When resting on their laurels signals trouble for businesses which lack flexibility to change
In order to compete in more volatile and uncertain environments, businesses need to do things differently
Professor Rita McGrath
Finding a real competitive advantage in an industry has been likened to discovering the Holy Grail in the corporate strategy stakes. However, it’s an increasingly elusive goal, according to US management expert, Prof Rita McGrath.
McGrath, who is based at Columbia Business School but is a frequent visitor to these shores, says that organisations now need to find ways of leveraging temporary advantages and to remain fluid and innovative enough to change tack when those advantages no longer remain.
“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,” she says.
“To compete in these more volatile and uncertain environments, you need to do things differently.”
Stability, not change, she says, is the state that is most dangerous in highly dynamic competitive environments. The presumption of stability creates all the wrong reflexes.
It allows for inertia and power to build up around the existing business model. It also allows people to fall into routines and habits of mind and it creates the conditions for turf wars.
“Human beings like predictability and managers find comfort in knowing what the rules are but it fast moving markets, it just doesn’t work anymore.” she tells The Irish Times.
However, two aspects of management which she says shouldn’t change are the cultural values and strong leadership characteristics of organisations.
The rapid change of the life cycle of advantages mirrors the shrinking in the time to mass adaptation of items such as popular consumer electronics.
The telephone and television developed over a period that covered most of the 20th century yet the smartphone achieved mass adaptation in a period of less than five years. The internet has been a massive accelerator of this phenomenon across a whole range of categories of products and services, she agrees.
One of the biggest changes in mind-set that is the need is to think of arenas rather than industries. The revolution in digital music is a case in point. Who could have predicted before the launch of iTunes that a computer company Apple would achieve such a pivotal position in the music business?
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” sources of advantage are proving to be less durable.
Instead, companies are learning to leverage more ephemeral things such as deep customer relationships and the ability to design unique experiences across multiple arenas.
In her latest book, The End of Competitive Advantage, McGrath distils the process by which a company creates a transient advantage. This starts with identifying an opportunity, allocating resources and assembling a team.
If and when that opportunity gets traction, the firm must ramp up its advantage speedily. All going well, it can then enjoy a long period of exploitation where it can milk the profits. This period can be extended if the firm reconfigures its structure by changing management or shifting resources.
Finally, when the advantage is exhausted, there is a process of disengagement where a firm disposes of its assets by selling, shutting them down or re-purposing them.
This should be done gracefully but quickly, she says, adding: “This should not be confused with business failure. Disengagement can and should take place when a business is still viable, rather than when a desperate organisation has no choice.”
McGrath can see a downside to transient competitive advantage and says she worries that it may compound existing inequalities. Those most capable of exploiting short-term advantages, by their nature, are the rich and the most powerful.
“We see it in the fast food sector in the United States where analytics can tell you the precise hours and minutes you need workers in your restaurants to optimise your profits. You can’t expect people to build a life around that,” she observes.
Good companies, she says, see the bigger picture. One of the companies she features in the book is Infosys, which hires for “learnability”, as one of its bosses told her. Employees spent 80 per cent of their time on defined core work task but the reaming 20 per cent is allocated to training and research efforts, she notes.
Transient advantage has implications for how employees – as well as companies – manage career development, she says and she devotes a chapter of the book to how individuals need to see their own futures differently (see panel).