Few would dispute that the original business strategies of Dell Computer, Walmart, and Southwest Airlines were remarkable. Each company achieved a strong advantage over its competitors in very competitive industries. But during the last 15 years, all three have struggled to discover and develop new sources of value, or at least sources not already anticipated or expected by investors.
Walmart’s early success came from focusing on small towns and creating a regionally dense network of stores. Walmart benefited from being the only discount retailer in these small towns and efficient logistics stemming from high store density within each region. However, despite Walmart’s strong position and successful strategic rollout, its equity price has seen little growth since 1999.
Only in recent years has its share price rebounded to match its 1999 level. For its market value to rise significantly, Walmart needs to reveal a source of new, unexpected growth, such as the capacity to profitably expand at large scale in developing global regions.
Southwest’s story is similar. For several decades, it maintained a profitable and well-crafted strategic position. Like Walmart, Southwest assembled highly complementary activities that deliver a distinct cost advantage — a position that competitors have been unable to replicate. Nonetheless, Southwest’s share price stagnated for a decade. After the price per share broke through $22 in December 2000, it took until 2014 for the value to approach that number again. More recently declining fuel prices have elevated the entire industry’s market valuations, but for much of the previous 15 years the market awaited the unveiling of a novel and unexpected source of growth.
In the 1990s, the positioning advantage Dell created became the stuff of legends. Dell managed to cut massive expensive by reducing both parts and finished goods inventories, two things that depreciated at five percent a month. Competitors found it nearly impossible to replicate, and Dell saw a meteoric rise in market capitalization.
Founder Michael Dell learned a painful lesson about investors’ unrelenting demand for new and unexpected growth. At an international IT convention in 1996, a reporter asked Michael Dell what he would do if he were running his struggling competitor Apple. He boldly pronounced that he would shut Apple down and redistribute its assets. A decade of stagnation in Dell’s share price soon followed.
Apple, meanwhile, experienced a dramatic rise in value as it transformed itself from a computer manufacturer into a giant across three industries: consumer electronics, music retailing, and mobile phones.
All three companies, and many others like them, prove a critical point. Sustaining competitive advantage — the commonly understood outcome of brilliant business strategy — does not sustain value creation, the ultimate goal for most firms and their shareholders. While the rare firm crafts an effective business strategy that preserves a valuable position, only the exceptionally rare sustains value creating. A brilliant business strategy is tremendously difficult to repeat.
What’s more, the powerful competitive advantage enjoyed by firms like Walmart, Dell, and Southwest often ends up functioning as a straitjacket. As Michael Porter points out, “[E]fforts to grow blur uniqueness, create compromises, reduce fit, and ultimately undermine competitive advantage. In fact, the growth imperative is hazardous to strategy.”
The backbone of what we commonly teach in strategy — the positioning concept — provides little guidance on how to find new sources of value creation. At present, positioning logic only recognizes the manager’s dilemma with little strategic guidance beyond, “Dig in.” Digging in, however, doesn’t cut it in capital markets. Investors want newly discover, unexpected value of compounding magnitude. Tomorrow’s positive surprise must be bigger in dollar magnitude than yesterday’s.
Managers need help achieving this goal, and in my new book, Beyond Competitive Advantage, I’ll present the concept of corporate theory as a means of providing managers and executives with a framework for thinking beyond competitive advantage as they negotiate a changing and challenging environment in search of sustained value creation. It’s not an abstract academic construct set about with obscure equations and language. Rather, it’s a narrative, an explanation, or even an image that reveals how a particular company can accumulate value or compose competitive advantage over time. Fortunately, humans are predisposed to composing these theories. They may not always be good or correct, but more will flow — and some will be good.
This excerpt comes from Beyond Competitive Advantage. Published June 14, 2016, by Harvard Business Review, enter your email below to download the first chapter.