Why Competitive Advantages Die

Since every week Mon-Fri, we remind our clients why great companies can sustain their competitive advantages for decades, it is worth taking the weekend to dwell on why for the vast majority of companies competitive advantages do NOT sustain. At the heart of this lack of sustenance is the insight from this quote by Prof Bruce Greenwald “At the end of the day, everything is a toaster” i.e. no matter how wonderful your product, if it is successful then others will copy it and sooner rather than later your product will be as easy to make as a toaster.
This piece from Morgan Housel provides further insights into why successful companies find it hard to sustain their success. Three points from this piece strike us as being particularly relevant for successful Indian companies.
Firstly, once a company becomes successful, its management has a tendency to put blinkers on and shut themselves off from new ideas: ““Being right is the enemy of staying right because it leads you to forget the way the world works.” – Jason Zweig. Buddhism has a concept called beginner’s mind, which is an active openness to trying new things and studying new ideas, unburdened by past preconceptions, like a beginner would. Knowing you have a competitive advantage is often the enemy of beginner’s mind, because doing well reduces the incentive to explore other ideas, especially when those ideas conflict with your proven strategy. Which is dangerous. Being locked into a single view is fatal in an economy where reversion to the mean and competition constantly dismantles old strategies.”
Secondly, as a company gets bigger, the HR challenges of managing and motivating thousands of people gets exponentially harder: “Scaling a product requires scaling HR, which is monstrously complex and usually unrelated to your original skill. Designing a device or discovering an investment strategy is a million miles separated from managing 500 or 1,000 people. Managing one-hundred thousand people is a different universe. Even when responsibilities are delegated, creating a culture that promotes trust, creativity, and growth is likely a totally different skill than was required to build your product in the first place.”
And thirdly, as a company makes money, as its executives enjoy the good life, naturally they become complacent and tend to lose their edge: “The decline of paranoia that made you successful to begin with. I like the idea that systems are better than goals, because once you reach a goal you tend to stop doing the thing that made achieving the goal possible. “I’m going to work out every day” is better than “I’m going to lose 10 pounds” because once you lose 10 pounds you’ll probably stop working out. Same thing happens when a successful business or career hits a big goal. Paranoia is a trait newcomers use to combat how deeply the odds are stacked against them. But it tends to die once a goal is hit. Few things sap the paranoiac drive to do better than stable cash flow and high profit margins. Michael Moritz of Sequoia was once asked why his firm had thrived for 40 years. “We’ve always been afraid of going out of business,” was his answer.”