what business owes Darwin and other ref lectionson competitive dynamics

The Origin of Strategyby Bruce D. Henderson

ScaphlteSouth Dakota

Consider tbis lesson in strategy. In 1934, ProfessorG.F. Gause of Moscow University, known as "the fa-ther of mathematical biology," published the resultsof a set of experiments in which he put two verysmall animals (protozoans) of the same genus in abottle with an adequate supply of food, if the animalswere of different species, they could survive and per-sist together. If they were of the same species, theycould not. This observation led to Gause's Principleof Competitive Exclusion: No two species can coex-ist that make their living in the identical way.

Competition existed long before strategy It beganwith life itself. The first one-cell organisms requiredcertain resources to maintain life. When these re-sources were adequate, the number grew from one

Bruce D. Henderson is professor of management at Van-derbilt University's Owen Graduate School of Manage-ment. He is also the founder and chairman emeritus ofthe Boston Consulting Group and has written exten-sively on business strategy. His most recent book is TheLogic of Business Strategy (Ballinger, 1985).

generation to the next. As life evolved, these orga-nisms became a resource for more complex forms oflife, and so on up the food chain. When any pair ofspecies competed for some essential resource, sooneror later one displaced the other. In the absence ofcounterbalancing forces that could maintain a stableequilibrium by giving each species an advantage inits own territory, only one of any pair survived.

Over millions of years, a complex network of com-petitive interaction developed. Today more than amillion distinct existing species have been cataloged,each with some unique advantage in competing forthe resources it requires. (There are thought to bemillions more as yet unclassified. ) At any given time,thousands of species are becoming extinct and thou-sands more are emerging.

What explains this abundance? Variety. The richerthe environment, tbe greater the number of poten-tially significant variables that can give each speciesa unique advantage. But also, the richer the environ-ment, the greater the potential number of competi-tors-and the more severe the competition.

FOSSILS COURTESY OF AGASSIZ MUSEUM SHOP. HARVARD UNIVERSnY 139

STRATEGY

For millions of years, natural competition involvedno strategy. By chance and tbe laws of probability,competitors found the combinations of resourcesthat best matched their different characteristics.This was not strategy but Darwinian natural selec-tion, based on adaptation and the survival of the fit-test. The same pattern exists in all living systems,including business.

In both the competition of the ecosphere and thecompetition of trade and commerce, random chanceis probably the major, all-pervasive factor. Chance de-termines the mutations and variations that surviveand thrive from generation to generation. Those thatleave relatively fewer offspring are displaced. Thosethat adapt best displace the rest. Physical and struc-

tural characteristics evolve and adapt to match thecompetitive environment. Behavior patterns evolvetoo and become embedded as instinctual reactions.

In fact, business and biological competition wouldfollow the same pattern of gradual evolutionarychange except for one thing. Business strategists canuse their imagination and ability to reason logicallyto accelerate the effects of competition and the rateof change. In other words, imagination and logicmake strategy possible. Without them, behavior andtactics are either intuitive or the result of condi-tioned reflexes. But imagination and logic are onlytwo of the factors that determine shifts in competi-tive equilibrium. Strategy also requires the ability tounderstand the complex web of natural competition.

Evolution determines who survivesand who is crowded out-in businessjust as sureiy as in the jungle.

THloblteDelta, Utah

If every business could grow indefinitely, the totalmarket would grow to an infinite size on a finiteearth. It has never happened. Competitors perpetu-ally crowd each other out. The fittest survive andprosper until they displace their competitors or out-grow their resources. What explains this evolution-ary process' Why do business competitors achievethe equilibrium tbey do?

Remember Gause's Principle. Competitors thatmake their living in the same way cannot coexist-no more in business than in nature. Each must bedifferent enough to have a unique advantage. Thecontinued existence of a number of competitors isproof per se that their advantages over each other aremutually exclusive. They may look alike, but theyare different species.

Consider Sears, K mart, Wal-Mart, and RadioShack. These stores overlap in tbe merchandise theysell, in the customers they serve, and in the areaswhere they operate. But to survive, each of these re-

tailers has had to differentiate itself in importantways, to dominate different segments of the market.Each sells to different customers or offers differentvalues, services, or products.

