Business Competitive Advantage Discussion

Discussion Post # 2:

Based on the book end of competitive advantage, what does transient advantage means for you, personally?Assignment

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THE End of
competitive
advantage
How to
Keep Your
Strategy
Moving
as Fast
as Your
Business
Foreword by
Alex Gourlay
Alliance Boots
Rita Gunther McGrath
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harvard business review press
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Praise for The End of
­Competitive Advantage
“The End of Competitive Advantage is an incredibly practical
play­­book for competing in today’s dynamic world. Rita McGrath’s
compelling book provides clear guidance for leaders searching for
the competitive edges that seem to grow more elusive by the day.
A ­must-read.”
—Scott Anthony, Managing Partner, Innosight; author,
The Little Black Book of Innovation
“Rita Gunther McGrath cements her status as one of the top
business gurus in the world with The End of Competitive Advantage.
She asserts that sustainable competitive advantage is obsolete and
offers a thoroughly compelling argument that successfully managing waves of transient advantage is the future of business success.”
—John Caddell, author, The Mistake Bank (forthcoming)
“In today’s economy, committing to achieve sustainable competitive advantage is like building the Maginot Line: It locks you into
a position from which it is hard to move, and it does not keep the
bad guys out. Better instead to adopt Rita McGrath’s playbook for
exploiting transient competitive advantages and get your organization to embrace the fact that the only constant is change.”
—Geoffrey Moore, author, Crossing the Chasm
and Escape Velocity
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“How do you strategize when sustainable competitive ­advantages
are gone? You need a playbook for strategy that fits today’s fast and
uncertain world. You need new methods for organizing and acting
to deliver continuous growth and profits over decades. You need a
new competitive advantage—this book.”
—Alex Osterwalder, entrepreneur and cofounder, Strategyzer.com
“McGrath’s central insight is authentic, empirical, and profound.
Too many organizations unicorn-hunt for ‘sustainable’ competitive
advantage at the expense of investing in agile—and anticipatory—
strategic opportunities. This book will provoke useful arguments
around creating versus exploiting innovation opportunism.”
—Michael Schrage, Research Fellow, MIT Sloan’s Center for
Digital Business; author, Who Do You Want Your
Customers to Become?
“If competitive advantage was ever sustainable, that time has
passed. McGrath’s book not only captures the shortcomings of
traditional, static models, but lays out the tools that fuel leading
performance. The End of Competitive Advantage will give you an
entirely new perspective on how to think about strategy.”
—Francisco D’Souza, CEO, Cognizant
“This smart, readable book addresses today’s most significant
strategy reality: that we are living in an era of transient advantage. Rita McGrath provides a playbook for this new landscape,
showing how you can identify opportunities fast, execute against
them at scale, and be unafraid to move on when the situation
changes.”
—William D. Green, former Chairman, Accenture
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“The urge to hold on to one’s established competitive advantage
is a vicious trap. McGrath clearly establishes the factors central to
building a dynamic competitive edge for an enterprise of tomorrow.
Refreshing, insightful, and a must-read.”
—Sanjay Purohit, Senior Vice President, Infosys Ltd.
“McGrath’s groundbreaking work is aptly timed for today’s d
­ ynamic
markets, where winning requires continuous reconfiguration.”
—Nancy McKinstry, CEO and Chairman, Executive Board,
Wolters Kluwer nv
“The End of Competitive Advantage makes clear that high-­
performance teams have to stay vigilant. Are your leaders seizing
new opportunities or just trying to optimize an outdated strategy?
Keep your head up and stay alert, or a transient advantage might
pass you by.”
—Klaus C. Kleinfeld, Chairman and CEO, Alcoa
“As a long-time member of the Rita McGrath fan club, I was
delighted to see this book. Her approach to strategy is fresh and
practical, and is exactly what managers need today. It acknowledges
competitive realities but shows a clear path forward. It is one of the
most illuminating takes on how to deal with disruption that I have
ever read.”
—Clayton M. Christensen, Kim B. Clark Professor of Business
Administration, Harvard Business School
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THE END OF
COMPETITIVE
ADVANTAGE
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THE End of
compETiTivE
advanTagE
How to
Keep Your
StrategY
Moving
aS FaSt
aS Your
BuSineSS
Rita Gunther McGrath
Harvard Business Review Press
Boston, Massachusetts
12/18/12 7:55 AM
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Find more digital content or join the discussion on www.hbr.org.
Copyright 2013 Rita Gunther McGrath
All rights reserved
No part of this publication may be reproduced, stored in or introduced into
a retrieval system, or transmitted, in any form, or by any means (electronic,
mechanical, photocopying, recording, or otherwise), without the prior
permission of the publisher. Requests for permission should be directed to
permissions@hbsp.harvard.edu, or mailed to Permissions, Harvard Business
School Publishing, 60 Harvard Way, Boston, Massachusetts 02163.
The web addresses referenced in this book were live and correct at the time
of the book’s publication but may be subject to change.
