Rita Mcgrath

The highest-ranking woman on the Thinkers50 list of the world’s most influential management thinkers (#10) describes the new strategic logic that every company should embrace.

Sustainable competitive advantage sounds like a good thing to most people—but you believe companies need to stop basing their strategies on it and embrace a new strategic logic. Please explain.

The high degree of change in today’s environment means that organizations have to adapt their strategy to new situations much more frequently than ever before. Historically, the preoccupation in strategy has been with seeking a long-term competitive advantage that is not easily duplicable by others in an industry, but we must all accept that this is an age of transient advantage. Previously, the sequencing has been: Identify a unique position in an attractive industry, throw up entry barriers like crazy, and then devote the rest of your efforts towards exploiting that position. In more and more areas of the economy, this approach no longer works. Either the position doesn’t have enough entry barriers and it erodes; new forms of competition come in and take over; customers change; or your position just wasn’t sustainable to begin with.

What does it take for an organization to thrive in an age of transient advantage?

I did a study a few years ago of a very unusual group of firms that I call ‘outliers’. My study population was ‘every publicly traded firm on any stock exchange with a market capitalization of over $1 billion’, and of that entire population, only 10 companies were able to grow their net income by at least five per cent per year for 10 years in a row. Among the interesting things about these outliers is that they were very different from one another: They varied from a Chinese beer company ( Tsingtao Brewery) to an Internet service provider ( Yahoo Japan) to a massive construction-oriented firm ( ACS Group of Spain). What they all seemed to do really well was to combine elements of stability with elements of dynamism. For example, leadership, culture, values and people might remain quite stable over a lengthy period, but resource allocation, job assignments, market explorations and assets were being moved around quite dynamically.

Talk a bit about your concept of ‘waves’ of transient advantage.

This is a shorthand way of thinking about the life cycle of a competitive advantage. Advantages begin with some kind of insight that a company has about how it might meet a customer need or invent something new. Peter Drucker once said that “the purpose of a business is to create a customer.” From that insight, there will be a period of incubation and experimentation which you can think of as ‘the innovation process’. When an innovation is ready, it gets ramped up and brought to scale. The next phase is ‘exploitation’, in which the firm gets to enjoy the fruits of its labour and gain an advantage. However, in many industries, competition soon matches the advantage, customers get bored or something new comes along and the advantage begins to erode. As a result, between these exploitation and erosion phases, a firm needs to have developed a new advantage. This process is ongoing, which is why I liken it to surfing through successive ‘waves’ of competitive advantage.

Rather than focusing on the competition within a particular industry, you believe innovators should be looking at ‘arenas’. Please explain.

Too many companies are obsessed with traditional industry analysis and continue to define their most important competitors as the other companies within their industry — i.e. firms offering products that are a close substitute for one another. Today, this is a very dangerous way to think about competition. In more and more markets, we are seeing industries competing with other industries, business models competing with other business models — even within the same industry — and entirely new categories emerging.

It isn’t that industries have ceased to be relevant; it’s just that using ‘industry’ as a level of analysis is not fine-grained enough to determine what is really going on at a consumer decisionmaking level. A new, more granular level of analysis is required to reflect the connections between market segments, offerings and geographic location. Thinking of competition in terms of ‘arenas’ helps you do that.

An arena consists of the combination of a customer segment, an offer and a physical or virtual space of some kind. In his research on disruptive innovation, Harvard’s Clayton Christensen and colleagues have written about ‘jobs to be done’. The basic premise is that customers ‘hire’ a particular product to satisfy a ‘job’ that they need to get done. Jobs can be either functional in nature (‘I need to find something to feed my family for dinner’) or emotional (‘I want to express my individuality’). At any given time, we all have dozens of such jobs to be done — and the fact is, there is more than one way to get each particular job done.

