The Russo-Japanese War of 1904–1905 started when the Japanese Navy attacked the Russian fleet in Port Arthur on the Liaodong Peninsula in northeastern China.
What were the Japanese and Russians doing fighting one another in a third country? Well, at that stage in its history, foreign powers had overrun large parts of China. The Russians had been in control of Port Arthur since 1897. The port’s strategic location, and the fact that it was ice-free all year round, made it the perfect base for the Russian Pacific Fleet.
A few years ago, I went to visit Port Arthur, or Lüshun, as it’s now called. Being a history buff, one of the first places I went to look at was 203 Meter Hill, a 203-meter-high hill that overlooks the harbor.
203 Meter Hill played a pivotal role in the war between the Russians and the Japanese. It cost the Japanese two-and-a-half months and thousands of lives to capture the hill—but it was regarded as strategically priceless. Why? Because as soon as the Japanese had control of 203 Meter Hill, they were able to bombard the Russian Pacific Fleet in the harbor at will and win control of Port Arthur in less than a month.
So why this digression into military history? I want to illustrate a simple point; In battle, winning control of the commanding heights is key to victory.
The commanding heights are the same thing as competitive advantage in business. Establishing a dominant position makes winning easier.
I see business competitive advantage as being made up of five components:
1. Economies of scale
The benefits of scale are obvious. The biggest company wins by dint of sheer size. That could be Samsung in D-RAM memory manufacturing, Foxconn in contract manufacturing, or Harvard among MBA schools.
2. Economies of scope
Scale is important, but successful companies need scope, too. Samsung, for instance, makes LCD displays, smartphones, TV, PCs, and batteries, in addition to D-RAM memory. The same is true for Harvard, which branched out from basic MBA courses into other fields like executive education and publishing.
3. Economies of speed
Again, scale and scope alone aren’t enough to guarantee success. A big business that moves too slowly will be overtaken by its rivals. Japanese electronics manufacturers Sony and Panasonic are cases in point. They both had scale and strength, but still lost out to Samsung, which was managed in a speedier, more top-down style. My motto is, there is no such thing as the “right” speed for a business. The only right speed is “faster than the competition.”
4. Economies of communication
A business also needs to communicate its brand and values to its customers effectively. Harsh truth: In business, the facts never speak for themselves. You have to work to get your message through and be noticed. If nobody knows about your company or its products/services, to all intents and purposes, they do not exist.
5. Economies of being global
Japan accounted for around 10% of global GDP in 1990. That figure has fallen to just above 5% now and will keep declining as Japan’s population shrinks and ages. There’s a similar (though less marked) trend in the USA, where the global GDP share has sunk from over 27% in 1950 to under 20% now. What’s the lesson here? Companies that only serve their shrinking domestic market are doomed to shrink with it. You have to take advantage of the global economy. Again, Samsung is a great example here. In 2013, the company generated an astonishing 90% of total sales outside its home market of Korea!
At GLOBIS, we have tried to build up competitive advantage based on the “five economies” model. Since launching in 1992, GLOBIS has become bigger than the business schools of three of Japan’s top universities, combined. (That’s scale.)
We generate twice as much revenue from corporate education and executive programs as from MBA courses. (That’s scope.)
Our university competitors had first-mover advantage, but our speedy decision-making enabled us to move faster than them. (That’s speed.)
We consciously positioned GLOBIS as a “different animal” in education and have always promoted ourselves through every form of media, as well as word of mouth. (That’s communication.)
Students from 50 countries have taken our English-language MBA, and we recently opened Shanghai and Singapore offices. (That’s being global.)
If you cannot seize the “commanding heights,” you’ll end up in a trench warfare scenario, grinding out slow, painful gains against your competitors. My “five economies” certainly provided me with a very practical framework for building strong competitive advantage.