Classic strategic concepts like the five forces, blue oceans, and core competencies are familiar, brilliant, and useful, but they aren’t the final word in competition. The rules of strategy have never been static and the ascent of the tech giants is reshaping them once again. As always, no approach is one-size-fits-all. For some companies, the answer will be to become bigger, broader, faster, and more like the tech monopolies. Others will need to remain focused deliberately, honing a few unmatchable capabilities, brands, or services. The four short pieces that follow will help you rethink your company’s strategy to compete and win among the giants.

THE OLD AND NEW RULES OF COMPETITIVE ADVANTAGE

by Julian Birkinshaw

Warren Buffett is famous for investing in businesses that have what strategists call “deep moats.” The moat is what protects the business from competitors. Sometimes it is based on access to a scarce resource or ownership of a patent, sometimes it is based on customer loyalty and a strong brand, and sometimes it is an artifact of government regulation.

How do you build a moat? One approach is to position your business skillfully, by finding an industry with high entry barriers and then differentiating your product to keep customers hooked in. The other approach is to focus on your underlying assets and capabilities, to invest in those assets that are rare, valuable, and hard for competitors to imitate.

These two worldviews—market positioning and the resource-based view—have dominated how we have thought about competitive advantage for 40 years.

But the rapid growth of business ecosystems in recent years challenges this thinking. Most of these ecosystem orchestrators, like Google, Alibaba, and Uber, don’t make the things they sell; they exist to link others together, and this makes the old positioning-based logic less relevant. And, of course, they don’t have many assets, either. They create value through relationships and networks, not through physical goods or infrastructure, so arguments built around asset ownership are equally challenging. These firms are also looking to grow the market—by increasing the flow of people and goods—rather than to capture as much of the existing market as possible.

In other words, they don’t care much for the moat-based logic of competitive advantage. I think a more apt metaphor for these firms may be the logic of the turnstile: They want to get as many players involved in their ecosystem as possible, and to get them interacting according to rules they have shaped. Of course, there are many ways these companies make money—committees, membership fees, advertising sales, and so on—but the key point with all these business models is that they work better when the ecosystem is larger. That’s why the turnstile metaphor is useful.

This shift from moats to turnstiles can be hard to grasp. For most business strategists, it is second nature to protect your existing assets and to keep competition at bay. But a pure-play orchestrator is happy to open up to competition and to share its intellectual property, as long as that keeps the ecosystem growing. Its aim is to maximize the number of people coming through the turnstile, rather than to increase the height of the fence or the width of the moat.

NETFLIX’S ANSWER TO COMPETING WITH AMAZON

by Walter Frick

Amazon doesn’t just want to be the place where you do your online shopping. It wants to be where you watch TV, how you interact with your home, the infrastructure behind your favorite websites—even the place where you do whatever offline shopping is left after its e-commerce behemoth is done gobbling up brick-and-mortar retail.

But is the only strategy in our winner-take-all era to get as big as possible, to aspire to eventually serve everyone, and to meet their every need?

Netflix’s Reed Hastings doesn’t think so. Of course, Netflix is no mom-and-pop operation. But in a telling interview with Recode, Hastings explicitly rejected the Bezos approach of strategy-as-world-domination. When asked why Netflix has no plans to add live sports, he explained:

We’re not trying to meet all needs. So, Amazon’s business strategy is super broad. Meet all needs. I mean, the stuff that will be in Prime in 5 or 10 years will be amazing, right? And so we can’t try to be that—we’ll never be as good as them at what they’re trying to be. What we can be is the emotional connection brand, like HBO or Netflix. So, think of it as they’re trying to be Walmart, we’re trying to be Starbucks. So, super focused on one thing that people are very passionate about.¹

Michael Porter would approve. “The essence of strategy is choosing what not to do,” he writes in his 1996 classic “What Is Strategy?” In Porter’s view, sustainable competitive advantage depends on trade-offs, including the fact that it’s difficult for one company to serve all customers across a wide range of needs. “A company known for delivering one kind of value may lack credibility and confuse customers—or even undermine its reputation—if it delivers another kind of value or attempts to deliver two inconsistent things at the same time,” Porter writes.

Hastings is betting that Porter’s rules haven’t been repealed. Do strategic trade-offs really limit Amazon’s ability to compete with Netflix? It’s hard to say. Maybe digital technology and the changing economies of scale really have changed the nature of competition. But for most companies, trying to compete on scale with tech’s frightful five is a losing gambit. And if you were to bet on which firms would manage to thrive alongside the giants, you could do worse than picking ones like Netflix, where the CEO is thinking hard about trade-offs and differentiation.

In an era where a small number of huge companies have unprecedented reach and control, Porter’s central question seems more important than ever: What won’t you be?

