Readers of this column will hardly be surprised to hear of the death of Professor Michael Porter’s concept of “sustainable competitive advantage”. My article on the topic elicited over 200,000 pageviews, along with articles from concerned strategy professors.
Now with the publication this week of The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business, the death is official. The book is written by Rita Gunther McGrath, a professor at Columbia Business School in New York and one of the world’s leading experts on strategy.
Moreover, the burial is being conducted by Harvard Business Review Press, which as recently as 2008 republished Professor Michael Porter’s “classic” 1979 article that launched the concept of sustainable competitive advantage and started a revolution in the strategy field.
Competitive advantage is transient, not sustainable
“Strategy is stuck,” Professor McGrath’s book tells us. “Virtually all strategy frameworks and tools in use today are based on a single dominant idea: that the purpose of strategy is to achieve a sustainable competitive advantage. This idea is strategy’s most fundamental concept. It’s every company’s holy grail. And it’s no longer relevant for more and more companies… Strategy was all about finding a favorable position in a well-defined industry and then exploiting a long-term competitive advantage. Innovation was about creating new businesses and was seen as something separate from the business’s core set of activities.”
The problem, says Professor McGrath, is that competitive advantage is transient, not sustainable. To operate, we need a new set of assumptions about how the world works and “a new playbook to compete and win when competitive advantages are transient.”
Basing your strategy on a new set of assumptions can seem daunting to those managers embedded in the old economy. But as Professor McGrath found, the Creative Economy is different. Some of the executives she interviewed “actually seemed to be having fun—rather than being defensive and debilitated, they used the pursuit of transient competitive advantages to represent a compelling and engaging call to action for their people and a spur to innovation.”
In the Creative Economy, where the quest is to find the next opportunity, “companies are getting better at figuring out what people really need and will pay for, at designing better experiences, and at wresting new efficiencies from existing assets.”
They don’t always get it right, says Professor McGrath. In fact,
“it’s almost impossible for a company to call it correctly every time. What matters, though, when you have been taken by surprise or something negative occurs, is what you do next. The best firms look candidly at what happened, figure out how to do it better the next time, and move on. It’s a bit like surfing a wave— you might fall off and find yourself embarrassedly paddling back to shore, but great surfers get back on that board. So too with great companies. They move from wave to wave of competitive advantages, trying not to stay with one too long because it will become exhausted, and always looking for the next one. It has been fun getting to know them.
“The list of once-storied organizations that are either gone or are no longer relevant is a long one. Their downfall is a predictable outcome of practices that are designed around the concept of sustainable competitive advantage. The fundamental problem is that deeply ingrained structures and systems designed to extract maximum value from a competitive advantage become a liability when the environment requires instead the capacity to surf through waves of short-lived opportunities. To compete in these more volatile and uncertain environments, you need to do things differently.”
Fundamental assumptions become obsolete
Professor McGrath says that when she got her start in the strategy field, there were two foundational assumptions that were taken as gospel. The first was that industry matters most. The second assumption was that once achieved, advantages are sustainable.
“There are indeed examples of advantages that can be sustained, even today. Capitalizing on deep customer relationships, making highly complicated machines such as airplanes, running a mine, and selling daily necessities such as food are all situations in which some companies have been able to exploit an advantage for some time. But in more and more sectors, and for more and more businesses, this is not what the world looks like any more. Music, high technology, travel, communication, consumer electronics, the automobile business, and even education are facing situations in which advantages are copied quickly, technology changes, or customers seek other alternatives and things move on. “
Sustainable competitive is not just ineffective, says Professor McGrath: it’s actually counterproductive.
“Think about it: the presumption of stability creates all the wrong reflexes. It allows for inertia and power to build up along the lines of an existing business model. It allows people to fall into routines and habits of mind. It creates the conditions for turf wars and organizational rigidity. It inhibits innovation. It tends to foster the denial reaction rather than proactive design of a strategic next step… A preference for equilibrium and stability means that many shifts in the marketplace are met by business leaders denying that these shifts mean anything negative for them.”
