Compete, innovate, or both?

Competing or innovating is the most fundamental strategic decision you can make. Confusing the two is a recipe for frustration and failure.

Each approach dictates a specific mindset and attitude that ultimately influences every decision a company makes. Neither is “better.” A competitor is defined by struggle and the intentional embrace of that struggle. An innovator is defined by new or unusual thinking that upends the conventional logic of competition. These stances dictate strategic, tactical, and operational decisions and effectively become part of a company’s cultural unconscious.

Companies commonly assert that they will “innovate in order to beat the competition.” As an outcome this statement is altogether plausible. As a process, however, it is not. To say this is to confuse outcome with original intent and, more importantly, correct procedure. You can proceed from innovation to beating the competition in point of fact. But procedurally, starting with this goal clouds and dilutes the process of innovation. It means you have accepted the terrain and the stakes in a manner that will limit and constrict innovation. It mistakes a serial process (innovating in a way that ends up defeating the competition) for a fictional parallel one (achieving this outcome by making it the sole explicit goal).

Competition begins with the consent to enter a defined market space. The relationship to one’s opponents becomes the primary driving force in decision-making. Competing means I have accepted there is a limited-sum game worth participating in. It means I believe I have special advantages that will let me enter this defined space, “attack” and gain a valuable share of the business that is currently flowing to those competitors. It is, as Mauborgne and Kim put it, a “red ocean strategy” based on the acceptance of an arena where I can hit my opponent, but in which my opponent can also hit me back.

Innovation begins with a blank page. It entails an open starting relationship to the environment and all the players in that environment. It implies a complete reframing or restatement of a traditional business problem or even a rejection of the problem itself as immaterial. Innovation is a “blue ocean strategy” that avoids competition and looks for freely navigable spaces. The innovator may end up destroying many diverse types of “competition” incidentally as he or she creates a new space in the business environment. But defeating competition is an accidental outcome and is never conceptualized as the original goal.

Winning through innovation, again, must happen serially after the act of innovation itself. The point cannot be made strongly enough. The innovator does not accept the conventional definition of a situation or problem as a given. Instead, she reevaluates an entire value chain or environment, observes what has changed, and rethinks the conventionally-understood goals and values of all players. The result is a radically different concept of the value delivered, which may end up undermining many competitors, but not by design.

Uber is an outstanding example of an innovative service based on a fundamental redefinition of value. The traditionally understood value of a taxi ride is that it takes the passenger from Point A to Point B. Uber goes deeper, and focuses on the subjective personal experience of finding, riding in, and paying for a cab. It takes the most vexing parts of this process – difficulty finding the cab, worry about when a called cab will show up, concern that the driver won’t know the destination, and uncertainty about how payment will be accepted – and creates a single seamless experience that eliminates all four issues. It does so by leveraging the smartphone, a new environmental variable that makes the entire solution possible.

Ambivalence towards competition and a general preference for innovation represent the entrepreneurial tone of our times. At the far end of antipathy towards competition we have Peter Thiel, cofounder of PayPal and author of the vigorous Zero to One. Thiel, like the bygone monopolists of the Gilded Age, views competition as a fundamentally negative and destructive force – one that benefits almost no one, not even necessarily the consumer. As an engineer focused on the time and cost required to create innovative products, Thiel believes competition is an ideology within American business and emphasizes instead the importance of originality and even secrecy.

A superficially different but functionally similar position is held by Marc Benioff, founder of Salesforce.com. As a promoter, salesperson and connector, Benioff is focused on messaging and more specifically on the messaging that wins business. In Behind the Cloud, he counsels readers to “always go after Goliath” and recounts how Salesforce grew through a direct assault on the software industry – its “No Software” campaign and clever marketing attacks on Oracle and Siebel. However, Benioff’s “embrace” of competition is mostly rhetorical and hence deceptive. Salesforce itself is based on a radical rethinking of the software ecosystem and the assumptions of on-premise enterprise software. A world-beating product is the happy outcome of these innovations, but if Salesforce’s originally intent had been simply to “beat Oracle,” they would have been locked into a battle with the giant and would have lost on the much stronger competitor’s terrain.

Why do today’s entrepreneurs seemingly prefer innovation to competition? The answer is likely that they have a new platform on which to innovate, the wired world and the “Internet of things” forming around it. These conditions make the radical reframing required for innovation possible and plausible in countless situations. Entrepreneurs are using technology to redefine business problems, leverage others’ assets, and skim considerable value in the process, as Uber, Airbnb, and numerous others are doing. These types of innovations, like drug compounds in the pharmaceutical industry, are not infinite in number. Eventually we may find ourselves back in conditions where competition is the better, or perhaps the only, option for many businesses. Until then, the cultivation of the innovative mindset seems most likely to generate the growth, leverage, and strong profits that businesses naturally seek.