A 40-Year Debate Over Corporate Strategy Gets Revived by Elon Musk and Warren Buffett

Here is an excerpt from an article written by Walter Frick for Harvard Business Review and the HBR Blog Network. To read the complete article, check out the wealth of free resources, obtain subscription information, and receive HBR email alerts, please click here.

Illustration Credit: Neasden Control Centre for HBR

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When Tesla CEO Elon Musk said that “moats are lame” during the company’s earnings call last week, he was calling out Warren Buffett, the chair of Berkshire Hathaway, who uses “moat” to describe barriers to imitation that stave off competition. “If your only defense against invading armies is a moat, you will not last long,” Musk continued. “What matters is the pace of innovation — that is the fundamental determinant of competitiveness.” In response, Buffett defended the idea of moats at Berkshire Hathaway’s shareholder meeting, which prompted satirical tweets from Musk.

Nothing about this debate is new, except maybe the tweeting. As entertaining as it is to watch these two billionaires argue in public, their different perspectives are near-perfect expressions of the two most influential strategy ideas of the past half-century.

Buffett’s notion of moats that prevent competition is nearly as old as the field of strategy itself. Much of the pioneering work in that discipline was concerned with identifying which industries and which positions within an industry give companies an advantage by making them hard to copy. Michael Porter’s 1979 HBR article on the five forces that shape strategy offered companies a framework for thinking through those positions, and his 1996 article “What Is Strategy?” — which advised them to stake out a sustainable position based on a unique advantage — codified it. (His advice in a nutshell: Build a moat.)

However, as early as the 1980s, strategy theorists began to warn that competitive advantage wasn’t static — that today’s advantage may not be sufficient tomorrow. “For any company in any industry, the key is not to get stuck with a single simple notion of its source of advantage,” George Stalk Jr. of BCG wrote in HBR in 1988. “The best competitors, the most successful ones, know how to keep moving and always stay on the cutting edge.” In fact, he continued, competition is so dynamic that speed is a critical strategic weapon.

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Here is a direct link to the complete article.

Walter Frick is a senior editor at Harvard Business Review.

 

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