Simplification, Oversimplification, and Competitive Advantage

Bruce Greenwald‘s and Judd Kahn’s  book has great cases and it is easy to see why managers might find the certainty they communicate useful. They suggest simplifying how we consider competition. They start with the five forces so beloved of generations of MBAs. After praising Michael Porter they argue he over-complicated the world. To Greenwald and Kahn one force is so important that “leaders seeking to develop and pursue winning strategies should begin by ignoring the others and focus only on it.” (Greenwald and Kahn, 2005, page 5). It is an admirably bold position.

My worry wasn’t with their boldness but their imprecision. Their key force is barriers to entry which they equate with Porter’s Threat of New Entrants. This seems strange as a barrier and a  threat are quite different in common English usage. Furthermore, consider that the threat from potential entrants can be reduced by an incumbent’s credible commitment to retaliate. At the risk of seeming pedantic I’m not totally convinced that we should call this a barrier to entry given it does not happen at the time of entry but changes the potential entrant’s expected profit calculus after entry.

Their most contentious claim is that barriers to entry and competitive advantage are interchangeable.

“The existence of barriers to entry means that incumbent firms are able to do what potential rivals cannot. Being able to do what rivals cannot is the definition of a competitive advantage. Thus, barriers to entry and incumbent competitive advantage are simply two ways of describing the same thing.” (Greenwald and Kahn, 2005, page 6).

This can’t be correct. Competitive advantage belongs to a single competitor, barriers to entry are surely in respect of a market. Take the soft drinks market. A law banning all drinks but Coke or Pepsi would create a strong barrier to entry but wouldn’t give Coke or Pepsi a competitive advantage over the other.  Similarly Coke’s brand strength may be both a barrier to entry to the market and a competitive advantage for Coke but doesn’t increase Pepsi’s competitive advantage.  Barriers to entry and competitive advantage simply aren’t the same thing.

Competitive advantage and barriers to entry are like rain and snow. There is a reasonable amount of crossover but they are different enough that lumping them together causes problems. Business academics should clarify our meanings or else we risk giving managers umbrellas and pushing them out into snow-storms.

Read: Bruce Greenwald and Judd Kahn (2005) Competition Demystified: A Radically Simplified Approach to Business Strategy, Portfolio Paperback Edition