For example, say I need to occupy myself for 20 minutes while waiting to board a flight. Like most people, I’m armed with a smartphone, so I have several options at my fingertips: I could play a game, do some personal banking, read The New York Times or watch Netflix. Each of these offerings is in effect ‘competing’ for my 20 minutes. We need to broaden the aperture and start to look at all the various ways that someone can get a particular job done, because any entity that is capable of doing that job is now your competition. That’s what competing in an arena looks like.

Talk a bit about how the move from ownership of assets towards access to assets is affecting companies.

Back in the heyday of the dot-com bubble, every company had to purchase its own computer equipment and hire programmers. Today, you can get all of that stuff on demand from places like Amazon Web Services. A technologist friend of mine recently told me he is shocked at what Amazon is ‘giving away’ in terms of artificial intelligence and machine learning applications. There are all sorts of tools that you can just ‘plug and play’ on your own system, without having to spend a dime. As a result of this shift, the total number of things that need to be managed inside of an organizational hierarchy has shrunk significantly. The upside is, those few capabilities that remain to be handled within the organization can become the ‘secret sauce’ that gives it an advantage. Leaders must be very selective about which activities they choose to carry out internally, versus obtaining them from external markets.

Describe a few of the key elements of the new strategy playbook you recommend.

The first element of the new playbook is a process I call ‘continuous reconfiguration’. In a rapidly changing environment, firms need to be able to change rapidly, as well. Rather than getting settled in a particular configuration, they must learn to manage constant motion. The fact is, change is not the dangerous thing; stability is.

Another key element is ‘healthy disengagement’, which refers to the way in which companies that can operate with transient advantages get out of an advantage that is exhausted in order to free up resources to invest in new advantages. In far too many firms, there is either no process for disengaging — which means they cling to exhausted businesses for too long — or disengagement is painful and approached reluctantly.

A third important element is ‘moving resources around’ an organization in such a way that it can deftly grasp new opportunities even as it pulls resources out of old ones. Transient advantage also places a premium on candour and transparency. You mustn’t analyze an opportunity to death: When it comes to making decisions today, ‘roughly right and rapid’ trumps ‘overly ponderous and precise’ every time.

You have called reconfiguration the ‘secret sauce’ of the new strategy playbook. Please explain.

As indicated, reconfiguration means that you are pulling resources away from the past and dedicating them towards the future. A way to illustrate this is to contrast the cases of Fuji Film and Kodak. In 1979, the price of silver suddenly shot way up and there came to be uncertainty about supply. All the photography companies panicked, but a few months into 1980, the crisis was over, and everyone went back to business as usual.

Except for Minoru Ohnishi, who had just become the CEO

of Fuji. Ohnishi remained uneasy about his company’s reliance on film processing, which was linked to the supply of silver. His unease was validated again in 1984, when Sony introduced the first commercial digital camera, the Mavica. As Ohnishi later told a reporter, this was the moment at which he could envision ‘a future of photography without film’. He thus began the reconfiguration process — pulling resources away from film and redirecting them into research and development of digital capabilities. By the late 1990s, the company had spent over $2 billion to get into the digital world. Moreover, Fuji moved its resources into a variety of other industries besides photography and today is in such segments as specialty chemicals, medical systems and optical devices. Sadly, Kodak never managed to reconfigure itself and, as we all know, it ended up going bankrupt.

Reconfiguration is critical because it enables assets, people and capabilities to make the transition from one transient advantage to another. Organizations that get this right are typically able to embed change into their normal routines, and they also tend to use an options-oriented approach to explore new opportunities. At the same time, as indicated, they are able to balance agility with stability — but stability rooted in ‘softer’ areas like vision, process and culture rather than in static competitive positioning or rigid resource alignment patterns.

Compare and contrast a company that has neglected these principles with one that has embraced them.

With much regret, I think a company that really missed the mark was General Electric. Over a period of many years, it was more geared towards exploiting existing advantages and continuing with what it knew how to do well, rather than embracing new opportunities. I was shocked to read that it had spent billions of dollars repurchasing shares. Couldn’t it have taken some of that cash and used it to define new activities?