What differentiates competitors in business maybe purchase price, function, time utility (the differ-ence between instant gratification and "someday, assoon as possible"), or place utility (wben your heatingand cooling system quits, the manufacturer's techni-cal expert is not nearly as valuable as the local me-chanic). Or it may be nothing but the customer'sperception of the product and its supplier. Indeed, im-age is often the only basis of comparison betweensimilar but different alternatives. That is why adver-tising can be valuable.

Since businesses can combine these factors inmany different ways, there will always be many pos-sibilities for competitive coexistence. But also, manypossibilities for each competitor to enlarge the scopeof its advantage by changing what differentiates it

140 HARVARD BUSINESS REVIEW November-December 1989

from its rivals. Can evolution be planned for in busi-ness? That is what strategy is for.

Strategy is a deliberate search for a plan of actionthat will develop a business's competitive advantageand compound it. For any company the search is aniterative process that begins with a recognition ofwhere you are and what you have now. Your mostdangerous competitors are those that are most like

you. The differences hetween you and your competi-tors are the hasis of your advantage. If you are in busi-ness and are self-supporting, you already have somekind of competitive advantage, no matter how smallor subtle. Otherwise, you would have gradually lostcustomers faster than you gained them. The objec-tive is to enlarge the scope of your advantage, whichcan happen only at someone else's expense.

Marketing wars are forever.Market share is malarkey

AmmonitL-Tindiiuf Basin, Morocco

Chasing market share is almost as productive aschasing the pot of gold at the end of the rainbow. Youcan never get there. Even if you could, you would findnothing. If you are in business, you already have100% of your own market. So do your competitors.Your real goal is to expand the size of your market.But you will always have 100% of your market,whether it grows or shrinks.

Your present market is what, where, .ind to whomyou are selling what you now sell. Survival dependson keeping 100% of this market. To grow and prosper,however, you must expand the market in which youean maintain an advantage over any and all competi-tors who might be selling to your customers.

Unless a business has a unique advantage over itsrivals, it has no reason to exist. Unfortunately, manybusinesses compete in important areas where theyoperate at a disadvantage-often at great cost, until,inevitably, they are crowded out. That happened toTexas Instruments and its pioneering personal com-puter. TI invented the semieonductor; its businesswas built on instrumentation. Why was it forced outof the personal computer business?

Many executives have been led on a wild goosechase after market share by their inability to definethe potential market in which they would, or could,

enjoy a competitive advantage. Remember the Edsel?And the Mustang? Xerox invented the copying ma-chine; why couldn't IBM become a major competitorin this field? What did Kodak do to virtually domi-nate the large-scale business copier market in theUnited States- What did Coca-Cola do to virtuallydominate the soft drink business in Japan?

But what is market share? Grape Nuts has 100% ofthe Grape Nuts market, a smaller percentage of thebreakfast cereal market, an even smaller percentageof the packaged-foods market, a still smaller percent-age of the packaged-goods shelf-space market, a tinypercentage of the U.S. food market, a minuscule per-centage of the world food market, and a microscopicpercentage of total consumer expenditures.

Market share is a meaningless number unless acompany defines the market in terms of the bound-aries separating it from its rivals. These boundariesare the points at which the company and a particularcompetitor are equivalent in a potential customer'seyes. The trick lies in moving the boundary of ad-vantage into the potential competitor's market andkeeping that competitor from doing the same. Thecompetitor that truly has an advantage can give po-tential customers more for their money and stillhave a larger margin between its cost and its selling

HARVARD BUSINESS REVIEW Novtmber-December 141

STRATEGY

price. That extra can be converted into either growthor larger payouts to the business's owners.

So what is new? The marketing wars are forever.But market share is malarkey.

Strategy is the management ofnatural competition. That is how itcompresses time.

Fossil FishGreen River. Wyoming

Strategic competition compresses time. Competi-tive shifts that might take generations to evolve in-stead occur in a few short years. Strategic com-petition is not new, of course. Its elements havebeen recognized and used ever since humans com-bined intelligence, imagination, accumulated re-sources, and coordinated behavior to wage war. Butstrategic competition in business is a relatively re-cent phenomenon. It may well have as profound animpact on husiness productivity as the industrialrevolution had on individual productivity.

