InThe End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business, Columbia Business School Professor Rita Gunther McGrath argues that it’s time to go beyond the concept of sustainable competitive advantage. McGrath spoke with MDM staff writer Angela Poulson on how organizations can capture opportunities quickly, exploit them decisively and move on before they are exhausted.
MDM: Tell me a little about the origins of this book.
Rita Gunther McGrath: The book had its origins in a profound sense of unease that I had that we really haven’t made much progress in the field of strategy for a long time. Historically, strategy was about the search for superior performance and a thing called sustainable competitive advantage. And the idea was you found something that you did better than other companies in your industry and you threw up entry barriers like crazy, and you then got to enjoy the fruits of your advantage for a long time.
In more and more parts of the economy, that set of assumptions is quite dangerous. What it causes people to do is to cling too long to advantages that are starting to fade, and it causes people to make decisions that are really not suitable for the long-term best interests of their companies.
That got me started on a path of thinking about what would we do if we abandoned the idea of sustainable competitive advantage and what I landed on was the idea that we’d do lots of things differently. You’d hire people differently. You’d use different assets. You’d have different ways of budgeting. You’d have different disciplines around how you spend your money. And when you add it all up what you really have is a really different management approach.
MDM: You mentioned that a sustainable competitive advantage is no longer relevant for some companies. How long has this been the case, and what factors have driven this change?
McGrath: We’ve had this for a long time in consumer electronics and other very fast-moving industries, like fashion. I think what’s happening now is it’s taking over more and more of the economy, and there are five things I would point to that are fundamentally driving the change.
The first one is shifting technologies. It used to be that you’d introduce some big innovation project and then you’d have a period where everything kind of settled down for a while, and you’d run things perfectly well until you had the next big punctuating innovation. What’s happening now is technological innovations are flying fast and furious.
A related development is digitization. As more and more of the world goes digital, the ease with which things can be copied increases that much more. So as more and more products move to digital platforms, it’s harder and harder to contain them.
A third has to do with the rise of competitors from nontraditional places, and globalization is one aspect of this. A lot of ideas about strategy were founded in an era when America had very little competition. A good chunk of the world was behind the Iron Curtain and another chunk of it was pretty devastated from a massive Second World War. A lot of it was geopolitical. In places like India, for example, they didn’t export. And China wasn’t allowed to do business with anybody. So competition was different back then.
Another thing that has really caused entry barriers to drop is the ability of communication technologies to inform others of what’s going on. If you had to wait for the Pony Express to get across the country to find out what the trend styles were on the East Coast, that took a while. But today with Skype you can see it, and you can have styles shown in Milan show up in Taiwan in a matter of minutes.
Another thing which I think is actually a big factor in all of this is the rise of easy and inexpensive travel, which has meant that you now have much more information exchange among individuals.
MDM: A relatively small percentage of wholesaler-distributors have a strategic plan. Why do you think so many companies are reluctant to go through a strategic planning process?
McGrath: I think there are many reasons. The thing about strategy is it helps guide what you’re going to do, but it also helps guide what you’re not going to do. So it forces organizations to actually make tough choices. And it’s hard work to make a strategy. So what people drop back to is planning, which basically means “We’re going to take last year’s budget and update it by 10 percent, and that’s this year’s budget.” Unless something comes along to really challenge the fundamental core of the company, they don’t get pushed to do any real strategy.
MDM: If a competitive advantage is a transient thing, how can companies achieve sustained long-term growth?
McGrath: I did a study looking at growth outliers with large, publicly traded firms, and out of nearly 5,000 of them, there were only 10 that have been able to grow net income every year by 5 percent a year. And the secret for them seems to be this interesting combination of stability and dynamism. They have tremendous stability in their leadership, in their values, in their culture and in customer relationships. But they’ve also got a lot of dynamism in terms of which markets they get into and out of and how they test and probe new opportunities.
The second thing I think is becoming more and more clear is that increasingly the only real competitive advantage is found in network ties and in the way that you build complete customer experiences, which often depends on the quality of the network ties that you have.
MDM: Could you give an example of a company that has succeeded in approaching competitive advantage in this new way?
McGrath: One example is Milliken Company, which had its roots in textiles. They were the last man standing in the U.S. textile industry, and today they’re in advanced materials. They’re in fibers, and they’re in all kinds of chemicals, so they’ve completely transformed their business in the space of a few decades. And they’re still there, still viable.
MDM: Do you think deeply ingrained structures and systems are liabilities in a fast-moving competitive environment?
McGrath: Absolutely. Not all of them, but many of them, because most of them are premised on the assumption of stability.
Let’s take a typical one. In a large organization, if I’m running a big division that generates 60 percent of our profits, I get to decide where the money gets spent, right? It makes perfect sense when you’ve got a very stable business and you want to be re-investing in the core. But let’s say that business goes into decline. That behavior becomes dysfunctional, because what you need to be doing is taking resources out and putting them into some alternative innovation.
MDM: You said in the book that companies need to think of customer “jobs to be done” rather than rigid markets influenced by supply and demand. Could you explain what you mean by that?
McGrath: I think what a lot of engineering types do when they’re trying to solve a need is to go after the problem like an engineering problem. But what you find when you actually go out and look at what people will pay for, what they pay for is to get certain things done.
Here’s an example from an industrial client that I worked with, a flavorings company. We decided to visit a customer, a food manufacturer, to see what needs they had that weren’t met. As we walked through their process, we got to this moment where the flavoring was getting dumped into a big vat of the product and somebody happened to ask: “What’s the average batch size of our material that you use in making your product?”
The answer was 30 pounds, and this stuff had been shipped from the dawn of time in 50-pound drums. Nobody had thought anything of it, yet when you think about it operationally, it was just a nightmare. The job that needed to get done was doing this mixing in an efficient way, but my guys were obsessed with things like, “How big is your molecule?” and “Is it stable under different temperature conditions?” when the thing that really solved the customer’s problem was a packaging innovation.
MDM: Tell me more about how resource allocation affects the way companies can develop competitive advantage.
McGrath: Resource allocation is at the crux of what happens in any company. If you want to change what a company does, that’s the first place to start. Are companies getting resources out from under the core businesses so that they can pay for the innovations of the future? You want to see some investments that could be the next core business, and you want to see some investments in options. Investments in options are small investments you make today that buy you the right, but not necessarily the obligation, to make a bigger investment in the future.
If you really want to get good at this, you need to have this continual re-configuration. You’re constantly investing in something new and constantly withdrawing resources and managing for efficiency things that are mature and beginning to fade.
MDM: What advice do you have for companies trying to initiate this shift in how they think about competitive advantage?
McGrath: I think the first thing you need to do, depending on the company, is start to have people get familiar with the concept. Obviously senior-level support and drive for this is pretty critical. But what I see a lot of is a lot of people in the middle ranks of companies saying, “Oh my God, we have to do something.” But by the time it gets up to the senior level, they’re all sitting around drinking port and life is good. The senior team needs to have a sense of urgency.
I think it’s also thinking about what systems you want to use as your points of leverage. For some companies it’ll be fixing the innovation system, or the resource allocation process. For some companies, it’ll be structure.
My main encouragement would be when you’re thinking about opportunities and customers, really think about the customer’s complete experience. I see so many companies do their piece and leave the rest of it untouched, and the result is often a very unhappy customer. What you really want to do is observe. You want to be looking for areas where customers are just making do, because your solution isn’t really good enough. It may be causing them cost and complexity where they may not even realize it.
The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Businessis available through the Harvard Business Review store at hbr.org or at Amazon or Barnes & Noble.