Library of Congress Cataloging-in-Publication Data
McGrath, Rita Gunther.
 The end of competitive advantage: how to keep your strategy moving as fast
as your business/Rita McGrath.
     pages cm
Includes bibliographical references.
ISBN 978-1-4221-7281-0 (alk. paper)
1. Strategic planning. 2. Competition. I. Title.
HD30.28.M38378 2013
658.4’012–dc23
2012051721
ISBN13: 9781422172810
eISBN: 9781422191415
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You jolted me from complacency in my nice little
bureaucratic job.
Said that if it were a “top five” school the PhD would be worth
doing—otherwise not.
We started a family, left the city we both loved, moved away
from our friends, and got a mortgage.
I was miserable. Transitions are hard.
But we went on to build something quite remarkable—together.
For John, and discovering what our next chapter holds.
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Contents
Foreword
ix
Preface
xi
1 The End of Competitive Advantage
1
2 Continuous Reconfiguration: Achieving
Balance between Stability and Agility
3 Healthy Disengagement
27
53
4 Using Resource Allocation to
Promote Deftness
5 Building an Innovation Proficiency
75
101
6 The Leadership and Mind-Set of Companies
Facing Transient Advantages
135
7 What Transient Advantage Means
for You, Personally
161
Notes
185
Index
193
About the Author
203
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Foreword
This book could not be more timely. Any leader seeking to
understand what it takes to win in the ruthlessly competitive
­
­markets most of us are faced with today will benefit from reading
it. In my ­thirty-two years as a retailer (beginning as a “Saturday
boy” at Boots in Glasgow), I have personally witnessed a dramatic
acceleration of the pace of change and the upending of assumptions we used to take for granted. Shopping behavior is changing
dramatically. We are witnessing the end of advantages that made
our 163-year-old Boots brand iconic. Consumers give businesses
less permission to be wrong than ever before, and the Boots brand
is not immune to this shift.
We were first introduced to Rita’s ideas when Boots Group
merged with Alliance UniChem in 2006 to form Alliance Boots,
and the breathing room that followed allowed us to take this ­newly
formed company private in 2007. At that time we decided to transform the organization in a way that would enable us to operate
very differently—by putting our customers first. Working with Rita,
who is a gifted and original strategic thinker, we sought to embed
many of the principles presented in this book into the leadership
­mind-set of our new organization. And we continue to do that
­today. We seek to be quicker and more decisive. We seek to be
more ­candid, so that pending news—even negative news—travels
fast and is ­immediately addressed. We seek to spend more time
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x
Foreword
thinking about the future than we ever have before. We seek to
break down silos so that our organization is appropriately ­structured
to capture opportunities and act as one unified entity. Most of all,
we seek to create courageous leaders—leaders who regard the fast
pace of competitive exchange as exciting and who are fully engaged
in creating an organization that can boldly capture opportunities
and just as boldly move away from strategies and business practices
that no longer represent opportunities.
When we started our evolution, many observers were skeptical.
The Boots brand was tired and undervalued, they said, and the
strategy poorly explained and not all that well executed. Moreover,
our new business model, which combined a business-to-business
wholesale operation with a customer-focused retail business, had
seldom proved to be successful. But our results have proven our
critics wrong. Measures assessing the recognition of our brand, satisfaction of our customers, and engagement of our employees are
at record levels, and the profitability of Alliance Boots has been
increasing by at least 10 percent every year since its privatization.
And all this was achieved despite the global recession.
­ owever,
Our evolution, like yours, is far from over. We believe, h
that the concept of strategy presented in this book is invaluable.
Strategy needs to change because customers and markets are
changing faster than ever. The ideas in these pages provide a muchneeded guide to a world of transient competitive advantage.
—Alex Gourlay
Chief Executive, Health & Beauty Division, Alliance Boots
Nottingham, United Kingdom, January 2013
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Preface
Strategy is stuck. If you dropped into a boardroom discussion or
an executive team meeting, chances are you’d hear a lot of strategic thinking based on ideas and frameworks designed in, and for,
a different era. The biggies—such as Michael Porter’s five forces
analysis, BCG’s growth-share matrix for analyzing corporate portfolios, and Hamel and Prahalad’s core competence of the firm—are
all tremendously important ideas.1 Many strategies today are still
informed by them. But virtually all strategy frameworks and tools
in use today are based on a single dominant idea: that the purpose
of strategy is to achieve a sustainable competitive advantage. This
idea is strategy’s most fundamental concept. It’s every company’s
holy grail. And it’s no longer relevant for more and more companies.
In this book, I take on the idea of sustainable competitive
­advantage and argue that executives need to stop basing their strategies on it. In its place, I offer a perspective on strategy that is
based on the idea of transient competitive advantage: that to win
in volatile and uncertain environments, executives need to learn
how to ­exploit short-lived opportunities with speed and decisiveness. I argue that the deeply ingrained structures and systems that
executives rely on to extract maximum value from a competitive
advantage are liabilities—outdated and even dangerous—in a fastmoving competitive environment.
