Transient Advantage- The End of Competitive advantage
Taken from: Author- Rita McGrath Published in Harvard Business Review 2013
Strategy is stuck. For too long the business world has been obsessed with the notion of building a sustainable competitive advantage. That idea is at the core of most strategy textbooks; it forms the basis of Warren Buffett’s investment strategy; it’s central to the success of companies on the “most admired” lists. I’m not arguing that it’s a bad idea— obviously, it’s marvellous to compete in a way that others can’t imitate. And even today there are companies that create a strong position and defend it for extended periods of time—firms such as GE, IKEA, Unilever, Tsingtao Brewery, and Swiss Re. But it’s now rare for a company to maintain a truly lasting advantage. Competitors and customers have become too unpredictable, and industries too amorphous. The forces at work here are familiar: the digital revolution, a “flat” world, fewer barriers to entry, globalisation.
Strategy is still useful in turbulent industries like consumer electronics, fast-moving consumer goods, television, publishing, photography, and…well, you get the idea. Leaders in these businesses can compete effectively—but not by sticking to the same old playbook. In a world where a competitive advantage often evaporates in less than a year, companies can’t afford to spend months at a time crafting a single long-term strategy. To stay ahead, they need to constantly start new strategic initiatives, building and exploiting many transient competitive advantages at once.
Though individually temporary, these advantages, as a portfolio, can keep companies in the lead over the long run. Firms that have figured this out have abandoned the assumption that stability in business is the norm. They don’t even think it should be a goal. Instead, they work to spark continuous change, avoiding dangerous rigidity. They view strategy differently— as more fluid, more customer-centric, less industry-bound. And the ways they formulate it—the lens they use to define the competitive playing field, their methods for evaluating new business opportunities, their approach to innovation—are different as well.
Sustainable competitive advantage is now the exception, not the rule. Transient advantage is the new normal.
The Anatomy of a Transient Advantage
Any competitive advantage—whether it lasts two seasons or two decades—goes through the same life cycle. (See “The Wave of Transient Advantage.”) But when advantages are fleeting, firms must rotate through the cycle much more quickly and more often, so they need a deeper understanding of the early and late stages than they would if they were able to maintain one strong position for many years.
A competitive advantage begins with a launch process, in which the organisation identifies an opportunity and mobilises resources to capitalise on it. In this phase a company needs people who are capable of filling in blank sheets of paper with ideas, who are comfortable with experimentation and iteration, and who probably get bored with the kind of structure required to manage a large, complex organisation.
In the next phase, ramp up, the business idea is brought to scale. This period calls for people who can assemble the right resources at the right time with the right quality and deliver on the promise of the idea.
Then, if a firm is fortunate, it begins a period of exploitation, in which it captures profits and share, and forces competitors to react. At this point a company needs people who are good at M&A, analytical decision making, and efficiency. Traditional established companies have plenty of talent with this skill set.
Often, the very success of the initiative spawns competition, weakening the advantage. So the firm has to reconfigure what it’s doing to keep the advantage fresh. For reconfigurations, a firm needs people who aren’t afraid to radically rethink business models or resources.
In some cases the advantage is completely eroded, compelling the company to begin a disengagement process in which resources are extracted and reallocated to the next generation advantage. To manage this process, you need people who can be candid and tough-minded and can make emotionally difficult decisions.
For sensible reasons, companies with any degree of maturity tend to be oriented toward the exploitation phase of the life cycle. But as I’ve suggested, they need different skills, metrics, and people to manage the tasks inherent in each stage of an advantage’s development. And if they’re creating a pipeline of competitive advantages, the challenge is even more complex, because they’ll need to orchestrate many activities that are inconsistent with one another.
Facing the Brutal Truth
In a world that values exploitation, people on the front lines are rarely rewarded for telling powerful senior executives that a competitive advantage is fading away. Better to shore up an existing advantage for as long as possible, until the pain becomes so obvious that there is no choice. That’s what happened at IBM, Sony, Nokia, Kodak, and a host of other firms that got themselves into terrible trouble, despite ample early warnings from those working with customers.
To compete in a transient-advantage economy, you must be willing to honestly assess whether current advantages are at risk. Ask yourself which of these statements is true of your company:
· I don’t buy my own company’s products or services.
