In today’s fast-paced, ever-changing world of business, a company’s competitive advantage is no longer a ‘sure-thing’, a globally-recognised strategy expert has warned.
Speaking at the World Business Forum in Sydney, last month, Rita McGrath, a professor at the Columbia Business School, explained that while sustainable competitive advantage has been a fixation of companies for decades, the concept has been rendered irrelevant by the conditions of the modern business world.
According to McGrath, in reality, once a competitive advantage is conceived, a company cannot expect to exploit it forever – rather, as technology, competitors and customers’ needs change, the advantage will erode and disappear.
One factor contributing to the increasing uncertainty around competitive advantages is the fact that companies are competing across industries.
“For many businesses, the most significant competition they will face isn’t from other organisations in their industry, it’s from some other industry coming in and making what they do irrelevant,” McGrath said, noting that technologies companies are now the key players in the music industry, while FinTech companies are solving the same problems banks deal with but in a very different way.
Don’t fall into the nostalgia trap
McGrath told attendees that it is dangerous for a company to assume a competitive advantage will always be sustainable because this mindset could result in destabilising conditions in their industry being overlooked.
To explain her point, she compared old rivals Fujifilm and Kodak. The former reduced its footprint in chemical photography, embraced digital photography in a big way, diversified into other industries and is today a relevant player. The latter, McGrath explained, “is literally blowing up its manufacturing plant because it can’t afford to pay the real estate taxes on them”. It didn’t have to be that way for Kodak, she added, pointing out that the company’s changing fortunes were the result of strategic choice and the fact that it fell into the ‘nostalgia as business strategy’ trap.
McGrath advised attendees that the old rules of strategy, with their emphasis on sustainable competitive advantage, no longer work, and introduced a new set of strategic principles for competing and winning in the world of business. These strategic principles included: continuous reconfiguration, healthy disengagement, deft resource allocation, innovation proficiency and discovery-driven leadership.
McGrath conceded that a company’s culture, values and big picture strategy should remain relatively stable so people have ‘something to hold onto’. However, she spoke of the need for companies to be in a state of constant motion, where their business is continuously reconfigured, in order to remain competitive and relevant.
McGrath pointed to US-based financial data and software company, FactSet as as a company that has prospered due to a steady stream of small but crucial changes.
“When FactSet got started in the late 1970s they were producing big phonebook sized set of numbers but today they are unrecognisable,” she said. “They are into big data and have databases that are the envy of the world. If you look at their corporate history, there is a lot of emphasis on innovation. In fact, innovation risks are featured in their letters to investors as a possible end to their business model. If they can’t get the next generation of innovation, investors should be aware of that. What you don’t see is big lay-offs and massive restructures. That’s because they kept on changing at the rate their environment was changing. You don’t need to do this massive, wrenching transformation.”
McGrath warned companies that unless they have formal disengagement processes, which allow them to ‘get out of the things they need to get out of’, disengage from an advantage (such as a product, asset or talent) is more likely to happen with maximum pain. Having disengagement processes also allows companies to maximise the value of advantages that must be brought to an end. McGrath gave the example of a company that requires its managers to put a ‘sell-by’ date on each of its product lines.
Deft resource allocation
McGrath explained that in companies that subscribe to the sustainable competitive advantage mindset, the resources generated by the business are often controlled – and even worse, held hostage – by the most powerful people.
“Research has found this a very good predictor of future poor performance,” she said. “Companies need to figure out a way of taking resources away from the powerful people and reallocating them to where they can do the most good.”
McGrath identified toymakers Lego as a company with a clever approach to resource allocation. She explained how the members of Lego’s leadership team are advised at the end of each financial year to plan on having 10% fewer resources moving forward. This results in 10% of the company’s resources being temporarily freed up, and the team is required to brainstorm how best to reallocate these resource within the company, with a view to’ ‘creating efficiency and funding the future’.
McGrath said that while innovation in a lot of organisations is episodic and sporadic, this is not sustainable. She painted a picture of a company whose CEO announces ‘we need more innovation around here’ and organises an innovation boot camp, only for this innovative mindset to lose momentum, fade away and re-emerge six months later following a change of leadership.
“This is no way to run a mission-critical process,” she explained. “Increasingly, companies need to build a real innovation proficiency. You can’t leave to chance, you can’t leave it to some important guy taking an interest, and you can’t leave it to a small band of hardy warriors that are true believers in the middle of the company. If it’s really important to the future of the organisation, it needs to be managed like a proficiency.”
A ‘discovery-driven leadership mindset’ is crucial in today’s business world, McGrath explained. Rather than blindly investing in a new initiative, which could result in a ‘big flop’, this model encourages companies to engage in learning processes that de-risks the initiative before lots of money is spent.
“When you look at failed innovations they tend to be untested assumptions taken as fact,” McGrath said. “The minute we anchor ourselves to some kind of point, our brains race to find reasons that point makes sense. It’s called confirmation bias and it’s very, very dangerous. Discovery-driven planning is a disciplined approach that puts a price-tag on learning the right answer. If the answer is “this initiative isn’t going to work”, then stop and do something differently.”