Conventional strategy theory tends to equip firms badly for 21st century competition. One of the great myths in the MBA strategy toolkit is the concept of sustainable competitive advantage that is endowed to a firm through access to a relatively unique internal resource. Most strategy textbooks talk about particular resources such as knowledge, relationships and brand that are the most common sources of sustained competitive advantage.

This is a dangerous myth because it lures us into thinking that if these things are part of out business then we are going to enjoy higher levels of profitability than out competitors forever. When you have a big competitive moat around you its tempting to think that innovation is a waste of money.

I keep running into instances of MBA pin-up businesses that I used to talk about in class several years ago being consigned to the wastebasket of business history. Did Kodak have a great brand and valuable technical skills? What about Nokia? My most recent example of a firm that I used to talk about in my undergraduate strategy classes is the surfwear company called Billabong. Eight years ago it seemed that Billabong was an unassailable brand. It was associated with the pro surf tour and other cool sports like skating and snowboarding.

The stockprice performance from 2001-2007 reflected the belief in the Billabong brand. This was something that was entrenched in the heart and soul of the young consumer. High margins would role on in perpetuity.

But then around mid 2007, something started to go wrong. Many analysts have written about the poorly timed aquisition of retail stores from 2009 but when I look at the financial data it tells a different story. Net profit margin and return on capital actually peaked in this business in 2006 and has since fallen steadily. In short, the brand was already starting to get tired. Rather than being the sources of sustainable competitive advantage, the brand was decaying just like any other aspect of a business such as knowledge and equipment. Brands have a half-life just like everything else and without innovation, they fall back to the competition sooner or later.

In looking at the relationship between valuable brands and innovation I’ve gone to the 2011 Interbrand survey and it tells a really interesting story.

The valuable brands that are growing much faster than the others are Google and Apple. In fact, Google is probably less than 3 years away from being the most valuable brand in the world. I initially wondered if this was just the effect of share price, which is part of the calculation of brand value but some companies have a share price that doesn’t correlate very well with brand value. For example, McDonalds the share price has increased proportionally more than the brand value on the above chart. Nokia’s relationship between the stock price and the brand is in the other direction with the stock falling faster than the brand value.

What occurred to me about Google and Apple is that there is a synergistic relationship between innovation and the brand. Both of these companies are innovative technogically, but they are also innovating the brand on a pretty constant basis. Apple advertising and marketing is pretty conventional but Google’s marketing and brand management is as radical as the company. A recent interview with Google’s brand manager shows how different the business really is:

How does Google think about its brand? The honest answer is that the first thing we think about is our products. First and foremost, we’re always thinking about what’s best for the user. We have a true north that’s always easy to touch back to.

I see this in meeting after meeting. There may be various constituents trying to decide what’s the best thing to do, and we say, well, what’s the best thing for the user? And the decision gets made pretty quickly. Having that consistency makes it very easy for someone like me who’s kind of the brand steward. I’m not policing as much as I might if we didn’t have those values.

At Google, the products and the brand converge into one thing. Innovation is the brand and the brand is the innovation.