· We’re investing at the same or higher levels and not getting better margins or growth in return.
· Customers are finding cheaper or simpler solutions to be “good enough.”
· Competition is emerging from places we didn’t expect.
· Customers are no longer excited about what we have to offer.
· We’re not considered a top place to work by the people we’d like to hire.
· Some of our very best people are leaving.
· Our stock is perpetually undervalued.
If you nodded in agreement with four or more of these, that’s a clear warning that you may be facing imminent erosion.
But it isn’t enough to recognise a problem. You also have to abandon many of the traditional notions about competitive strategy that will exacerbate the challenge of strategy reinvention.
Seven Dangerous Misconceptions
Most executives working in a high-velocity setting know perfectly well that they need to change their mode of operation. Often, though, deeply embedded assumptions can lead companies into traps. Here are the ones I see most often.
The first-mover trap
This is the belief that being first to market and owning assets create a sustainable position. In most industries a first-mover advantage doesn’t last.
The superiority trap
Almost any early-stage technology, process, or product won’t be as effective as something that’s been honed and polished for years. Because of that disparity, many companies don’t see the need to invest in improving their established offerings—until the upstart innovations mature, by which time it’s often too late for the incumbents.
The quality trap
Many businesses in exploit mode stick with a level of quality higher than customers are prepared to pay for. When a cheaper, simpler offer is good enough, customers will abandon the incumbent.
The hostage-resources trap
In most companies, executives running big, profitable businesses get to call the shots. These people have no incentive to shift resources to new ventures.
The white-space trap.
When I ask executives about the biggest barriers to innovation, I often hear, “Well, these things fall between the cracks of our organisational structure.” When opportunities don’t fit their structure, firms often simply forgo them instead of making the effort to reorganise.
The empire-building trap
In a lot of companies, the more assets and employees you manage,
the better. This system promotes hoarding, bureaucracy building, and fierce
defense of the status quo; it inhibits experimentation, iterative learning, and
risk taking. And it causes employees who like to do new things to leave.
The sporadic-innovation trap
Many companies do not have a system for creating a pipeline of new advantages. As a result, innovation is an on-again, off-again process that is driven by individuals, making it extraordinarily vulnerable to swings in the business cycle.
Strategy for Transient Advantage: The New Playbook
Companies that want to create a portfolio of transient advantages need to make eight major shifts in the way that they operate.
1: Think about arenas, not industries.
One of the more cherished ideas in traditional management is that by looking at data about other firms like yours, you can uncover the right strategy for your organisation. Indeed, one of the most influential strategy frameworks, Michael Porter’s five forces model, assumes that you are mainly comparing your company to others in a similar industry. In today’s environment, where industry lines are quickly blurring, this can blindside you.
Industry-level analysis doesn’t give you the full picture. Indeed, the very notion of a transient competitive advantage is less about making more money than your industry peers, as conventional definitions would have it, and more about responding to customers’ “jobs to be done” (as Tony Ulwick would call it) in a given space.
2: Set broad themes, and then let people experiment.
The shift to a focus on arenas means that you can’t analyse your way to an advantage with armies of junior staffers or consultants anymore. Today’s gifted strategists examine the data, certainly, but they also use advanced pattern recognition, direct observation, and the interpretation of weak signals in the environment to set broad themes. Within those themes, they free people to try different approaches and business models.
3: Adopt metrics that support entrepreneurial growth.
When advantages come and go, conventional metrics can effectively kill off innovations by imposing decision rules that make no sense. The net present value rule, for instance, assumes that you will complete every project you start, that advantages will last for quite a while, and that there will even be a “terminal value” left once they are gone. It leads companies to underinvest in new opportunities.
Instead, firms can use the logic of “real options” to evaluate new moves. A real option is a small investment that conveys the right, but not the obligation, to make a more significant commitment in the future. It allows the organisation to learn through trial and error. As Kaaren Hanson, the company’s vice president of design innovation, said at a recent conference at Columbia Business School, the important thing is to “fall in love with the problem you are trying to solve” rather than with the solution, and to be comfortable with iteration as you work toward the answer.
4: Focus on experiences and solutions to problems.