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xii Preface
This much at least seems to be well understood. But then why
hasn’t basic strategy practice changed? Most executives, even when
they realize that competitive advantages are going to be ephemeral,
are still using strategy frameworks and tools designed for achieving
a sustainable competitive advantage, not for quickly exploiting and
moving in and out of advantages.
This book addresses that problem. It offers a new set of ­practices
based on the notion of transient, not sustainable, competitive
­advantage. With this book, you’ll get a new playbook for strategy—
one that is based on a new set of assumptions about how the world
works—and learn how some of the most successful companies in
the world use the new playbook to compete and win when competitive advantages are transient.
The Evolution of Strategy
How did the idea of sustainable competitive advantage get so
­entrenched in the first place? Let me retrace how this concept
evolved and, in parallel, show how my own work—both in academia
and in the world of management practice—has led up to this book.
Sustainable Competitive Advantage
Historically, strategy and innovation have been thought of as two
separate disciplines, in both research and practice. Strategy was all
about finding a favorable position in a well-defined industry and then
exploiting a long-term competitive advantage. Innovation was about
creating new businesses and was seen as something separate from
the business’s core set of activities. Initially, I studied the corporate
innovation process, much of which is laid out in my previous
­coauthored books.2 At the time, relatively few serious scholars
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Preface xiii
were studying “corporate venturing,” with a few exceptions such
as Bob Burgelman; Kathy Eisenhardt; and, of course, my coauthor,
­mentor, and colleague Ian C. MacMillan.3 Instead, most of my PhD
colleagues were busy studying positional dynamics within industries (with the goal of understanding how to achieve sustainable
competitive a­ dvantages).
My academic work at that time had mostly to do with fostering
entrepreneurial behavior within large firms. A major insight from
those days was that when you’re trying to enter fields in which you
don’t have a broad-based platform of experience—in other words,
areas in which the ratio of assumptions you have to make relative
to knowledge that you possess is high—a different set of disciplines
needs to be employed. Ian MacMillan and I wrote a suggested
approach to tackling this dilemma in “Discovery-Driven Planning,”
a best-selling article in Harvard Business Review that has since
become a staple of entrepreneurship and innovation courses.4 We
didn’t realize it at the time, but we were laying the foundations
for a new approach to strategy, in which sustainable competitive
­advantage wasn’t really the point.
The Growing Gap between Traditional Approaches to
Strategy and the Real World
I had the opportunity to apply many of these ideas with consulting clients as we sought to help them develop an innovation proficiency. But this is when it started becoming obvious to us that
most companies we were working with were really having trouble
with their basic strategy for competing in their core businesses.
­Diverse clients such as DuPont, 3M, Nokia, Intel, and IBM were
all beginning to recognize that traditional approaches to strategy
and ­innovation weren’t keeping pace with the speed of the markets
in which they were competing.
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xiv Preface
But even as management tools to supposedly help cope with the
pace of competition proliferated, executives didn’t use them. Executives reported to the consultancy Bain “that the speed of the new
economy has caused people and firms to believe they don’t have time
to implement tools,” and firms, particularly in North America, were
feeling “understaffed,” with the consequence that they were sticking
increasingly to tools they had already had experience with. Ironically, at the time, despite a lot of innovation in management tools
and ­approaches, firms were increasing their reliance on strategy
tools that they had inherited from the past.5 So although they talked
about using increasingly sophisticated approaches, if you looked at
what they were really working with you would still find SWOT analyses, industry analyses, and rather conventional competitive analysis.6
­Although executives realized the need for new approaches to strategy, they were still using old ones—or none at all.
Along with this growing gap in practice, some scholars in a­ cademia
started to question the idea of sustainable competitive advantage.
Ian MacMillan was one of the first to tease out its specific implications for strategy. Competitive advantage, he reasoned, could best be
thought of in waves, with the job of the strategist being to seize strategic initiative by launching ever-new waves.7 He and Rich D’Aveni
coined the term “hypercompetition” to characterize markets in which
a firm’s competitive advantage would be quickly competed away.8
In both business and academia there was an increasing sense
that existing frameworks were not doing a great job helping leaders cope with the faster pace of competition. And then, with the
advent of the internet and the knowledge-based economy in
general, ­
­
decreases in protective trade regulations, and technological advances, things seemed to move ever faster, and for some
­reason companies that you would think would be able to cope lost
their edge. Max Boisot, a dear and now departed friend, summed
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Preface
xv
up the implications for unstable advantage in knowledge-intensive
industries, ­basically concluding that the most profitable point in
the evolution of an advantage was also its most fragile.9 By the late
1990s, the connection between innovation and strategy went mainstream with the publication of Clay Christensen’s The Innovator’s
Dilemma,10 which cited discovery-driven planning as a useful element of the strategists’ toolkit while trying to do innovative things.11
Transient Competitive Advantage
What was starting to happen was that the disparate fields of competitive strategy, innovation, and organizational change were all
coming together. This in turn meant we needed to add new frameworks and tools for practicing strategy to the well-entrenched ones
such as five forces analysis and the growth-share matrix. In my previous books, Harvard Business Review and journal articles, talks,
and consulting, I’ve tried over the years to sketch out what a new
way of practicing strategy might look like. Options reasoning, for
instance, is a way of making investments in the future without having to risk massive losses.12 Intelligent failures can be helpful in
facilitating learning.13 Opportunity recognition is a skill that can be
enhanced and developed in a systematic way.14 The resource allocation process is perhaps the most significant way to influence what
gets done in an organization and who does it.15 You need to think
of customer “jobs to be done,” rather than rigid markets i­nfluenced
by supply and demand.16 Business model innovation was every bit
as important as R&D or product innovation.17 And different leadership behaviors need to be deployed in businesses with different
levels of maturity.18
The implications of all these ideas came together in what I’m
calling in this book a new playbook for strategy. The new playbook
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xvi Preface
is based on a new set of assumptions about how the world works—
a different set of assumptions from those that gave us the useful
frameworks and tools we’ve been using for the past several decades. The strategy playbook today needs to be based on the idea of
transient competitive advantage—that is, where you compete, how
you compete, and how you win is very different when competitive
advantage is no longer sustainable.
