McGrath started out in government 30 years ago, after earning a B. In , McGrath returned to school, first pursuing her Ph. Snider Entrepreneurial Research Center. The idea of learning from failure, the notion of studying business portfolios, and the concept of building new capabilities are all linked when you consider the new competitive environment and how companies need to change in order to succeed within it. McGrath then compared each company to its top three competitors. We used to think of the competitive environment as one of punctuated equilibrium, where there were long periods of stability between disruptions.
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McGrath started out in government 30 years ago, after earning a B. In , McGrath returned to school, first pursuing her Ph. Snider Entrepreneurial Research Center. The idea of learning from failure, the notion of studying business portfolios, and the concept of building new capabilities are all linked when you consider the new competitive environment and how companies need to change in order to succeed within it.
McGrath then compared each company to its top three competitors. We used to think of the competitive environment as one of punctuated equilibrium, where there were long periods of stability between disruptions. Now the disruptions are coming closer and closer together. The competitive environment is in perpetual motion. McGrath: Because many of the barriers to entry that once protected companies and sectors have fallen. The most obvious reason is globalization. There are a number of forces that have converged to make attractive opportunities more visible to more players, and the resources needed to go after them are more available, too.
All these dynamics make it very hard to hang on to competitive advantage for any long period of time. McGrath: Leaders need a process that enables them to step back from the day-to-day hustle and ask the right questions. They need to look for warning signs, such as whether they are investing in a business without getting the proper returns.
There are a number of questions that they can ask. Are there traditional barriers to entry that are coming down? Are cheaper substitutes for their products making inroads in the marketplace? Those kinds of things are pretty strong indicators that competitive advantage is starting to fade. McGrath: There have always been industry transitions.
It used to be that if you wanted to run a railroad, you had to own all the assets required to run a railroad. Today, if you want to compete with the Fortune Global , you can get your computer systems from Amazon, your programmers from oDesk, etc.
You can assemble assets very, very quickly and then disassemble them. The leaders at Infosys, one of the outliers that I cite in the book, reorganize the company every two or three years, whether they need to or not. But we tend, unfortunately, to perceive reorganization as a negative thing.
Companies use structures as a means to an end—to coordinate activity, to capture and share information, and to get the right expertise to bear on the right problem. In a fast-moving environment, structures that require very heavy information flows or that are very hierarchical are going to slow a company down. One of the tests that [George Mason University Distinguished Professor of Information Sciences] Paul Strassmann always uses when he looks at the information efficiency of an organization is how many information exchanges are needed to respond to a demand, such as a customer order or inquiry.
More exchanges mean slower response time. You will choose flexibility over optimization, even if you have to give up a bit of margin to do that. The classic example is Amazon. For years now, it has valued growth and flexibility over margins, and that makes Amazon very, very hard to compete against. You will choose people who are educable rather than people who are deeply specialized. You will think of your competitive position in terms of arenas rather than industries.
McGrath: Industry is a very traditional concept in corporate strategy. Industrial organization economics says that the structure of the industry determines the profitability of the firms within it, and those firms with favorable positions within an industry will outperform those with less favorable positions. Look at broadcast television, print journalism, and my business, education.
A report in the Wall Street Journal noted that from , when the iPhone was first introduced, to , household spending in the U. You need to look at the arena of addressable household spending and ask how to make cars that are very relevant to American households. You need to ask if your company should stay in the car business or maybe diversify into another line of business with better prospects.
McGrath: If you start to put those kinds of frames on it, you limit what you see. Consumer spending is a customer arena. There are arenas in the factor markets [markets used to trade the services of a factor of production, such as labor or capital] for labor and raw materials and other resources as well.
It requires a quite different kind of strategic thinking. McGrath: Traditional diversification strategies seek businesses that follow different rhythms. For example, I recently heard about a food manufacturer in India with a lot of free cash flow that bought a tobacco plant. The idea was that in learning to make tobacco products, they would gain access to lots of different kinds of opportunities that might then be relevant to the food business.
In an environment of temporary advantage, you need to be able to reconfigure assets, people, and capabilities to move from one opportunity to the next as the advantage shifts.
That requires continuous morphing as opposed to extreme downsizing or restructuring. To me, that symbolizes the fact that human beings are very bad at chaos. Companies need to provide some stability in the midst of change.
