When two titans like Elon Musk and Warren Buffett square off in public, it raises eyebrows. Their spat has been playing out in public and is centered on a classic strategy debate--is it better to build a strategic "moat" to protect yourself or to excel at the pace of innovation?

Buffett favors the moat, which is when a business builds up seemingly sustainable competitive advantages to discourage or hamper competitors from effectively competing. At Procter & Gamble, when a competitor did this, we called it a "walled city" and were very careful before deciding to "attack" such a competitor with our precious resources (and opportunity cost) at risk.

Musk favors a blistering pace of innovation, reasoning that no moat is built to last and that any "sustainable" competitive advantage really isn't sustainable if competitors succeed at innovating.

Musk backed up his point of view at his most recent earnings call by saying that "moats are lame" (taking a clear shot at Buffett) and adding, "If your only defense against invading armies is a moat, you will not last long. What matters is the pace of innovation--that is the fundamental determinant of competitiveness."

Buffett countered Musk at the recent Berkshire Hathaway shareholders meeting by defending his belief in the importance of moats. Musk countered that with these snarky tweets:

Someone woke up on the wrong side of his roadster.

Minus the snark, Musk is essentially saying that he believes a company's specific ability (in this case the ability to learn and innovate) is far more important than any assets they may have. As Walter Frick, senior editor at The Harvard Business Review recently pointed out, "Musk's decision to open up some Tesla patents reflects his view that capabilities, not assets, are the company's competitive advantage."

Musk opened up Tesla patents because, as he said, "We believe that Tesla, other companies making electric cars, and the world would all benefit from a common, rapidly-evolving technology platform." 

Musk would rather bet on his company's ability to out-learn and out-innovate rather than hope to build his own walled city.

Why I think Musk is correct on this debate.

The truth is that in many industries now the rate of change is so great that the only competitive advantage left is the very rate at which the industry's constituents are able to learn, adapt, and innovate. Research from the Brookings Institution revealed that a full 60 percent of an organization's competitive advantage could be traced to its skill at innovating as a discipline--and that was 19 years ago. The rate of change has exponentially increased since then. 

Other research indicates that in a growing number of industries the knowledge obtained in college three to five years ago is already 80 percent obsolete.

Throughout the decades of my experience at P&G, the periods when we were doing poorly could most often be traced to a lack of innovation and/or one of our own "moats" being swiftly crossed by wily, tenacious competitors.

I'm not trying to say that moats can't be incredibly effective for a time. Would you like to be tasked with toppling the advantages that companies like Facebook or Coca-Cola have built up, for example?

The problem I have with the moat as a long-term strategy is the behavior and culture it drives. Far too often I've seen executives that didn't prioritize spending any time "outside of the castle walls", choosing inside to stay internally focused in the comforting shadow of their strong brand equity, their leadership levels of marketing spending, or their belief that what they were doing was simply unassailable. 

The moat-mindset can produce a sheen of out-of-touchness.

On the other hand, I've worked with more and more companies that are embracing innovation as a differentiating skill to be built in and of itself. Watching such companies operate, I find myself wondering, "How can you pin down where and how to compete with a company like this that's always upping what good looks like to its consumers/customers/clients?" 

I've come to believe I'd rather plot how to cross a drawbridge rather than figure out how to leapfrog a frog that innovates in leaps and bounds.

What's your opinion? Are you on the "moat" side or "pace of innovation" side of this debate?

Published on: Jun 5, 2018
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