Basing your strategies on a new set of assumptions can seem
daunting, even if you know it’s the right thing to do. Even more
challenging is shifting the ultimate goal of your strategy from a
sustainable competitive advantage to a transient one—you can no
longer plan to squeeze as much as you can out of any existing competitive advantage unless you are already well into exploring a new
one. But as you’ll see from the stories in this book from companies and leaders all over the world who are competing on transient
­advantages, once you start working with the new strategic playbook, changes in the configuration of your advantages don’t have to
be intimidating at all. Some of the executives I interviewed actually
seemed to be having fun—rather than being defensive and debilitated, they used the pursuit of transient competitive advantages to
represent a compelling and engaging call to action for their people
and a spur to innovation.
Fast-moving strategies have implications for managerial careers
as well. A friend of mine working for a Brazilian company suggested
a somewhat counterintuitive idea: “In Brazil,” he said, “we’ve been
through it all—inflation, corruption, unpredictable governmental
regulation, you name it. And you know, you get good at it.” He
pointed out that managers whose only experience is with more
tame types of competition would be flummoxed if they had to confront some of the challenges his generation of leaders in Brazil had
to overcome on a routine basis.
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Preface xvii
Although it’s easy to see the devastation wreaked on companies
whose leaders were not prepared to be dynamically competitive,
I think it’s important to recognize the benefits, too. Sclerotic and
inefficient industries get better when faced with genuine competitive threats. Would anyone want to go back to the days in which
the government-owned telephone company dictated pricing and
choices, for instance? In their quest to find the next opportunity,
companies are getting better at figuring out what people really need
and will pay for, at designing better experiences, and at wresting
new efficiencies from existing assets. In a lot of cases, the value
an average person gets for the same dollar, yen, or euro is vastly
greater than it was even a decade or two ago. And there are more
opportunities for new ideas and for young companies to thrive than
ever before.
Before closing this preface, I’d like to acknowledge some of the
people who have been instrumental in making this book a reality. Jill S. Dailey, of Accenture, proved invaluable as an intellectual
sparring partner, a source of new ideas, and a resource for figuring
out how these ideas could work in practice. The idea of arenas and
of industries competing with industries is an idea we’ve worked on
pretty intensively together. Ian MacMillan was a sounding board
and an unapologetic critic of those ideas he didn’t feel made sense.
I appreciated the suggestions and comments of the many people I
interviewed for the book. Alison Norman, Xi Zhang, and Sooreen
Lee provided invaluable research assistance. Melinda Merino and
the team at Harvard Business Review Press have been true partners
in crafting and shaping the ideas presented here.
I hope you enjoy this introduction to people and companies that
I believe represent some of the best new strategic thinking and
behavior for winning even when competitive advantages don’t last.
They don’t always get it right—in fact, if my ideas about temporary
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xviii
Preface
advantage and learning from failure apply, it’s almost impossible for
a company to call it correctly every time. What matters, though,
when you have been taken by surprise or something negative
occurs, is what you do next. The best firms look candidly at what
happened, figure out how to do it better the next time, and move
on. It’s a bit like surfing a wave—you might fall off and find yourself
embarrassedly paddling back to shore, but great surfers get back on
that board. So too with great companies. They move from wave to
wave of competitive advantages, trying not to stay with one too long
because it will become exhausted, and always looking for the next
one. It has been fun getting to know them.
