Playing To Win
What Strategy Questions are You Asking?
The Key to Competitive Advantage
I was with a Silicon Valley software company client last week talking about the nature of competitive advantage. In the discussion, I used a metaphor that he found helpful to his thinking. I decided that it warranted a post. So, I am writing my 27th Year III Playing to Win Practitioner Insights (PTW/PI) piece is on What Strategy Questions are You Asking: The Key to Competitive Advantage. You can find the previous 137 PTW/PI here.
The Popular View of Competitive Advantage
The most popular view of the nature of competitive advantage is that it is represented by a moat. The person who popularized this view is Warren Buffett who famously spoke on the subject during the 1995 Berkshire Hathaway annual meeting. He explained that his most desirable investment target was a company protected from competition from a deep and wide moat — and moreover, one that was stably impervious to breaching.
I think it became popular because metaphors matter. People comprehend and internalize them more easily. And when they do, they tend to adopt them literally, despite their origin as metaphors. That is, the metaphor becomes the thing like a map becomes the territory. A moat is a stable, not dynamic thing. As Buffett emphasized, the best moat is a permanent one. This promotes the idea of competitive advantage as static and unchanging.
My Conception of Competitive Advantage
I don’t disagree fundamentally with Buffett on competitive advantage. Every company should strive for an advantage over competitors. As I have argued many times, competitive advantage is better for customers, employees, shareholders, and communities in which companies operate. But I don’t like the metaphor because I see competitive advantage as dynamic, not static like a moat. And to be clear, I am not saying competitive advantage should be dynamic. I am saying, it is dynamic.
For me, the metaphor for competitive advantage is a long row of rooms. In this conception, every company, at any given point in time, exists in a room of its own making. The room is defined by the set of questions on which the company is working — and that set of questions is, in turn, defined by what the company understands about the market in which it competes. It understands things about the customers it serves, the technologies it uses, the competitors it faces, the industry in which it operates, etc. That causes it to work on projects and initiatives about which it currently knows. It competes on bases that it knows. It can’t work on things about which it doesn’t know because it can’t pose questions about things it doesn’t realize exist.
But in due course, working diligently on those questions in that room will bring about insights which will allow the company to move through a thick curtain to the next room. In that new room, it has access to questions that only became obvious to the company after it has contemplated and answered the previous questions. There is no other way into that room but through the curtain.
Let’s use P&G and its Tide laundry detergent as an example. Thanks to its long experience (launched in 1946) with the brand and a longstanding leading market share with detergent consumers, it has been able to ask and answer innumerable questions about what consumers care about, how to formulate and manufacture detergents, what technologies can be brought to bear, etc. Over time, that knowledge — from addressing and answering questions — has enabled P&G to move into the next room earlier than its competitors have been able to. Alone successively in each of those rooms, P&G has been able to contemplate new sets of questions about the intersection of what consumers would love and what is technologically possible and, as a result, was able to lead with game-changing advancements like compact powdered detergent, liquid detergent with bleach, detergent that washes as well in cold water as others do in warm water, and so on.
Most recently, P&G was able to formulate a question about what might be a more convenient form than a pourable bottle of liquid detergent with a measuring cup. Out of that consideration came the idea of Tide Pods — a step-function improvement in ease of use and perfect dosing. It has been an absolute killer product — unique, loved by consumers, and at a considerably higher price. It has, demonstrably, a huge advantage.
But is the advantage P&G’s superiority in taking a consumer insight and turning that insight into a new and interesting product — Pods? Or its ability to produce a new form of detergent at scale? I would never argue that P&G has no advantage on these fronts. But I don’t see any of these as the true advantage. The true advantage was that P&G was asking — and then answering — questions that its competitors had no idea were questions that they should be asking.
P&G was in another room that facilitated insights which made Tide Pods an obvious idea — but to their people only. I think of it as the moral equivalent of data room that gets created by a company that puts itself up for sale. Potential acquirors have access to a cornucopia of information that they wouldn’t have had without the data room. Being in that room — alone — enabled P&G to work away at the new product for years without competitors lifting a finger on the idea — because all of them were at least one room behind. They had no chance to answer questions they had no idea were questions. They couldn’t work on something that they had no way of thinking about. There has to be a hypothesis in order to have exploration.
That is the true nature of competitive advantage. You could still call it a moat and argue that Tide Pods is protected by a moat. But the metaphor isn’t particularly apt because the ‘moat’ in question is everchanging. Tide Pods as it currently exists isn’t the true manifestation of the P&G detergent advantage/moat. The true advantage is that P&G’s detergent folks are already in the next room — thinking about things their competitors aren’t yet in a position to think about.
I would argue that the most important thing protecting any advantaged company — perhaps really the only thing, but that might be exaggerating a bit — is the curtain separating the room it currently is in from the room it was formerly in. The worst thing to see is its competitor poking through that curtain. I think about the great American baseball legend Satchel Paige’s admonition: “Don’t look back, something may be gaining on you.”
But in this case, I would beg to differ with Paige. You should look. It is important to know whether the curtain has been breached and your competitor is thinking about and working on the same things you are because they have gained access to the same room as you. If they have, your task is to figure out how to get to the next room — how to be asking the next set of questions.
It is not easy. You can’t get into the next room just because you want to be there. You have to be thorough and conceptual about your business. You have to answer the questions in your room to get clues about the nature of the questions in the next. That means being endlessly curious about your business — the customers, the technologies, the anomalies, the outliers. Have urgency because it is competitive life or death. If competitors get into the next room before you do, it can be deadly.
Advantage and Data in the Modern World of Business
The modern world is completely ga-ga over data. Data is everything — it will sing magical songs to you. No, it won’t. Data analysis without hypothesis is just data mining. But if you use data — and the ever-increasing capacity to collect and process data faster — to refine, deepen, and enhance your understanding of your current room, you will be able to answer questions and frame new questions that will get you into the next room, and get there earlier. To me, the advantages of Google, Amazon, Facebook, Uber, and Netflix are not static moats but rather the product of their use of data to get to the next room, and the next, and the next — before their competitors. I have no doubt that as it established its massive lead, Netflix was asking questions about exactly how entertainment consumers chose content that Time Warner, Comcast and others just weren’t even imagining were questions. And same with Uber versus Lyft. When these companies refer to data advantage, it is really a questions advantage. Only if you have a great question can you get a great answer.
However, it is very easy to get self-satisfied and stop asking the questions that will enable transit into the next room. I believe that is happening to some of the tech giants. They should always be in the next room rather than watching upstarts frolic in that room!
Practitioner Insights
Be very deliberate about the questions you ask about your business. Invest heavily in the activity. Never just do. Do and reflect. Ask yourself, how can I ask more sophisticated questions about my business? Is it by interacting more with customers? Is it by being more systematic about the data that we collect about them? Is it by hanging out with technologists working in my industry? Is it by paying attention to anomalies? Rather than dismissing anomalies because they are anomalous, ask: how can I think about this anomaly as a leading indicator, not a one-off?
The goal is to acquire clues as to what is the next set of questions, because when you figure out what those questions are, you can slip through the curtains to the next room. And as long as you are in that room, you have a monumentally valuable lead in the ability to answer the next questions, and get through the next curtains, and so on. If you see any competitor appearing to ask questions that you are not yet asking, that is your signal that you better start understanding those questions because it is a threat to your survival. If they get to operate in the next room before you, it could be all over.
Always think about advantage as ever-evolving. It isn’t a moat. If you think it is, you won’t focus enough on the next room. And the advantage of always being in the next room is truly powerful — a truly renewable resource that is well worth pursuing.
