Moving from sustainable to transient competitive advantage
Focusing on long-term competitive advantage can blind you to market disruptions.
I saw an interview with Rita Gunther McGrath, the author of The End Of Competitive Advantage, by Cathy Olofson. The fundamental concept that McGrath explores in her book is that the premise of sustainable competitive advantage is no longer a useful model for organizing a business (if it ever was).
Olofson: You argue that competitive advantage is dying and that companies need to embrace the idea of transient advantage. What do you mean by that?
McGrath: The Holy Grail of strategy for many years has been defined as sustainable competitive advantage: you find an opportunity, you throw up entry barriers like crazy and then you get to enjoy it for a long period of time. But increasingly, this no longer works well or even makes sense, thanks to globalization, digital disruptions, and so on. So in response to this shift, organizations need to build up temporary or transient advantages where they seize opportunities, exploit them, and then move on quickly when they’ve exhausted the opportunity. To do this effectively, we need to think differently about strategy.
Olofson: What are the implications for innovation strategy?
McGrath: One result of this shift to transient advantage is that is that innovation becomes more imperative, which means that organizations really do need to make it a routine capability, rather than pursue it in fits and starts. So you need a governance structure. You need a well-thought-out process for getting new ideas into the market quickly. You need a way of making sure that the funds are there in the right way. You need to create the right the incentives. Innosight has spotlighted this in its Growth Factory work.
Olofson: You caution executives not to get trapped by competitive advantage. What do you mean by that?
McGrath: What happens when a company has been very successful for a long time is that people don’t feel the urgency to innovate. There’s a tendency to continue to invest along the trajectory that’s already been invested in. And it’s very, very difficult to retool because anything new and uncertain becomes the classic innovator’s dilemma situation.
Probably the most vivid example at the moment is Research In Motion. The company is just trying to shore up its advantage by throwing millions of dollars at trying to get back in the game. And you really have to ask just the question: would they be better off taking that money and doing something else with it rather than trying to recapture dated glory?
Olofson’s insights are dead on. In the fast-and-loose postnormal, adopting the time-frame of long-term competitive advantage — trying to think about a ten-year product life cycle — takes your attention away from the quickly changing environment where transient advantages may come and go in weeks or months, or a long-term competitive advantage, like RIM’s dominance of business mobile messaging, can blind you to the disruption inherent in competitor’s actions.
An interesting footnote: Michael Porter coined the term competitive advantage in 1985, and the concept become a byword of the postmodern era of business management. The idea that a company could erect barriers to block new upstarts from entering markets seemed like a way to mint money, as Steve Denning argued last year (see What Killed Michael Porter’s Monitor Group? The One Force That Really Matters). But the model he used to describe the various forces in marketplace was so simplistic that it had no real predictive power, and had “no basis in fact or logic.” As Denning says,
There was just one snag. What was the intellectual basis of this now vast enterprise of locating sustainable competitive advantage? As [Matthew] Stewart [Author of The Management Myth, an investigation into Porter’s theory and the Monitor Group] notes, it was “lacking any foundation in fact or logic.” Except where generated by government regulation, sustainable competitive advantage simply doesn’t exist.
Porter might have pursued sustainable business models. Or he might have pursued ways to achieve above-average profits. But sustainable above-average profits that can be deduced from the structure of the sector? Here we are in the realm of unicorns and phlogiston. Ironically, like the search for the Holy Grail, the fact that the goal is so mysterious and elusive ironically drove executives onward to continue the quest.
Hype, spin, impenetrable prose and abstruse mathematics, along with talk of “rigorous analysis”, “tough-minded decisions” and “hard choices” all combined to hide the fact that there was no evidence that sustainable competitive advantage could be created in advance by studying the structure of an industry.
Although Porter’s conceptual framework could “help explain excess profits in retrospect, it was almost useless in predicting them in prospect.” As Stewart points out, “The strategists’ theories are 100 percent accurate in hindsight. Yet, when casting their theories into the future, the strategists as a group perform abysmally. Although Porter himself wisely avoids forecasting, those who wish to avail themselves of his framework do not have the luxury of doing so. The point is not that the strategists lack clairvoyance; it’s that their theories aren’t really theories — they are ‘just-so’ stories whose only real contribution is to make sense of the past, not to predict the future.”
Porter’s Monitor Group filed for bankruptcy in 2012, after spectacularly being unable to create sustained competitive advantage for itslef, or its clients.
So, it’s just as well that we are left to seek transient competitive advantage, since sustainable competitive advantage was an illusion, anyway.
Originally published at www.stoweboyd.com September 21, 2013.