—Rita Gunther McGrath
Princeton Junction, New Jersey
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THE END OF
COMPETITIVE
ADVANTAGE
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1
The End of
Competitive
Advantage
Fuji Photo Film Company had an inauspicious beginning. It was
divested from Japan’s first cinematic film manufacturer in the
1930s because it was a chronic underperformer. Over the years,
it improved its poor reputation for quality, became a ­significant
global firm, and began to take on giants such as Eastman Kodak
in film and film processing. The market for amateur and professional chemical-based photographic processes hadn’t really
changed in over a hundred years, meaning that competition
tended to devolve around distribution rather than products,
and Fuji struggled to break into markets in which Kodak was
entrenched. There were many innovations, to be sure—­including
roll film, 35-millimeter film, easy-to-load cartridges, and even
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2
THE END OF COMPETITIVE ADVANTAGE
disposable cameras—but the basic position of film at the center of
the photography industry’s competitive universe hadn’t changed
for decades.
In the 1970s, however, an event that subsequently proved
­seminal to the evolution of the photography business took place.
Two members of one of America’s wealthiest families, Nelson
Bunker Hunt and William Herbert Hunt, made a play to corner
the ­silver market. They were interested in using silver as a hedge
against inflation (a big issue at the time) and also as a diversifying
asset class given that they had large holdings in oil. They began to
make investments in silver in 1973, at which point the price of an
ounce of silver was just under $2. In early 1979, the price had risen
to about $5. By the time their plans were publicly exposed at the
end of 1979, they had amassed more than 100 million ounces (6.25
million pounds) of silver, which observers guessed was about half
the world’s supply. Their actions caused the price of silver to jump
to a mind-boggling number of over $50 per ounce.1
The consternation among manufacturers was palpable—what
would happen if silver, a key ingredient in film processing, proved
far more expensive than their economic models had predicted?
Further, what if the investors in silver had such a lock on the m
­ arket
that there would not be enough of the material to go around? Their
anxiety didn’t last long, however, because in March of 1980 the
price of silver collapsed precipitously, bringing with it collateral
damage in the form of one of the sharpest declines in the Dow
Jones Industrial Average ever experienced.2 With the crisis over,
most photography companies, Kodak among them, settled back
into doing business as usual.
Minoru Ohnishi, who became CEO of Fuji Photo Film in 1980,
remained deeply uneasy about the experience, however. He sensed
that a fundamental change was potentially afoot in the photography
business. The introduction of Sony’s first digital camera, the Mavica,
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The End of Competitive Advantage
3
in 1984 created the reality of photography that could do without
film. He said later, “That’s when I realized film-less t­echnology
was possible.”3 He wasted no time moving on this insight. He
invested heavily in building up expertise in digital technologies to
prepare for the next round of competition in the photography business. His determination for the company to make this transition
was described as “single-minded” by a writer for BusinessWeek, who
observed that if one were to tally up Fuji’s investments by 1999
in research and technology dedicated to digital products, it would
easily top $2 billion. The article went on to note a “mystical” belief
among the company employees in the correctness of this strategy.
This attitude was reflected by chief scientist and senior advisor
Hirozo Ueda, who told the reporter, “We’re not going to quit, and
we’re not going to lose this battle.”4 By 2003, Fujifilm had nearly
five thousand digital processing labs in chain stores throughout the
United States; at the time, Kodak had less than a hundred.5
Ohnishi was determined not only to keep his company relevant
in digital technologies for photography, but also to extend its reach
to opportunities outside the photography business. He pushed the
company to establish a sales channel for new products such as
magnetic tape optics and hybrid electronic systems. It became the
first non-US company to produce videotape. Later diversification
efforts took the firm into biotechnology and office automation. It
entered floppy disk manufacturing. Ohnishi was an innovator in
business processes at Fuji as well. In a Japanese context famous
for its long-tenured “salarymen,” Ohnishi championed a lean headquarters staff, even going to great lengths to benchmark how well
Fuji compared with forty other Japanese companies with respect to
how many staff were involved in overhead functions. Although Fuji
came in at 9 percent (and the average of the rest was 16.7 ­percent),
Ohnishi was determined to bring this ratio down to 7 percent by
asking the organization to cut its workload significantly and to
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THE END OF COMPETITIVE ADVANTAGE
eliminate 50 percent of the time-consuming consensus b
­ uilding
and documentation that were standard business practice at the
time.6
The reconfiguration of the company continued after Ohnishi was
replaced by Shigetaka Komori, with sometimes-painful transitions
as jobs were lost and facilities closed. The firm aggressively pulled
resources from the photographic film business, reportedly cutting
more than $2.5 billion in costs in order to invest those resources
in new businesses.7 Today, Fujifilm has significant health care and
electronics operations and obtains some 45 percent of its revenue
from document solutions and office printers.8 All this was accomplished during several decades in which Japan’s domestic industries
were moribund and the country seemed unable to escape stagnation. In 2011, Fujifilm generated $25 billion in revenue, employed
more than 78,000 people, and ranked 377th on Fortune’s Global
500 list. Kodak has gone bankrupt.
Fuji’s story suggests that simply managing well, developing quality
products, and building up well-recognized brands is insufficient to
remain on top in increasingly heated global competition. The stakes
for the company were huge—it risked undermining its existing
advantages, and had to make a bet on a highly uncertain future.
