Almost every time I teach the basic concepts of strategy — the five forces framework or the principles of competitive advantage — I get the same question. “These ideas are more than 30 years old,” managers complain. “Isn’t there anything more recent?”
Unfortunately, this question demonstrates a lack of understanding of the nature of knowledge. It the same as saying to a maths professor who is explaining the principles of calculus, “These ideas are more than 100 years old. What are the new ideas?”
It took decades to figure out the basic principles of business strategy, and now that we have figured them out, we should not be valuing them any less because they have been clear to us for 30 years or more.
The basic principles are:
- If you want to earn above the cost of capital (if you want to create value), you must get a higher return on your efforts than the average competitor.
- To get a higher return than the average competitor, you must have an advantage or you must compete in an unusually attractive sector.
- There are only two ways to get an advantage. Your prices must be higher or your costs, including the cost of your balance sheet and the cost of taxes, must be lower.
- Unusually attractive sectors are those where the forces of competition are muted. Usually this is because there are few competitors. But there are other reasons, such as legislation or demand growing faster than supply.
Every day entrepreneurs find new ways of getting higher prices than competitors or of reducing costs below those of competitors. So, yes, in that sense there are many new ways to compete. For example, Mark Warner, the family holiday company, found a clever way of reducing its staff costs.
It started by recruiting students in their gap years to work on its holiday camps, paying them only the statutory minimum wage, which the students didn’t mind because they got something to put on their resumes. But Mark Warner found clever a way to reduce the costs even further. It pays a large chunk of the wages through “use of facilities” and in “board and lodging.” So Mark Warner only pays about 50 euros per week in cash…and even this is dependent on the employee completing his or her contract.
Another example comes from the restaurant industry. Some restauranteurs have found that they get higher prices for their meals if they allow the customers to pay what they think the meal is worth, instead of having stated prices. Because some customers get special enjoyment from the meal, some of which may be more to do with the people they are with, this policy is a way for the restaurant to capture more of the total value that is created by the occasion.
My point is that looking for the next new idea or next new theory is much less likely to lead to success than simply thinking hard about prices and costs and competitors. Porter had it figured out in the mid-1980s. Your challenge in the face of stiff competition is not to rewrite his theory, but to be creative about applying it. To do that, you need to come up with some clever offer that entices customers to pay higher prices or some operational innovation that lowers costs, or find a new market where there aren’t many competitors.
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