The New Paradigm of Advantage

By: Umair Haque

10:51 AM Wednesday March 10, 2010

Here's something you might not know. There's enough food in the world to feed pretty much everyone. So why are more than 1 billion people nearly 20% of the world's population either starving or malnourished? And why, over the last two decades, has global hunger steeply risen? The answer has everything to do with the past and future of advantage. Over the last few months, I've discussed in depth the tectonic shifts rocking the macro and micro economy. Let's put it all together. Here's what the 21st century demands from firms of all stripes: a paradigm shift in the nature of advantage. The past of advantage was extractive and protective. The future of advantage, on the other hand, is allocative and creative. I made a little Prezi to illustrate it, below. Let's go through each category in turn. The future of advantage: Allocative. Google's advantage was built on allocating attention to content and ads better than its rivals. Google's real secret? Relevance, media's measure of how efficiently attention is allocated. Match.com is building an allocative advantage in, well, matching people with partners. Allocative advantage asks: are we able to match people with what makes them durably, tangibly better off and can we do it 10x or 100x better than our rivals? Creative. Apple's advantage is, of course, radically creative: built on creating insanely great stuff that turns entire industries upside down. Next month, the iPad promises to do what the iPhone and iPod did before it. The power's in the creativity, not just the technology: Apple's thinking different yet again. Creative advantage asks: is our strategic imagination 10x or 100x richer, faster, and deeper than our rivals? And the past:

Extractive. Over two decades, Microsoft has honed its extractive edge, coming up with cleverer and cleverer ways to extract profits from customers and suppliers. But Microsoft's just a flea on Wall St's elephant who mastered extractive advantage by finding ways to, ultimately, extract trillions from you, me, and our grandkids. Extractive

advantage asks: how can we transfer value from stakeholders to us, 10x or 100x better than our rivals? Protective. Think Microsoft's the master of 20th century advantage? Think again. Monsanto's Round-up Ready strategy protects genetically modified crops with proprietary herbicide that crops need to flourish. The result? A protective advantage: Monsanto's made sure that farmers are locked in to Monsanto as tightly as possible. Protective advantage asks: are buyers and suppliers locked in to dealing with us, 10x or 100x more tightly than to rivals? These dimensions are mutually exclusive. When a company pursues an extractive or protective advantage, it cannot hone an allocative or creative advantage. The opportunity cost of protecting yesterday is creating tomorrow. The opportunity cost of extracting resources is allocating them in better ways.To extract or protect is to forgo finding better ways of allocating or creating. Microsoft has achieved an extractive advantage but what Microsoft hasn't done is allocate software production and consumption more efficiently, or, of course, create better software. Lately, Google seems to be making mistake after mistake and the root cause is the placing an extractive over an allocative advantage. Apple's reportedly on the offensive, suing rivals and that focus on protecting yesterday might just cost it its creative advantage. Monsanto has locked farmers into crops but what it hasn't done is create better food, supermarkets, or markets. But perhaps the steepest price of a protective advantage has that Monsanto, like all its agro-giant rivals, has turned a blind eye distributing the vast surplus of food to the poor and malnourished. Putting protective advantage above allocative advantage is why, though there's enough food to feed the poor, the poor don't get fed. That's so 20th century, it hurts. Here's what's so obviously, painfully wrong with the picture of people starving in the face of agricultural giants thriving: The profits earned don't represent real value created just a massive transfer of value from people, farmers, and communities to shareholders. The future of advantage is radically different from the past for a simple reason: because it's economically better. 20th century advantage focuses firms on simply extracting resources from people, communities and society and then protecting what they extract. 21st century advantage focuses firms on creating new resources, and allocating them better. The former is useful only to shareholders and managers but the latter is useful to people, communities, and society. The old Microsoft was useful to shareholders, but a lot less useful to society and that's exactly how Google and Apple attacked it, and won.

Those that are mastering allocative and creative advantage, in contrast, are learning to create thick value: authentic economic value, that's meaningful to humans. That's why allocative and creative advantage are the equivalent of economic superweapons. They are letting today's revolutionaries stun, stagger, and vaporize rivals, no matter how big, bad, or historic. And that's never mattered more. An economy built on extractive and protective advantage is a giant, endless Ponziconomy. Value is transferred from one party to the next but little is created anew. That's what we're finding out the hard way. Only through creative and allocative advantage can we rebuild a more meaningful economy. Most companies can only achieve 20th century advantage. If you're one of them, kiss tomorrow goodbye. In the 21st century, advantage belongs no longer to the wealth-eaters and the misery-feeders, but to the constructive: those who can help fuel a more authentic prosperity from the ground up.