Once a company has demonstrated that demand for something exists, competitors quickly move in. What customers crave—and few companies provide—are well-designed experiences and complete solutions to their problems. Unfortunately, many companies are so internally focused that they’re oblivious to the customer’s experience. dutifully provide.
Companies skilled at exploiting transient advantage put themselves in their customers’ place and consider the outcome customers are trying to achieve.
5: Build strong relationships and networks.
One of the few barriers to entry that remain powerful in a transient-advantage context has to do with people and their personal networks. Indeed, evidence suggests that the most successful and sought-after employees are those with the most robust networks. Realising that strong relationships with customers are a profound source of advantage, many companies have begun to invest in communities and networks as a way of deepening ties with customers.
And of course, social networks have the power to enhance or destroy a firm’s credibility in nanoseconds as customers enjoy an unprecedented ability to connect with one another. Firms that are skilled at managing networks are also notable for the way they preserve important relationships.
6: Avoid brutal restructuring; learn healthy disengagement.
In researching firms that effectively navigate the transient-advantage economy, I was struck by how seldom they engaged in restructuring, downsizing, or mass firings. Instead, many of them seemed to continually adjust and readjust their resources.
Sometimes, of course, downsizing or sudden shifts can’t be avoided. The challenge then is disengaging from a business in the least destructive, most beneficial way.
Preparing customers to transition away from old advantages is a lot like getting them to adopt a new product, but in reverse. Not all customers will be prepared to move at the same rate. There is a sequence to which customers you should transition first, second, and so on. In trying to force many customers to move faster than they were prepared to, the company can enrage them.
7: Get systematic about early-stage innovation.
If advantages eventually disappear, it only makes sense to have a process for filling your pipeline with new ones. This in turn means that, rather than being an on-again, off-again mishmash of projects, your innovation process needs to be carefully orchestrated.
Companies that innovate proficiently manage the process in similar ways. They have a governance structure suitable for innovation: They set aside a separate budget and staff for innovation and allow senior leaders to make go or no-go decisions about it outside the planning processes for individual businesses. The earmarked innovation budget, which gets allocated across projects, means that new initiatives don’t have to compete with established businesses for resources. Such companies also have a strong sense of how innovations fit into the larger portfolio, and a line of sight to initiatives in all different stages. They hunt systematically for opportunities, usually searching beyond the boundaries of the firm and its R&D department and figuring out what customers are trying to accomplish and how the firm can help them do it.
8: Experiment, iterate, learn.
As I’ve said for many years, a big mistake companies make all the time is planning new ventures with the same approaches they use for more-established businesses. Instead, they need to focus on experimentation and learning, and be prepared to make a shift or change emphasis as new discoveries happen. The discovery phase is followed by business model definition and incubation, in which a project takes the shape of an actual business and may begin pilot tests or serving customers. Only once the initiative is relatively stable and healthy is it ramped up. All too often, in their haste to get commercial traction, companies rush through this phase; as a result whatever product they introduce has critical flaws. They also spend way too much money before testing the critical assumptions that will spell success or failure.
Speed is paramount. Fast and roughly right decision making must replace deliberations that are precise but slow.
Should we be aiming for competitive advantage in education?
Hopefully schools are working together to support all staff to improve so that all pupils receive a good education.
Can we use the strategies for transient advantage in education?
Do we allow people to experiment? Do we have a school culture which allows new ideas to be trialled?
Do we use the logic of real options to evaluate new moves?
Do schools put themselves in the child’s and families place to consider what they want from their education? I think through COVID this was prevalent when schools were planning their remote learning offer.
How do schools build strong relationships with parents and pupils? Especially during COVID when Reception parents have not even been allowed to set foot in the building.
How do we prepare parents, pupils and staff for a change in the way things are done to bring them on board?
Ensuring a school has a good reputation is important in ensuring you fill your intake year.
Is the governance structure in education suitable for innovation? Are governing boards looking for new initiatives and ideas that will have the greatest impact on the pupil’s outcomes? Is time given to analyse research-rich opportunities?
Do schools focus on experimentation and learning, and are they prepared to make a shift or change emphasis as new discoveries happen?
McGrath, R.G., (2013). Transient advantage. Harvard business review, 91(6), pp.62-70