WALMART WON’T STAY ON TOP IF ITS STRATEGY IS “COPY AMAZON”

by Denise Lee Yohn

Walmart has made a series of moves to fight Amazon and grow its e-commerce business. It purchased Jet.com and installed Jet’s founder, Marc Lore, as head of its e-commerce division. It has also been acquiring e-commerce niche players, including Shoebuy and outdoor gear retailer Moosejaw, and digital technology companies, such as search experts Adchemy and cloud platform OneOps.

Walmart does need to shore up its e-commerce capabilities, but its attempts to out-Amazon Amazon aren’t a winning strategy. For one thing, by offering the new shipping service, Walmart is really only playing catch-up. Lore himself described free shipping as table stakes. And Amazon is adding new benefits to Prime membership continuously.

Walmart can’t compete with Amazon Prime’s value proposition, at least not yet. Walmart’s acquisitions of e-commerce companies and digital technologies, and the talent that comes along with them, enable it to get better at this, but Amazon will continue to improve too.

Trying to beat Amazon at its own game is not only likely to fail, it’s also not in Walmart’s best interests. Walmart has perhaps the best physical distribution and retail network in the world. It needs to be competitive on digital channels, sure. But, more important, it should excel at brick-and-mortar. Improving the in-store experience, promoting omnichannel shopping and fulfillment options, and developing in-person service innovations are avenues that leverage its brand equity and core competencies—and they’re approaches that would put Amazon at a disadvantage. Walmart should invest to advance its strongest competitive advantage: its physical stores.

The company’s obsession with competing with Amazon also seems to have taken Walmart’s focus off its brand identity in everyday low prices. In its announcements and ads about the new free shipping service, product prices have not been mentioned. Walmart has held a low-price leadership position from its start. Now, in some cases, it can often offer lower prices than Amazon because Jet.com’s operating model doesn’t rely on holding inventory. But the company has not initially elected to make its new pricing capabilities or its long-standing low prices part of its marketing efforts for e-commerce.

Many companies feel a pull to imitate the practices of successful rivals. But this rarely ends well. Core competencies stagnate, customers become confused, and the opportunity to lead instead of follow is squandered.

IN THE ECOSYSTEM ECONOMY, WHAT’S YOUR STRATEGY?

by Michael G. Jacobides

Many firms assume they should be the focus and chief architect of any ecosystem they create. That’s not necessarily the case; sometimes you are better off sharing the role or being a complementor.

If you lack the qualifications to build an ecosystem but have an IP-protected product or service that could anchor one, your best bet most likely involves attracting the interest of a large company that could buy into or license your idea. If a small-scale HVAC installer had come up with a remotely controllable thermostat, it probably could not have attracted the ecosystem of complementors that Google did. But it could have approached Google with the idea and served as a complementor while benefiting from licensing revenue. For many medium-size firms, a key strategy is to embed in many ecosystems. LIFX, for instance, connects with customers through Amazon’s Alexa, Google Home, and Apple HomeKit.

Even if you bring a great product or service to the party and have the organizational and cultural capabilities to attract complementors, it might make sense to orchestrate in partnership with another firm in order to reach critical mass. Daimler and BMW recently announced plans to jointly create a managed-mobility ecosystem combining car sharing, ride hailing, parking, and other services. Concerned about disruption from firms such as Uber and Lyft, the automakers decided to collaborate on high-end services anchored to their brands—their chief differentiator and element of value, which a wholesale migration to mobility-as-a-service (MaaS) might well erode.

A big company can also buy into an ecosystem, which can be particularly helpful if its contribution is interchangeable with other firms’ offerings. Toyota recently invested $1.5 billion in the Southeast Asian ride-hailing company Grab, reasoning that MaaS will drive demand for reliable low-cost cars. That partnership, the company hopes, will give Toyota not just a direct edge as a car supplier but also an understanding of car usage patterns that could confer an advantage over rivals such as Hyundai and Nissan.

TAKEAWAYS

While the hub economy may be upending some of the last century’s rules of strategy—and even the last decade’s—it remains as important as ever for companies to understand their unique strategic advantages and opportunities.

✓   The “build a moat” logic of competitive advantage often no longer applies when you are working with large business ecosystems and platforms. A “turnstile” metaphor for allowing more companies to coexist in an ecosystem is more appropriate.

✓   Aspiring to be a giant is not a winning strategy for most companies. To thrive among the giants, smaller companies should think hard about trade-offs, differentiation, and deciding what they won’t be.

✓   Simply imitating the practices of successful rivals can result in the stagnation of core competencies and cause customer confusion. Instead, companies should continue to invest in their unique competitive advantages.

✓   Companies may assume that they need to be the chief architect of any ecosystem in which they participate—but often they’re better off sharing the role, being a complementor, or buying into a jointly owned ecosystem.