Do you want a competitive advantage in business? Why is focusing on your competition actually bad for your company?
In The Age of Agile, Stephen Denning targets companies’s focus on competition and creating long-term competitive advantages. He claims that such attention on other businesses in this way doesn’t work for two reasons: rapid change and high customer expectations.
Check out why competition isn’t the sole thing you need to pay attention to.
Focusing on Competitive Advantages
Focusing on competitive advantages in business, a concept popularized by Harvard business professor Michael Porter, suggests that firms can achieve perpetual profits by positioning themselves in protected market niches where they’re insulated from competition by structural barriers. For example, large pharmaceutical companies benefit from patent protections, which give them the exclusive rights to sell specific drugs for years. They may also face few competitors because barriers like the high costs of research and development and the extensive FDA approval process hinder startups from entering the market.
(Shortform note: To understand why businesses became so focused on finding a competitive advantage, let’s look into the history of this approach. Michael Porter introduced the concept of competitive advantage in 1985, during a period of major industry consolidation. In the 1980s, a wave of mergers and acquisitions created significant barriers of entry for startups and small firms. Many business leaders began looking for a stable niche within the market where they could maintain a long-term advantage over their competitors, and Porter’s concept became popular among business schools and business leaders.)
Why It Doesn’t Work Anymore #1: Rapid Change
Denning explains that in today’s fast-changing, unpredictable business landscape, protected market niches are rarely permanent, as barriers to competition can swiftly collapse. Globalization or deregulation can erode a company’s competitive advantage by opening the market to new competitors. Furthermore, competitive advantages that are based on technological innovation can disappear when competitors adopt new technologies.
(Shortform note: Experts agree with Denning that globalization and deregulation can make competition more intense, which may make it harder for a given business to maintain their competitive advantage. Research also supports Denning’s assertion that companies may be on less stable footing now than they’ve been in the past because of technological change. One study found that since the 1950s, the lifespan of an S&P 500 company has fallen from an average of 60 years to an average of under 20 years. The researchers concluded that the speed of innovation was likely to blame, as more and more companies fall behind by failing to adjust to the impacts of new technologies on their industries.)
Why It Doesn’t Work Anymore #2: High Customer Expectations
Furthermore, a focus on competitors distracts companies from their customers. Denning argues that customers should be a company’s priority because customers have higher expectations than ever. While companies used to have the luxury of offering customers a sub-par experience and relying on marketing and advertising to drive sales, this is no longer a viable business strategy. Companies now have no choice but to provide real value that excites their users.
According to Denning, this change is due to three developments:
1) Many tech companies have succeeded in providing customers with immediate gratification and value, so many customers now expect high-quality user experiences and refuse to settle for anything else.
2) Customers have an easier time sharing and accessing information about products and services through online reviews. This means that companies are now limited in their attempts to maintain the reputation of their products purely through advertising and marketing.
3) The fast proliferation of technology, combined with globalization and deregulation, has resulted in a competitive economy where customers have more power because their range of options is larger than ever—they can afford to be choosy.
