Rapid and disruptive change is a key feature of the environment facing companies today. This is causing many executives to re-examine their traditional view of competitive advantage.
Rita Gunther McGrath, The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business. Harvard Business Review Press, 2013.
Much has been written in the last few years about the need for companies to develop strategies that can readily adapt to an environment where advantages are increasingly temporary. My initial reaction, upon starting this book, was that this ground was already well covered by a number of authors, including Clayton Christensen and Roger Martin. This reaction was a bit unfair. While Rita Gunther McGrath’s fundamental thesis may not be as groundbreaking as promoted, she does contribute both a valuable perspective on strategy and some useful ideas about how companies can sustain growth under these new conditions.
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Ms. McGrath is a professor at the Columbia Business School. An author of numerous books on strategy and business growth, she is also a consultant to many leading companies.
Her fundamental thesis in this book is that sustainable competitive advantage has become increasingly less relevant for many companies, as are many of the traditional analytical frameworks and tools used to achieve it. Rather, future business success will be based on a company’s ability to manage waves of transient advantage by identifying and exploiting often short-lived opportunities quickly and decisively.
To uncover the characteristics of companies that succeed in a volatile competitive environment, Ms. McGrath and her research team scanned every global exchange looking for publicly traded companies with a 2009 market cap of US$1 billion or more, seeking companies that were able to grow net income by five per cent annually over the prior decade.
From a group of 5,000 companies, they found 10 that met these criteria. Included on this list were Fujifilm, Cognizant Technology Solutions and Infosys, among others.
In examining these so-called “growth outliers,” Ms. McGrath found that the common trait was the ability to move quickly from wave to wave of competitive advantage. Moreover, this ability was deeply embedded in their organizational design and fostered by their senior leadership.
The lessons that she draws from this research are relevant for companies of all sizes, including startups.
The first is the need to shift the focus away from industry as the key unit of competitive analysis.
Today, she argues, competitive threats are increasingly likely to come from peripheral or non-obvious locations – such as Google in telephony – rather than traditional industry rivals.
Her alternative framework is based on the concept of competitive arenas. These are characterized by particular connections between customers, the solutions they seek and the alternative way their needs can be met, rather than the conventional description of product or service offerings that are near substitutes for one another. Competitors from a number of different industries can be found contending in the same arenas.
It’s insufficient for a company to only think differently about its competitive rivals. To be successful, a firm must also rethink its approaches to organizational design, resource allocation and innovation.
In order to capitalize on waves of transient advantage, businesses must be “shape shifters” that are willing to continuously reconfigure as part of their normal routines, systematically disengaging from existing but fading competitive advantages and freeing up and repurposing valuable resources to build new ones. This means avoiding an excessive buildup of people and assets that could be a barrier in moving on to the next advantage.
They also need to allocate resources quickly and effectively to capitalize on emerging opportunities. This involves creating processes to manage key resources centrally, as opposed to having them held hostage at the divisional or business unit level.
Finally, not only does the innovation process need to be well-managed to ensure success, it also needs to maximize flexibility by taking a real options approach to exploring new opportunities. This entails making small investments initially, followed up later with more substantial investments as warranted.
The book provides the usual range of strategy tools and checklists, as well as some excellent advice on how to create an early warning system to tell if your competitive advantage is fading.
Overall, it will get you thinking about what it takes to compete in a world where competitive advantages rapidly come and go.
Micheál Kelly is dean of the School of Business & Economics at Wilfrid Laurier University and former dean of the Telfer School of Management at the University of Ottawa.
