The Grand Narrative of Competitive Advantage (GNOCA) and Toy Models

Robin Matthews

DRAFT

Introduction

This is a note on different types of models. It follows on from a recent seminar. The theme is grand narratives, and the focus is the the grand narrative of competitive advantage (GNOCA). Narratives are stories. Human beings love stories and story tellers are legendary. All stories are composed of a plot, actors (agents) and sequences of events situated in space and time, causes and effects. Narratology, the study of stories, extends the notion of story to science, technology, politics and economics.

Here, I divide models into two types, grand narratives and toy models. Both consist of stories. Grand narratives contain any number of toy models. As stories they have a plot, a setting, and actors (agents). The monotheist religions, Judaism, Christianity, and Islam are grand narratives of Creator of the universe(s), and a right path towards heaven and a wrong path leading to hell, a day of judgement and a Redeemer. Stories of prophets, of kings and queens, saints and sinners, heroes and priests, angels, and their actions, proverbs, psalms, parables are part (subsets) of the monotheistic tradition.

Buddhist GNOCAGNOCA has a long heritage. We can trace it back to the work of Adam Smith and his concept of the invisible hand and much further back to the teaching of the Buddha and the Second Noble Truth of Buddhism, Samudāya. Samudaya is roughly translated as greed and attachment, which Buddhists see as the root cause of suffering or Dukkha, the first Noble Truth.

Grand narratives

There are many grand narratives. The Marxist and Bolshevik grand narratives, which are surprisingly close to the grand narrative of Christianity. The grand narratives of economics, include Keynesian, Neoclassical traditions; in psychoanalysis and the Freudian and Jungian traditions; in physics, classical, quantum and the search for a grand unification theory; in the life sciences, Darwinism and neo-Darwinism. Perhaps the grandest narrative is that of great religions and atheism being their negative image.

Models, theories, experiments share the characteristics of stories; plot, as sequences of events leading to outcomes; actors who influence and are influenced by events; actors who interpret events; events that are situated in time and space. Situation is defined by the conditions (parameters) of a theory or experiment; controls that isolate them from interference by things that are considered inessential (noise); assumptions perform a similar role. Stories are conditional explanations of the world; probabilistic explanations. All stories are Bayesian stories.

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Essentials of GNOCA

Our concern here is the grand narrative of competitive advantage. The rich picture, figure 1, composed in seminar in May, illustrates the roots of GNOCA. It is difficult to isolate founding fathers of GNOCA since its construction was a collective effort. The rich picture awards the prize jointly to Adam Smith for his Invisible Hand, Joseph Schumpter for his concept of the entrepreneur, Frank Knight for risk and uncertaintly, Nikolai Kondratiev for business cycles and long waves, and all for their understanding of capitalism.

The story

The story of GNOCA follows. Organizations (individuals, groups, firms, institutions) exist for a purpose. The purpose is to search for something extraordinary, something beyond the normal or average. You could describe it as a drive. Extraordinary could be defined as rewards or payoffs, monetary or non monetary or sheer satisfaction. But GNOCA is a capitalist phenomenon. Under capitalism competitive advantage is the extraordinary return, sought after.

The most desirable payoffs are profit. Profit is measured by shareholder returns, since private ownership is the essence of capitalism and shareholder returns, equity are returns to ownership. The entrepreneurial spirit, expressed by innovation, is a force released by capitalism. When organizations achieve competitive advantage, their success is like a magnet attracting competition. When they fail, they release resources for a more successful enterprizes. Markets, by aligning supply and demand, reconcile conflicting interests.

Thus capitalism creates wealth. Innovation creates new technologies and processes, new organizational structures, new markets, new entrants into existing markets. But it is also destructive. The new destroys the old; deaths and new entrances. New entrants erode profit. Outcomes are uncertain, subject to random shocks and particularly to waves of innovation. Profit opportunities are wave like, because innovation is wave like. Both rise and fall. Capitalist expansion peaks and then declines.

All innovation is knowledge based and increasingly technology is science based. Innovations comes in bunches. It waits upon new knowledge, new cognition, and as new knowledge and cognition accumulate, opportunities for innovaton open up, new profit opportunities open up and expansion of capitalist wealth is resumed.

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Figure 1; a rich picture of GNOCA

GNOCA is illustrated in the vivid rich picture above. Schumpeter/Kondratiev long waves are related to a time line (in red) of spates of innovation that drive capitalist accumulation, until decline sets in and profit opportunities decline. Recovery (upturn of the wave) awaits a new spate of innovations. Financial shocks such as the Great Recession that began in 2007 and is still with us, is illustrated by its cost to the global economy, variously estimated as between 60 and 180 trillion dollars.

