Michael Porter was the first economist to become a business guru. He used economic concepts to illustrate issues of corporate strategy. One of his most cited conclusions was the need to avoid being “stuck in the middle”. Companies, he said, must either gain a cost advantage or emphasise product differentiation. It was fatal to fall between the two stools of cost leadership and superior quality.
This claim struck me as nonsense. Middle market positions were not only viable but the preferred stance of many successful companies. In debate with Prof Porter, the eponymous chairman of Sainsbury’s supermarket defiantly displayed a model truck carrying the slogan “Good food costs less at Sainsbury’s” — a celebration of being stuck in the middle. And, when Tesco overtook Sainsbury’s in the UK market, it was not by following Prof Porter’s advice but by beating Sainsbury’s at its own game.
Yet if we look at the UK supermarket sector today, the consensus view is that Prof Porter was right after all. The most successful competitors are Waitrose, firmly at the top of the market, and German discounters Aldi and Lidl, which have placed themselves at the bottom. Tesco, the market leader, along with traditional rivals Asda and Morrisons are under pressure, apparently stuck in the middle. The transformation of fortunes is not confined to the food sector; a remarkable phenomenon in UK high street retailing is the rise of Primark, which sells clothes for less than a hotel charges to launder them. And the most valuable company in the world, Apple, charges premium prices for premium products.
Like many business gurus, Prof Porter wriggled out of the challenge of “good food costs less” by adopting a slippery definition of his proposition. “Don’t be stuck in the middle” can be interpreted as meaning that unless you have some cost advantage or product differentiation, you are unlikely to be very successful. That is a proposition so banal as to be almost tautological. A different proposition altogether says that you must emphasise either cost advantage or product differentiation, and if you aim at both you will not be successful. This may be either true or false. It is disingenuous to use the self-evident truth of the first proposition as support for the empirical validity of the second. And that, I argued back in the 1990s, was exactly what Prof Porter was doing.
Business conferences typically proceed by competitive anecdote. But these debates can never be resolved by repeating slogans and telling stories; you can usually find a narrative to support all but the most outlandish assertions. The only way to find answers is to use more comprehensive data sets, and the combination of market research and company financial statements made such analysis possible here.
My empirical research drew on a database that enabled us to relate perceived market position to return on capital employed. We discovered, to no one’s surprise, that high cost with low quality was not often a successful strategy. And low cost with high quality yielded the highest profits. Of course it did. But were you better off with low cost, low quality, or high cost and high quality, or being stuck in the middle with medium quality and medium cost? All produced similar returns.
A product offering is very rarely a sustainable source of competitive advantage because it can readily be imitated. What really matters is enjoying a competitive advantage in the market position you choose — and that typically involves matching your market position to the distinctive underlying resources and capabilities of your business. Waitrose, Aldi and Lidl are not the beneficiaries, and Tesco and Sainsbury’s not the victims, of any verity of business strategy other than the eternal one; the best strategy is to be good at whatever it is you do.
This article was first published in the Financial Times on March 4th, 2015.