Yet, ultimately, it was Fuji’s approach—investing in new advantages
and pulling resources from declining ones—that proved to be more
robust in the face of change. It didn’t get it right every time, and
sometimes the transitions were painful. But the company didn’t get
trapped by its past.
When competitive advantages don’t last, or last for a much shorter
time than they used to, the strategy playbook needs to change.
Leaders have inherited a lot of ideas that may have made sense at
one point but aren’t keeping up with the pace of strategic change
today. Although executives realize that rapid change is the norm,
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The End of Competitive Advantage
5
the strategies they use to compete still draw on frameworks and
practices that were most effective decades ago. Executives need a
new set of strategy frameworks and practices for winning over the
long haul, even as sustainable competitive advantages have become
a thing of the past.
This book is about the dynamics of transient, rather than
sustainable, competitive advantage. It shows the new strategic
­
logic—where to compete, how to compete, and how to win—when
competitive advantages are temporary, and shows what we can
learn from companies that have learned to ride the wave from one
transient advantage to another.
Your Strategy Is Based on Old Assumptions
Sony. Research In Motion (RIM). Blockbuster. Circuit City. Even
the New York Stock Exchange. The list of once-storied organizations that are either gone or are no longer relevant is a long one.
Their downfall is a predictable outcome of practices that are
designed around the concept of sustainable competitive advantage.
The fundamental problem is that deeply ingrained structures
and systems designed to extract maximum value from a competitive advantage become a liability when the environment requires
instead the capacity to surf through waves of short-lived opportunities. To compete in these more volatile and uncertain environments, you need to do things differently.
When I got my start in the strategy field, there were two foundational assumptions we took practically as gospel. The first was
that industry matters most. We were taught that industries consist of
­relatively enduring and stable competitive forces—take the time and
effort to deeply understand these forces, and voilà, you can create a
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THE END OF COMPETITIVE ADVANTAGE
road map for your other decisions that is likely to last for some time.
The emphasis in strategy was therefore analytical: because industries were assumed to be relatively stable, you could get a decent
payoff by investing in analytical capabilities to spot industry trends
and design your strategy accordingly. Those were the days of the
five-year plan. A major assumption was that the world of five years
from now was to some extent comprehensible today.
For instance, the traditional network television model in the
United States was successful for many decades because the limited
and expensive broadcast spectrum meant that a few players (in this
case the major networks) dominated the few channels to customers.
Constraints having to do with geography, syndication rights, and
ratings all kept the model in place for years. For advertisers, this
meant that television stations offered the promise of extremely large
mass markets. Over the last thirty years, the constraints that held
this model in place have eroded. Cable television eliminated the
constraint of limited channels, fragmenting the mass market. Video
rentals allowed viewers to watch content at their own c­ onvenience.
The ability to record programs and skip the commercials was later
embraced by a public weary of intrusive advertisements. More
recently, the internet has facilitated an explosion of “channels”
that viewers might look to for entertainment. This relaxation of
­constraints has fundamentally undermined the networks’ business
model. Indeed, the most important dynamic wasn’t network-to-­
network competition but an invasion from other industries.
The second assumption was that once achieved, advantages are
sustainable. Having achieved a solid position within an industry,
companies were encouraged to optimize their people, assets, and
systems around these advantages. In a world of lasting advantage,
it made sense to promote people who were good at running big
businesses, operated with greater efficiency, wrung costs out of
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The End of Competitive Advantage
7
the system, and otherwise preserved the advantage. Management
structures that directed resources and talent to strong core businesses, often called “strategic business units,” were associated with
high performance. The core assumption here was that you could
optimize your systems and processes around a set of sustainable
advantages.
There are indeed examples of advantages that can be sustained,
even today. Capitalizing on deep customer relationships, making
highly complicated machines such as airplanes, running a mine,
and selling daily necessities such as food are all situations in which
some companies have been able to exploit an advantage for some
time. But in more and more sectors, and for more and more businesses, this is not what the world looks like any more. Music, high
technology, travel, communication, consumer electronics, the automobile business, and even education are facing situations in which
advantages are copied quickly, technology changes, or customers
seek other alternatives and things move on.
The New Logic of Strategy
The assumption of sustainable advantage creates a bias toward
­stability that can be deadly. My research suggests that rather than
stability being the normal state of things and change being the
abnormal thing, it is actually the other way around. Stability, not
change, is the state that is most dangerous in highly dynamic competitive environments.
Think about it: the presumption of stability creates all the wrong
reflexes. It allows for inertia and power to build up along the lines
of an existing business model. It allows people to fall into routines
and habits of mind. It creates the conditions for turf wars and
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THE END OF COMPETITIVE ADVANTAGE
organizational rigidity. It inhibits innovation. It tends to foster the
denial reaction rather than proactive design of a strategic next step.
And yet “change management” is seen as an other-than-normal activity, requiring special attention, training, and resources. A Google
search on the phrase “change management” turns up 21,600,000
results—that’s twenty-one million citations.