The basic elements of strategic competition arethese: (1) ability to understand competitive behavioras a system in which competitors, customers, money,people, and resources continually interact; (2) abilityto use this understanding to predict how a given stra-tegic move will rebalance the competitive equilib-rium; (3) resources that ean be permanently com-mitted to new uses even though the benefits will bedeferred; (4) ability to predict risk and retum withenough accuracy and confidence to justify that com-mitment; and [5] willingness to act.

This list may sound like nothing more than thebasic requirements for making any ordinary invest-ment. But strategy is not that simple. It is all-en-compassing, calling on the commitment and dedi-cation of the whole organization. Any competitor'sfailure to react and then deploy and commit itsown resources against the strategic move of a rivalcan turn existing competitive relationships upside

down. That is why strategic competition compressestime. Natural competition has none of these char-acteristics.

Natural competition is wildly expedient in itsmoment-to-moment interaction. But it is inherentlyconservative in the way it changes a species's charac-teristic behavior. By contrast, strategic commitmentis deliberate, carefully considered, and tightly rea-soned. But the consequences may well be radicalchange in a relatively short period of time. Naturalcompetition is evolutionary. Strategic competition isrevolutionary.

Natural competition works by a process of low-risk, incremental trial and error. Small changes aretried and tested. Those that are beneficial are gradu-ally adopted and maintained. No need for foresight orcommitment, what matters is adaptation to the waythings are now. Natural competition can and doesevolve exquisitely complex and effective forms even-tually. Hiunans are just such an end result. But un-managed change takes thousands of generations.Often it cannot keep up with a fast-changing envi-ronment and with the adaptation of competitors.

By committing resources, strategy seeks to makesweeping changes in competitive relationships. Onlytwo fundamental inhibitions moderate its revolu-tionary character. One is failure, which can he as far-reaching in its consequences as success. The other isthe inherent advantage that an alert defender hasover an attacker. Success usually depends on the cul-

142 HARVARD BUSINESS REVIEW November-December 1989

ture, perceptions, attitudes, and characteristic behav-ior of competitors and on their mutual awareness ofeach other.

This is why, in geopolitics and military affairs aswell as in business, long periods of equilibrium arepunctuated by sharp shifts in competitive relation-ships. It is the age-old pattern of war and peace and

then war again. Natural competition continues dur-ing periods of peace. In business, however, peace isbecoming increasingly rare. When an aggressivecompetitor launches a successful strategy, all theother businesses with which it competes mustrespond with equal foresight and dedication ofresources.

Biologists are better guides tobusir^ ess tinon economists.

ScaphiteSou) Dakia

' V

In 1975, the British War Office opened its classifiedfiles on World War II. Serious readers of these descrip-tions of "war by other means" may feel inclined torevise their thinking about what happened in thatwar and about strategy generally, particularly thedifferences between actual strategies and apparentstrategies.

The evidence is clear that the outcome of individ-ual battles and campaigns often depended on highlysubjective evaluations of the combatants' inten-tions, capabilities, and behavior. But until the recordswere unsealed, only people who were directly in-volved appreciated this. Historians and other observ-ers ascribed victories and defeats to grand militaryplans or chance.

Also in 1975, Edward O, Wilson published Socio-biology, a landmark study in wliich he tried to syn-thesize all that is known about population biology,zoology, genetics, and animal behavior. Whatemerged was a framework for understanding the suc-cess of species in terms of social behavior-that is,competition for resources. This synthesis is the clos-est approach to a general theory of competition that Iknow of. It provides abundant parallels for business

behavior as well as for the economic competitionthat characterizes our own species.

Human beings may be at the top of the ecologicalchain, but we are still members of the ecologicalcommunity. That is why Darwin is probably a betterguide to business competition than economists are.

Classical economic theories of business competi-tion are so simplistic and sterile that they have beenless contributions to understanding than obstacles.These theories postulate rational, self-interested be-havior by individuals who interact through marketexchanges in a fixed and static legal system of prop-erty and contracts. Their frame of reference is "per-fect competition," a theoretical abstraction thatnever has existed and never could exist.

In contrast, Charles Darwin's On the Origin ofSpecies, published in 1859, outlines a more fruitfulperspective and point of departure for developingbusiness strategy: "Some make the deep-seated errorof considering the physical conditions of a country asthe most important for its inhabitants; whereas itcannot, I think, be disputed that the nature of theother inliabitants with which each has to compete isgenerally a far more important element of success." ^

Reprint 89605

HARVARD BUSINESS REVIEW November-Dctcmber 143