Forget long-term strategy. What today’s volatile market demands is strategy based on a rolling series of adroit responses to short-lived competitive opportunities.
That, in a nutshell, is what “transient competitive advantage” is about, says author, consultant, and Columbia University professor Rita Gunther McGrath. “It refers to the situation where an organization will see an opportunity, grasp that opportunity, and when that opportunity is exhausted, move on,” she told Travel Weekly PLUS. The difference between that approach and a long-term strategic framework is that “strategy now becomes stringing together sets of opportunities in a pipeline rather than trying to exploit one big success.”
An acknowledged expert on strategy in volatile times, McGrath has worked with senior leadership teams in a variety of multi-national organizations including Coca-Cola Enterprises, General Electric, Alliance Boots, Pearson, Nokia, Microsoft, and the World Economic Forum.
Her fourth book, The End of Competitive Advantage(Harvard Business Review Press, 2013), has been described as a new playbook for business strategy based on updated assumptions about how the world works. It includes principles and practical tools, as well as examples of how successful companies have used both in practice.
“The old strategy was that you would find a strong position in an industry, throw up entry barriers like crazy, and then exploit that for a really long time,” McGrath said. “I found that way of thinking was trapping companies into a lot of counterproductive behaviors. They were letting powerful people dictate where the resources were being spent. They didn’t have a systematic way of doing innovation. They didn’t have a systematic way of getting resources out of exhausted opportunities. There were a lot of ways in which that way of thinking became a barrier to making progress.”
This is the first excerpt from a dialogue between McGrath and Travel Weekly PLUS Editor in Chief Diane Merlino about successful strategy and the nature of competition in today’s market.
Merlino: Rita, not so long ago the golden rule of business strategy was based on developing a sustainable competitive advantage. The new methodology you propose is strategy based on creating transient competitive advantage. That’s quite a departure in thinking and practice.
McGrath: It’s challenging because a lot of what we’ve been taught in places like Columbia Business School, where I work, don’t really have good tools that make sense under conditions of high uncertainty or high volatility. Take something as beloved as the net present value rule. There are assumptions embedded in that tool that don’t make sense in an uncertain world.
The first assumption is that you can’t have any hope of accurately projecting cash flows out into the future. The second is that your core business is going to remain steady state; it doesn’t speak to what happens when your core business goes into decline. And the third assumption is that by starting a project, you’re committing yourself to carrying it all the way through.
With transient competitive advantage, net present value becomes very different. In fact it’s become almost option-like if you admit the possibility of being able to stop a project before it’s finished.
Merlino: What does transient competitive advantage look like in practice? What’s different about it?
McGrath: When I looked at companies that seemed to be doing a reasonably good job at this, I found a couple of things that are quite different from the way most companies are organized. The first was what I call continuous reconfiguration. I learned about this from a very rare group of 10 firms in my sample that had been able to grow their net income by at least 5% a year over an entire 10-year period.
I got a group of graduate students to study them, and I directed the group to find the downsizing, find the reorganizations, find how they got out of things and restructured. They spent an entire summer on it, and they kept coming back with nothing. I said come on, there’s got to be more!
And when we really dug in and studied those companies. we found that they never let themselves get too stable. They were constantly moving in response to the markets and in response to signals of opportunity. You never had this starting and stopping — reorganizing, then having things settle down and go on for quite a while, then reorganizing again. What we saw was a much more continuous change process. In fact, I would argue that by the time you need change management, it’s almost too late.
Merlino: Continuous change. As you’ve said, that means jumping on an opportunity and then moving on to another as soon as the opportunity has exhausted itself. That sounds like a tall order.
McGrath: It’s a big challenge for a lot of businesses. They really struggle with it, and there are a number of institutional reasons why. The powerful people in most companies are the people that built the last generation competitive advantage, so they don’t want to let it go.
Also, it’s very hard when you have to leave behind a business. There will always be a lot of arguments against that — it’s still got some life in it, or this is just a temporary effect and it’s going to come back, we just haven’t seen the results yet. There’s always someone who can make the argument that you should stay in. Yet, if you keep resources trapped in those businesses, you won’t have the money to fund something new.
Merlino: This sounds like the principle you describe in the book as “healthy disengagement.” Please fill that out for us.
McGrath: Healthy disengagement means observing that a business or an initiative is not going to be durable much longer, or it’s just not for you. Maybe your strategy has changed or the world has changed in some meaningful way, and you need to move on.
The healthy part is doing it early, doing it in such a way that you recoup maximum value from whatever investment you’ve made in it — and doing it in such a way that it causes the least amount of human stress and disappointment.
Merlino: That sounds pretty straightforward, at least in theory. I’m sure it’s not so simple in practice.
McGrath: I have a framework in the book where I look at six different kinds of disengagement. They have to do with making a decision about whether a capability is just going to go away, or whether it might be valuable to somebody else but not to you anymore.
Those small point-and-shoot instant cameras are one example. Nobody uses those anymore. Everybody’s using their phones and their tablets to take pictures so they’re just going away. That’s one kind of decision.
Or, take something like Verizon selling off its phonebook division [Verizon Directories, sold in 2006]. Ivan Seidenberg, who was the CEO at the time, basically made the decision that phone books were going away, that it was not going to be a long-term growth vehicle for the company even though at the time it was a healthy business with a great cash flow. He got a great price for it from a hedge fund.
Merlino: Do you have any other examples of healthy disengagement?
McGrath: Sure. One of the most interesting is to me a company in the newspaper business, a company called Schibsted [Schibsted Media Group, Norwegian media conglomerate based in Oslo), a very old and traditional maker of newspapers. They opened up a cannibalizing sister company that does digital advertising. As their newspaper business lost advertising revenue that advertising revenue went over to Schibsted’s sister division. They’re basically swapping analog revenue for digital revenue. It was a self-cannibalizing disengagement.
Merlino: Another key principle you cover in the book is asset allocation to promote deftness. So can you just expand on that a bit?
McGrath: Here’s where we get at the problem I was alluding to before, which is, when powerful people in the organization control the allocation of resources it becomes very, very difficult to fund things that are new.
Imagine yourself being head of the Sony Walkman business in 2000, before iPods were introduced. You’re good at getting media to be played with great fidelity. You’re good at little machines that wing and whir and carry on. Then someone comes along says there’s no future in little machines that wing and whir. And guess what? Albums are going away. It’s all going to be songs. How do you feel about that? I think you would feel very negative because that’s your baby. That’s what you’ve grown up with, and that’s what you know and love.
The dilemma is, if you let that person control the resources that are going into your portable music business, you’re never going to create something like an iPod. You’re never going to have innovation that is cannibalizing, because that person’s interest does not promote that.
What I find in successful cases in these companies is that a third party shifts the resources. Often it’s the CEO; sometimes it’s the head of strategy and planning. But all these companies have a really well developed process for getting resources out of businesses that are either slow-growth or declining and moving them into areas that are fast-growth or rising.
Merlino: Are these same principles applicable to smaller companies as well as big businesses?
McGrath: I think smaller companies actually have had a better intuitive sense of this for a long time, because if you’re a small company and you run out of money, you die. If you’re a big company, it happens a lot more slowly.
NEXT ISSUE: Rita Gunther McGrath on how competition has shifted away from industries and into arenas.