At the other end of the spectrum, a company that has really embraced this approach is Adobe. A few years ago, it sparked huge amounts of customer outrage when it decided to move one of its most popular products — Photoshop — to the cloud. It basically abandoned the previous model of offering shrink-wrapped software on CDS that people owned, and started offering the same kind of software experience but on a subscription basis through the cloud.

Adobe had the courage to say, ‘Our business model is changing. There is a whole new platform we need to be thinking about; and if we don’t get there with our software by the time it becomes obsolete and somebody else has beaten us to it, we will lose the market’. It was very courageous of them to leave behind a market that was, at the time, still very profitable, with very loyal customers, to make a move to something entirely new.

You advise organizations to measure their ‘innovation maturity’. How is that done?

I have developed a set of metrics that organizations can use to measure their level of innovation maturity. The ‘Innovation Maturity Scale’ ranks a company on a scale from one to eight on 28 questions about things like governance principals, innovation metrics, how people are rewarded and what, culturally, is the best way to get ahead in the organization. We have found that many companies are practising ‘early stage innovation’ (1-2 on the scale); some are at the mid-point (3-4); and very, very few are at a late stage (5-7).

Too many of the companies at low levels of innovation maturity are still partaking in what I call ‘innovation theatre’. Everyone agrees that innovation is important, but what do they do? They pack their senior people up on a plane and head off to Silicon Valley, where they tour around and get their pictures taken next to the Google sign. Then they come back and say, ‘Wow, that was so cool’ — but nothing happens.

Companies that are more mature in terms of innovation create metrics around it and treat it the same way they would treat any other significant process like quality or customer satisfaction. For these companies, innovation isn’t some weird thing that only certain people get to do; it is always part of the conversation and it’s always on the agenda.

One company that is brilliant at this is SAS Corporation. It is privately held, which I think in some cases, really does help. Every Tuesday, its founder and CEO Jim Goodnight gets his top people together for two to three hours to hear what’s going on with their various innovation programs. People come in and do a ‘show and tell’, or to pitch things. Think about that: for half a day, every single week, innovation is on every executive’s calendar. We definitely don’t see enough of that.

What does living in an age of ‘transient advantage’ mean for each of us, personally?

Just as firms need to be continuously reinventing themselves and innovating, there are similar implications for our own lives. First and foremost, you need to build resilience into your career. Are you part of multiple networks? Do you have other ways of making money beyond the salary that is dependent on your employer? Do you have skills that are transferable across different sectors?

Are you keeping on top of developments in your field? Have you taken any courses at a place like the Rotman School to refresh your skills?

The idea that you can emerge from school, join a company, work there for 30 years and then retire is increasingly unrealistic. Younger people are asking questions like, ‘If I take this job, will I be more employable when I’m done? What am I going to learn here? Who are you going to introduce me to?’ Employers who can’t answer these questions are really going to struggle to attract the best young talent.

You have said that one way to thrive in an era of transient advantage is to develop a great set of ‘entrepreneurial goggles’. Please explain.

I have found that there is one thing that differentiates great serial entrepreneurs from the rest of us: The way they see the world. Above all else, they are very curious. They’re constantly looking around in the environment for patterns. They’re always looking for unmet needs and opportunities, or ways to take an underutilized asset and put it to work. In their minds, they are constantly asking, ‘Could this be a business?’ Most of the time, the answer is no, so they quickly move on to the next thing. But sometimes this lens triggers a really great business idea — and when it does, they move quickly. Rita Mcgrath is an Associate Professor at Columbia Business School and the best-selling author of The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business (Harvard Business Review Press, 2013), which was recognized by strategy+business as the #1 business book of the year. She is ranked #10 on the Thinkers50 list of the world’s most influential management thinkers.