbers tell a very different story. As Michael Porterargued a long time ago, the simplest measure of competition is profitability. The more competition a company faces, the harder it is to make money. Just look at what’s happened to workers. With weaker unions and greater international trade, they’re exposed to much more competition nowadays. As a result, wages have stagnated or fallen in the U.S. in recent decades.
But corporate profits have actually been rising since the 1990s, the opposite of what you’d expect if business was really so competitive. Puzzling anecdotes abound: Microsoft has missed out on a series of new products in the past decade, yet as Don Sull points out, it continues to be highly profitable.
The decline in competition shows up in all sorts of other metrics, starting with the size of companies. In a competitive economy you tend to get lots of little, focused companies. If a company tries to become big, it usually fails because it becomes less flexible and responsive to competitive threats. If it succeeds, that’s usually because it has economies of scale that serve as a competitive advantage. A variety of evidence suggests that company size has increased in the last decade, not decreased. Those competitive advantages are real.
Meanwhile we’re seeing less entrepreneurship. Overall new business formation ismuch lower than it was in the 1980s. Despite the internet and cheap, super-powerful computers, people aren’t seeing a lot of opportunity to challenge incumbents. Silicon Valley may be buzzing with startups, but as Eric Garland recently pointed out, most of them are trying to get sold to the giants, not to run them out of business. Business dynamism seems to have fallen, removing rivals that would have dampened profits in previous decades.
And what about the internet anyway? There’s been growing attention to the power of intermediaries. As Benjamin Edelman noted in HBR, “businesses and consumers have become starkly more dependent on a number of powerful platforms.” Instead of ramping up competition with frictionless commerce, the web may be generating a whole series of winner-take-all monopolists. And the web itself doesn’t have the power it used to. Much of what used to take place there is shifting toward apps, which are “walled gardens” controlled by big companies.
When big companies do gain a competitive advantage, they have less to worry about from regulators. The current investigation into airlines notwithstanding, the U.S. government has been less concerned with antitrust than in previous decades. As Luigi Zingales has observed, politicians are increasingly “pro-business” rather than “pro-market.” And with the electoral system relying more on corporate donations, it’s become easier for big companies and their industry associations to win support for beneficial regulations and subsidies – so much that “corporate welfare” has become a rallying cry of the Tea Party. Washington, D.C., has become one of the wealthiest parts of the United States, even as federal employment has fallen.
How can the conventional wisdom be so wrong? One possibility is that labor, capital, and many commodities have become so cheap that big companies are getting a windfall. Another is that short-term oriented companies are so desperate for margins that they’re hollowing out their operations or eating their R&D seed-corn. But we’ve seen higher profitability for so long that deeper forces are surely at play. Otherwise, business competition would have eventually forced companies to pass the windfall onto consumers.
Maybe profitability has been high because a continuing stream of “big bang” innovations have added so much value that companies can keep a large chunk as profits even while lowering prices for consumers. But there’s no evidence of these big gains in the macro evidence. Overall productivity growth has actually been below historical levels for the last decade. Corporate profits have risen relative to overall GDP. We are living in a time of amazing technologies, but that’s arguably been true of every period since the industrial revolution.
In fact, if competition is as tough as people say, we should see companies scrambling to work much more efficiently with new technologies and work practices. But they don’t seem to be, at least at the macro level, as compared to earlier decades. A close look at a number of HBR articles will show authors expressing frustration that companies are taking their time in implementing great new management ideas.
Taking a cue from Don Sull, we can distinguish between two types of competition. One is the kind of disruption that McGrath and others are talking about, where once prized strategic advantages disappear almost overnight. That still happens, but it’s a much smaller share of the macro economy than we think. The other is the more static, ongoing rivalry that Porter focused on, which seems to have declined since he wroteCompetitive Strategy, and which describes most industries.
Part of the problem here may be simply inertia. U.S. corporate profits peaked in the 1950s, then declined as companies struggled with European and Japanese imports starting in the 1960s. The 1970s added deregulation to the mix. Back then U.S. industry truly did face intense competition. Profitability eventually started rising again in the 1990s. But we were slow to get the message, probably because we were so impressed with the internet and globalization. Major companies and even whole industries were getting “blown to bits” in very public ways. It was easy to assume that competition was just as intense as ever.
The other factor is surely that a lot of us would rather talk about competition than the opposite. Going back to the 1970s again, the struggles of big companies led to an explosion in business media. Corporate doings became a prominent feature of news reports, and successful CEOs became cultural heroes. Once in place, these voices inevitably looked for something dramatic to talk about.
It’s similar to what has happened with violence in society, which also spiked in the 1960s and 70s. Murders and assaults have fallen dramatically since then. Yet most people think violence is still high, because the news media loves to report those stories. Business is just less interesting when competition is moderate, rather than intense.
John T. Landry is a contributing editor to HBR and a business historian.
IMAGE CREDITS: http://i.ytimg.com/