When Tesla CEO Elon Musk said that “moats are lame” during the company’s earnings call last week, he was calling out Warren Buffett, the chair of Berkshire Hathaway, who uses “moat” to describe barriers to imitation that stave off competition. “If your only defense against invading armies is a moat, you will not last long,” Musk continued. “What matters is the pace of innovation — that is the fundamental determinant of competitiveness.” In response, Buffett defended the idea of moats at Berkshire Hathaway’s shareholder meeting, which prompted satirical tweets from Musk.
Nothing about this debate is new, except maybe the tweeting. As entertaining as it is to watch these two billionaires argue in public, their different perspectives are near-perfect expressions of the two most influential strategy ideas of the past half-century.
Buffett’s notion of moats that prevent competition is nearly as old as the field of strategy itself. Much of the pioneering work in that discipline was concerned with identifying which industries and which positions within an industry give companies an advantage by making them hard to copy. Michael Porter’s 1979 HBR article on the five forces that shape strategy offered companies a framework for thinking through those positions, and his 1996 article “What Is Strategy?” — which advised them to stake out a sustainable position based on a unique advantage — codified it. (His advice in a nutshell: Build a moat.)
However, as early as the 1980s, strategy theorists began to warn that competitive advantage wasn’t static — that today’s advantage may not be sufficient tomorrow. “For any company in any industry, the key is not to get stuck with a single simple notion of its source of advantage,” George Stalk Jr. of BCG wrote in HBR in 1988. “The best competitors, the most successful ones, know how to keep moving and always stay on the cutting edge.” In fact, he continued, competition is so dynamic that speed is a critical strategic weapon.
By the 1990s “dynamic capabilities” were a common focus within strategy. The idea, as Pankaj Ghemawat describes in his history of the field, was that a company’s capabilities, not just its assets, could form a sustainable advantage. This seems to describe Musk’s view of strategy, that Tesla’s strength comes from its capacity to innovate, rather than from its assets or any particular niche in the automotive market. (Musk’s decision to open up some Tesla patents reflects his view that capabilities, not assets, are the company’s competitive advantage.)
Perhaps the strategist Musk most sounds like is Columbia’s Rita Gunther McGrath, who in 2013 wrote a book titled The End of Competitive Advantage. McGrath put forward two main ideas: First, companies should give up on the idea of sustainable competitive advantage and admit that any advantage is transient. Second, strategy and innovation are best thought of in conjunction. “The assumption of sustainable advantage creates a bias toward stability that can be deadly,” she writes. Musk couldn’t have tweeted it better.
Neither side of this debate is likely to be proven definitively right anytime soon. However, even in dynamic, technology-driven industries like social media, moats remain a powerful force. Consider Facebook’s competition with Snap. The latter argues that its capabilities — its ability to deliver new, innovative products — gives it an edge over its larger rival. So far, Facebook’s scale and network effects — a modern moat — seem to be the better bet.
But businesses aren’t the only ones weighing the power of moats to deliver stable profits. Musk’s most controversial claim last week was, “Saying you like ‘moats’ is just a nice way of saying you like oligopolies.” Policy makers are starting to worry about the outsize profits generated by a small number of “superstar” companies, and many of them agree with Musk that those profits are due to a dearth of competition. More than a few analysts have suggested breaking up Facebook, for instance, or at least limiting its ability to swallow up smaller competitors.
As for the billionaires, not only does their argument bring two schools of strategic thinking to life, but it also proves (for the umpteenth time) that John Maynard Keynes had a point when he said, “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” In this case, though, Michael Porter and his peers are hardly defunct. On the contrary, their intellectual influence is alive and well.
from HBR.org https://ift.tt/2I5ggOY