A preference for equilibrium and stability means that many shifts
in the marketplace are met by business leaders denying that these
shifts mean anything negative for them. Consider the ­reaction
of executives from Research In Motion (the parent company of
BlackBerry devices) to the 2007 introduction of the iPhone. Jim
Balsillie, the company’s co-CEO, told a Reuters reporter that the
launch of Apple’s iPhone wasn’t a major threat, simply the entry
of yet another competitor into the smartphone market.9 Five years
later, the company is at risk for its very survival, facing a slew of
disappointing product launches, subscriber defection, continuing
service outages, and shareholders in open revolt. Its former leaders
have been replaced. Yet this company’s products were so beloved by
its corporate users that asking them to put away their BlackBerries
was like asking them to amputate a limb. What happened? A long
track record of relatively stable success caused the ambition to
hungrily search for new opportunities to atrophy. Once that’s gone,
it’s hard to regain quickly in the face of fast competitive onslaughts.
It’s typical for leaders to deny there is an issue until far too late,
at which point there is an “all hands on deck” full-blown crisis.
As one of my interview respondents from a major medical device
manufacturer observed, “We had seen it coming, and decided to
ignore it and put our fingers into our ears until it became so obvious
that we could no longer ignore it.” Only then are resources mobilized, teams formed, and a sense of urgency created. Unfortunately,
by that time it is often too late. Strategy today instead needs to be
based on a new set of assumptions and practices.
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The End of Competitive Advantage
9
Where to Compete: Arenas, Not Industries
One of the biggest changes we need to make in our assumptions is
that within-industry competition is the most significant competitive threat. Companies define their most important c­ompetitors
as other companies within the same industry, meaning those firms
offering products that are a close substitute for one another. This
is a rather dangerous way to think about competition. In more
and more markets, we are seeing industries competing with other
industries, business models competing with business models even
in the same industry, and entirely new categories emerging out
of whole cloth. This is most obvious in those markets that have
embraced the digital revolution—just look at the shrinking CD
­section of your local bookstore (if, of course, your local bookstore is
still around) and you’ll see what I mean. Indeed, a reporter for the
Wall Street Journal recently observed that if you look at categories
of purchases for the average American family, vehicle purchases,
apparel and services, entertainment, and food away from home are
all shrinking, some at double-digit rates. What’s growing? Spending
on telephone services, up by 11 percent since the 2007 introduction of the iPhone.10
It isn’t that industries have stopped being relevant; it’s just that
using industry as a level of analysis is often not fine-grained enough
to determine what is really going on at the level at which decisions
need to be made. A new level of analysis that reflects the connection
between market segment, offer, and geographic l­ ocation at a ­granular
level is needed. I call this an arena. Arenas are ­characterized by
­particular connections between customers and solutions, not by
the conventional description of offerings that are near substitutes
for one another.
To use a military analogy, battles are fought in particular geographic locations, with particular equipment, to beat particular
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10 THE END OF COMPETITIVE ADVANTAGE
rivals. Increasingly, business strategies need to be formulated with
that level of precision. The driver of categorization will in all likelihood be the outcomes that particular customers seek (“jobs to be
done”) and the alternative ways those outcomes might be met. This
is vital, because the most substantial threats to a given advantage
are likely to arise from a peripheral or nonobvious location.
This further raises the issue that a firm may not have a single
approach that holds for all the arenas in which it participates. Instead,
the approach may be adapted to the particular arena and competitors
it is facing. For example, consider the strategy of language-teaching
firm Berlitz. As Marcos Justus, their former Brazilian president,
told me, in Brazil, competition for the mass market was fierce, but
­competition for customers in the upper income brackets was less so.
There, a strategy of focusing on the upper echelons and positioning
the brand as an elite product made sense. In the United States, where
the majority of customers are somewhere in the middle, a ­different
positioning featuring convenience and flexibility made sense. These
are two different strategies, responding to the exigencies of the two
different arenas. Both of these strategies, however, drive Berlitz’s
evolution toward the cultural consultancy it aspires to become.
The arena concept also suggests that conventional ideas about
what creates a long-lived advantage will change. Product features,
new technologies, and the “better mousetrap” sorts of sources of
advantage are proving to be less durable than we once thought.
Instead, companies are learning to leverage more ephemeral things
such as deep customer relationships and the ability to design
irreplaceable experiences across multiple arenas. They will be
­
focused on creating capabilities and skills that will be relevant to
whatever arenas they happen to find themselves operating in. And
they may even be more relaxed about traditional protections and
barriers to entry, because competition will devolve around highly
intangible and emotional factors.
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The End of Competitive Advantage
11
There is a big difference between thinking about strategy in
terms of arenas as opposed to industries. In industry analysis, the
goal is often to determine one’s relative position with respect to
other players in the same industry. It’s good to have a large market share. And competitive threats are of the traditional kind—
moves regarding product introductions, pricing, promotions, and
so on. It’s very easy to be blindsided. In the 1980s, for instance,
no money-center bank even saw the threat of Merrill Lynch’s cash
management account offering because it wasn’t offered by a bank;
millions in deposits flew out the door before anybody realized
what was going on. More recently, Google’s moves into telephone
operating systems and online video have created ­consternation in
traditional phone businesses; retailers such as Walmart are ­edging
into health care; and the entire activity of making payments is
being contested by players from a bunch of different industries,
including mobile phone operators, internet credit providers,
swipe card makers, and, of course, traditional credit and debit
card providers.