Where to compete: arenas, not industries
One of the biggest changes, says Professor McGrath is “to stop thinking of within-industry competition as the most significant competitive threat… This is a rather dangerous way to think about competition. In more and more markets, we are seeing industries competing with other industries, business models competing with business models even in the same industry, and entirely new categories emerging out of whole cloth.”
Today, competition can come from anywhere. It’s not just cheap substitutes to their products, capturing low-end customers, and then gradually move upmarket to pick off higher-end customers. Now entire product lines—whole markets—could be destroyed almost overnight as customers defect in droves by “big bang disruption.
A new level of analysis that reflects the connection between market segment, offer, and geographic location at a granular level is needed. She calls this “an arena”.
“Arenas are characterized by particular connections between customers and solutions, not by the conventional description of offerings that are near substitutes for one another… The driver of categorization will in all likelihood be the outcomes that particular customers seek (‘jobs to be done’) and the alternative ways those outcomes might be met. This is vital, because the most substantial threats to a given advantage are likely to arise from a peripheral or nonobvious location.”
“The arena concept also suggests that conventional ideas about what creates a long-lived advantage will change. Product features, new technologies, and the ‘better mousetrap’ sorts of sources of advantage are proving to be less durable than we once thought. Instead, companies are learning to leverage more ephemeral things such as deep customer relationships and the ability to design irreplaceable experiences across multiple arenas. They will be focused on creating capabilities and skills that will be relevant to whatever arenas they happen to find themselves operating in. And they may even be more relaxed about traditional protections and barriers to entry, because competition will devolve around highly intangible and emotional factors.”
The future of strategy is vast and bright
Professor McGrath is not, as some have suggested, declaring “the end of strategy”. In fact, quite the opposite. Along the same lines as my article, her book sees an active future for strategy, albeit one not built on “sustainable competitive advantage”.
Chapter 5 of her book is about “Building an Innovation Proficiency”. It suggests that in a world of temporary advantage, innovation needs to be a continuous, core, well-managed process rather than the episodic and tentative process it is in many companies.
Chapter 6 discusses the implications of competing in volatile markets has for the mind-set leaders musut bring to their businesses. As the pace of competition becomes faster, decisions that are made quickly and in “roughly right” mode are likely to beat a decision-making process that is more precise, but slower. Prediction and being “right” will be less important than reacting quickly and taking corrective action.
Chapter 7 discusses what the shift means for you: whether you are a leader, an employee, a client, or simply an observer of the scene. One reality is that we are starting to see a two-part world. For some people, the end of competitive advantage is going to mean painful downward adjustments in what they can aspire to at work because they don’t possess rare or valuable skills. They are likely to be vulnerable to organizations’ ruthlessly trimming fixed costs to maximize their own flexibility. For people with valuable, rare, or in-demand skills, however, the rewards are likely to be rich indeed.
Next steps in strategy
Where to from here? Professor McGrath’s book is a landmark contribution to the strategy field. It also points to areas where further work is needed. Chapter 6 for instance discusses briefly “escaping the tyranny of NPV” and refers to Eric Ries’s book, The Lean Startup, in which innovation is driven, not by what managers or strategists think makes sense, but rather by direct feedback from customers in carefully designed A/B experiments.
“The fundamental problem is that when you are trying something new, it isn’t typically clear right away which exact configuration of elements is going to be a winner. This suggests that experimentation, trial-and-error learning, and discovery are the key practices. What firms unfortunately often do, however, is try to plan their new businesses as though they were operating with a lot more certainty than they actually are.”
Ries’s work also suggests that “escaping the tyranny of NPV” may need to go further. Strategy may need to think through: what is the bottom line of the organization in this new world of transient advantage? Is it merely making money or maximizing shareholder value? Or is it profitably adding value to customers?
Thus “sustainable competitive advantage” is not the only concept in the business toolkit that needs updating. Further work is needed on other fundamental components, such as maximizing shareholder value, the concept of strategy itself seen as coping with competition, the uni-directional supply chain, the preoccupation with short-term gains from off-shoring, and the supposed distinctions between leaders and managers. If Professor McGrath’s next book could explore these issues, and do what this book does for competitive advantage, what a magnificent contribution that would be!
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