An entrepreneur’s date of birth seems to be important for success in innovation, and in achieving competitive advantage; Bill Gates, Paul Allen, Steve Ballmer, Steve Jobs, Eric Schmidt, were all born in the early 1950s and young enough to take advantage of the breakthrough in personal computing that began in the 1970s. The right hand side of the picture illustrates some toy models standing under the umbrella of GNOCA.

Competitive advantage a more precise definition than usual

Competitive advantage is rarely defined precisely. It is described variously and vaguely as a superior return or as an above-average return for the sector. I will define competitive advantage as a return which is above average for the sector or risk class in which a firm competes. You might see that this definition corresponds to the statement of the capital asset pricing model (CAPM). It is illustrated in figure 2.

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Figure 2: GNOCA as risk/return tradeoff

The red-line in figure 2 separates success from failure. Below the redline firms are not achieving critical success factors. Above the line they are successful in achieving competitive advantage and overachieving critical success factors. Two companies and B and A have different risk profiles. It appears that company B’s return outperforms A, but since B is in a higher risk class, failure is on the cards. The diagram is derived from CAPM and is an idealisation.

Toy models as subsets of GNOCA

Grand narratives are meta narratives. They contain many toy models as subsets. Toy stories take many forms; children stories, mythical stories of heroes, villains, scapegoats, CEO’s, entrepreneurs, leaders and followers, presented in the storyline of the newspaper articles, stories from history and in novels. Stories have a plot that describes a succession of events, that have a beginning and an end. Stories have actors; the hero in myths, Natasha Rostov, David Copperfield, James Bond, or imaginary and nonhuman actors, giants or animals in fairy stories.

Toy models are subsets of grand narratives. You can find a host of toy models on the website valuemanagement.com. There you will find more 60 toy models under the heading of strategy, and approximately the same number under leadership and management, more than 50 under change, organisation, culture, and a host of financial management, human resource management, management accounting toy models. See figure 3 below

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Figure 3: varieties of toy models

The 5 forces toy story

The Toy Story of Michael Porter’s five forces is a subset of GNOCA. The plot concerns a series of eventualities (5) that threaten the competitive advantage of a firm. It is situated rooted in the industrial organisation approach, according to which the determinants of success (performance) are industry structure, and conduct (monopoly, oligopoly, technological shocks, barriers to entry, predatory pricing, economies of scale and scope). The actors or agents in the plot, influence the degree of competition, which is measured by market share of the dominant firms.

Management capabilities don’t feature very highly in the story. But it is quite easy to introduce dynamic capability, and core competence into the story.

The meta model as a Toy Story.

The meta model has been introduced elsewhere and you can see it on the website. Essentially the meta model is a Toy Story within the Enneagram.

GNOCA as a basin of attraction

An attractor is a set of values that a dynamic system tends towards, even though it is occasionally shifted by shocks from one path to another. I describe GNOCA as a basin of attraction because it has a number of aliases The basin of attraction is made up of connected sets; The (Post) Washington Consensus, Neo-Conservatism, Neo Liberalism and Modern Capitalism. Their intersection consists of faith: faith in private property rights, faith in competition and faith in market as an organizing principles that converges towards equilibria within the attractor. There are many possible paths because shocks shift the dynamical system from one to another.

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GNOCA, as I am using it in this note, has many aliases, illustrated in figure 4. The aliases share a faith in the efficacy and efficiency of competive markets. Competitive markets enable decisions to decentralised; distributed among human agents. The state composed of an elected legislature, plus an executive (civil servants) and a judiciary is required to resolve conflicts of interest.

Figure 4: subsets of GNOCA

Conclusion and further remarks

You won’t find reference to grand narratives in valuemanagement.com . I doubt that many people who teach or practice strategy are aware of the philosophical/ethical foundation of what they are preaching, or teaching. The grand narrative of MBA courses are more or less variations on the theme of competitive advantage.

Management and business courses are dominated by what I call a grand narrative or meta narrative of competitive advantage. The grand narrative has many features, but in essence it is a view that firms seek competitive advantage and they should do so and their success is judged by the extent to they achieve competitive advantage or not. The grand narrative of competitive advantage is a meta narrative since it is expressed in a large number of toy models that you are familiar with; Boston and Ansoff boxes, generic strategies, value and supply chains, balanced business scorecards, dynamic capabilities and competences, to name but a few. The proposition is that competitive advantage is applied and taught either unconsciously or in the belief that it is the only legitimate view of business.

References to follow

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