There has to be a mix. People need to be able to count on their leaders and the values of the firm. There needs to be clarity about the relationships and the development of people. These things provide stability. On the other hand, they need to be pushed to avoid complacency, to try new things, and to stretch a bit. Part of the skill of leadership is being able to provide both. Atmos Energy, another of the outliers, has done this quite well.
Its CEO, who took over when the company was in bad shape, purposefully created a culture of high performance and change. The company is now running a regulated energy business and an unregulated energy business—two very different business models with very different drivers, and yet they are able to work together in a coherent way.
How should companies approach this? If the business is dying—like dial-up Internet or landline telephony—you need to figure out how to depreciate its assets and get out.
They tried to get into digital, pharmaceuticals, and other businesses. But the weight of the core film business hamstrung them.
Another thing that is unique to Kodak is its location in Rochester, N. The environmental cues in a place like Rochester are that everything is fine.
In contrast, there is Fuji Photo Film. While Kodak was sinking, Fuji was hungrily searching out developing opportunities and, at the same time, pulling resources out of exhausted opportunities.
The traditional company invests a huge amount of resources in its strategy and then tries to defend it. Fuji is less about defense and more about opportunities.
How should it be managed? Often, resources get trapped in the core businesses, and innovative new businesses have no hope in heaven of getting anywhere. There are many examples: Research in Motion, Microsoft, Nokia. All of these companies have had trouble getting resources out of their core businesses and into anything new and different.
New businesses tend to be small and failure rates are high. It should be centralized or at least managed separately from the day-to-day businesses. The pace and rhythm of allocation decisions need to be speeded up, too. Infosys allocates resources quarter by quarter. What happened last quarter? Where do we need to move people and resources this quarter?
If you have really good IT, you can do that. McGrath: Yes. Take UPM, a plus-year-old wood products company in Finland. It sells lumber and paper—businesses it has been in forever. Its CEO realized two things: first, that print magazines and newspapers were declining; and, second, that lumber was heavily dependent on the health of the unpredictable construction industry.
Leaders running mature businesses need to run them with absolute efficiency and really sweat the assets, while being aware that their businesses may be shrinking. The leaders of the new businesses are charged with finding the best opportunities, getting the kinks out of the technology, and figuring out how to differentiate UPM in their markets.
If they can come up with a proposition that works, the company is going to invest like crazy in that business. You innovate once in a while and then maximize the benefit of whatever it was you innovated. Innovation is fragile and episodic. In fact, I would argue that having too much money is actually really dangerous to innovation because it causes people to latch on to a given route to market too early. When I studied big corporate flops, in almost every case I found that having too much money up front caused people to fix on certain assumptions that later proved untenable.
It has to be embedded in the organization. It is constantly experimenting with new opportunities, and its CEO is constantly pushing it into new spaces. In one market, it partnered with Vodafone to serve the unbanked. In another market, it tried microlending. McGrath: Leaders need to get out of defensive mode and be honest. There are two things I hear senior leaders say that make the little hairs on the back of my neck stand up.
But when the surprises are unanticipated developments, like a new competitor coming from out of left field, leaders need to hear about them or it could be fatal. They should be candid and probing, and a little less focused on operational excellence.
Best business books
The context of business has changed so rapidly over the past few decades that it may be time for a new lexicon. In this book, strategy expert and Columbia Business School professor Rita McGrath takes on one of most fundamental and recognized notions in strategy: that of sustainable competitive advantage. She argues this can no longer be the Holy Grail for companies because in a constantly changing environment, deeply ingrained structures and systems designed to extract value actually become a liability. The new path to winning includes taking advantage of shorter term opportunities, as well as relying on new organizational talents like speed and decisiveness. McGrath defines the new transient lifecycle of competitive advantage and shows how successful firms manage through it by using an updated philosophy.
The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business
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Rita Gunther McGrath on the End of Competitive Advantage
Rita Gunther McGrath. Are you at risk of being trapped in an uncompetitive business? Chances are the strategies that worked well for you even a few years ago no longer deliver the results you need. Dramatic changes in business have unearthed a major gap between traditional approaches to strategy and the way the real world works now.
The End of Competitive Advantage