The most influential contemporary strategic framework, espoused by Michael Porter, is based on two exclusive ways to compete: low cost or differentiation.1 A company can achieve low cost by aggressively reducing costs or differentiate by creating something that is perceived industrywide as unique. Although low cost and differentiation call for fairly distinct strategies, both center on product economics or on delivering the “best product.” Customers are attracted by a low price or by the differentiating product characteristics that go beyond price. Although the best-product strategy continues to be relevant, our research shows that it does not describe all the ways companies compete in the current environment. Two companies illustrate this point:
- Microsoft has been a phenomenal success, perhaps the model for a modern business in a complex environment. By 1998, Microsoft had created $270 billion of market value in excess of debt and equity. Did it do this by having the best product? Microsoft does not have a 90 percent share of the market for personal computer operating systems because of low price. While it may have an effective cost infrastructure, its position is not based on being the low-cost provider. On the other hand, its operating system and, most certainly, the MS DOS product that fueled its dominance, has never had the best features or been the easiest to use. In fact, many would argue that Apple had the best set of differentiated features. Nonetheless, Microsoft is unambiguously the market leader. The source of its success is a distinctive competitive position that is not best product, but rather one supported by the economics of the system as a whole, which we label system “lock-in.”
- During a ten-year period, MCI WorldCom has grown to $100 billion in market value, with about $30 billion in annual revenue and a price-to-earnings ratio of more than 100. MCI WorldCom has generated the third highest shareholder return over the past ten years with a 53 percent annual growth from 1986 to 1996. How did MCI WorldCom do this? The predominant activity in Jackson, Mississippi, its headquarters, is acquisitions; MCI WorldCom has acquired more than thirty companies since its inception in 1985. The focus of the acquisitions is not to create the lowest cost product.