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strategy and business
 / Winter 2008 /Issue 53(originally published by Booz & Company)


Best Business Books 2008: Strategy

How then should a company pursue a strategy? In a riposte to so many formulaic books, Barnett writes: “There is no one best strategy. Rather, organizations must perform better than their rivals according to the context’s logic of competition.” What works best is context-specific; change the context and the company’s performance will vary. Some competitive contexts may be coarse-grained — the results of competition are relatively few and far between but of huge consequence, such as winning or losing a contract for a new airplane or a bid for a major construction project. Others may be fine-grained, with payoffs that are frequent but less consequential, such as merchandising a consumer product in a narrow geographic region. But whatever the competitive context, explains Barnett, “winning and losing in competition depends on whether organizations are well adapted to the specific competitive logic that prevails in their contexts.”

Barnett does not underestimate the uncertainty that managers face in understanding their competitive contexts or the difficulties inherent in having to make inferences quickly on limited samples. “If, with the benefit of large samples seen in hindsight, those who study organizations face indeterminacy, then even greater uncertainty is faced by those who manage organizations,” he writes. “After the fact, we can look back over the evidence of an industry’s history and recount with greater clarity the various logics of competition as they have unfolded. Before the fact, however, these logics are yet to be discovered.”

Barnett’s view of fitness through competition is borne out by sound and extensive analysis of two very different industries: commercial banking and computers. Through an empirical analysis of commercial banks in the state of Illinois over many years, based on extensive archival data, Barnett shows that banks that had been exposed to intense competition became stronger competitors. The same pattern is found in the computer business: In several industry segments — mainframes, minicomputers, and microcomputers — manufacturers discovered ways of matching technologies with customer needs through the process of competition itself. Observes Barnett: “The logic of competition that we would come to understand in each market was discovered by competing.” As for the performance implications, it turns out that computer manufacturers with greater exposure to competition were also the ones more likely to survive.

Barnett’s findings have profound managerial implications. Many recent strategy books urge managers to change the game, to search for blue oceans free of competitors, or otherwise to escape the rigors of competitive rivalry. But as this author says, “Managers busily pursuing a strategy of isolation are especially challenged by this theory. If exposure to competition is what generates capabilities, then the strategy of differentiation in order to minimize competition is called into question.” Analogies from sports often miss the mark in business, but here they seem apt. Competition brings out the best in athletes — and in companies. Records are set not in practice, but in head-to-head confrontations where rivals spur one another to do their best.

If isolating oneself from competition is not wise, surely the opposite is not recommended, either — walking into the buzz saw of intense competition, where companies have little ability to differentiate their offerings. Presumably the lesson for managers is to steer a middle path, but Barnett does not offer many guidelines for action here.

Furthermore, when the logic of competition changes, capabilities that were essential in one environment may prove to be less so in another — or even prove to be counterproductive. Thus, Barnett offers up the notion of a firm getting caught in a competency trap — becoming so well adapted to a given competitive context that it is unable to adapt when the game changes. He also raises the idea that seeking to break out of existing markets and apply experience elsewhere may not be very effective. Managers may think their experience will help them thrive in new markets and conditions, when in fact the opposite is likely to be the case.

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