Although this is oversimplifying things a bit, you can think of
traditional strategic analysis as being somewhat like the game of
chess, which is quite sophisticated and nuanced but in which the
goal is to achieve a powerful competitive advantage in a major
­market, akin to checkmating one’s opponent. Arena-based s­ trategy
is much more akin to the Japanese game of Go, in which the goal
is to capture as much territory as possible—the winner in Go
lays the strategic groundwork by adroit placement of pieces on a
board, eventually capturing enough territory to overwhelm one’s
opponent.
The imagery of arena-based strategy is more that of orchestration
than of plotting a compelling victory, and implementation on the
ground by those actually confronting conditions within a ­specific
arena becomes increasingly important (table 1-1).
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12 THE END OF COMPETITIVE ADVANTAGE
TABLE 1-1
Where to compete: industry perspective versus arena
­perspective
Industry
Arena
Goal
Positional advantage
Capturing territory
Measure of success
Market share
Share of potential
­opportunity spaces
Biggest threat
Intraindustry competitive
moves
Interindustry moves; disruption of existing model
Definition of customer
segment
Demographic or
­geographic
Behavioral
Key drivers
Comparative price,
­functionality, quality
“Jobs to be done” in total
customer experience
Likely acquisition ­
behavior
Within-industry
­consolidation or beyondindustry diversification
Bolt-on for new capability
acquisition, often across
industry boundaries
Metaphor
Chess
Japanese game of Go
How to Compete: Temporary, Not Sustainable,
Competitive Advantage
You can think of the evolution of a particular competitive advantage
in several phases, as illustrated in figure 1-1. During the launch process, a firm organizes to grasp a new opportunity. During launch,
opportunities are identified, resources allocated, and a team is assembled to create something new. This is where innovation comes in.
If the opportunity gets traction, the advantage begins to enjoy a
period of ramping up: from the initial few segments, more and more
are captured, and the business gains ground. Systems and processes
to get the business to scale are implemented. Experiments become
full-scale market introductions. Speed is often critical here: ramp
up too slowly, and competitors can quickly match what you are
doing and destroy your differentiation.
After a successful ramp-up, the company can enjoy a period—
sometimes quite a long period—of exploitation, in which the
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The End of Competitive Advantage
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FIGURE 1-1
How to compete: the wave of transient advantage
Returns
Launch
Ramp up
Exploit
Reconfigure
Disengage
business is operating well and generating reasonable profits.
During the exploitation phase of a transient advantage, a firm has
­established a clear point of differentiation from competitors in
a way that its customers appreciate and is enjoying the benefits.
During exploitation, market share growth and profitability typically
expand, more and more customers are adopting, prices and margins
are attractive, and competitors see your organization as the one to
beat. The goal is to understand how this period can be extended for
as long as possible while simultaneously being mindful that it will
eventually erode.
Managing the exploitation phase well means focusing on those
few key areas in which a firm has achieved meaningful competitive
separation. Within those spaces, managers need to manage competitive moves and countermoves, build highly scalable competencies
for the next innovation, make sure that new advantages are eventually integrated into the firm’s core offerings as a legitimate part of the
company, and remain alert to threats and opportunities from different areas. One really wants to prevent excessive build-up of assets
and people during the exploitation phase, because these will create
barriers to moving on to the next advantage. Even as the existing
advantages are generating good results, leaders need to be pulling
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14 THE END OF COMPETITIVE ADVANTAGE
assets and resources out of them to create resource space for the next
advantage, just as Fuji did with its film-based photography business.
With temporary advantages, the existing model will always come
under pressure, suggesting the need for reconfiguration and renewal
of the advantage (in essence, launching a new wave). The reconfiguration process is central to succeeding in transient-advantage situations,
because it is through reconfiguration that assets, people, and capabilities make the transition from one advantage to another. During
reconfiguration, teams that might have been engaged to ramp up or
exploit an advantage are shifted to some other set of activities, assets
are changed or redeployed, and people move from one assignment
to the next. Rather than viewing such reorganizations as negative,
as they often are in a sustainable-advantage context, they are taken
for granted as necessary and useful in a transient-advantage world.
Indeed, not having such dynamism in the structures and processes
in place in an organization can be seen as negative by the employees.
Finally, when an advantage is exhausted, the opportunity undergoes a process of erosion, suggesting the need for disengagement.
Through the disengagement process, a firm disposes of the assets
and other capabilities that are no longer relevant to its future, either
by selling them, shutting them down, or repurposing them. The
objective is to manage this process gracefully and quickly. Long,
drawn-out disengagements do little more than consume resources
without making the end result any more pleasant. In a transientadvantage context, unlike a conventional one, disengaging is not
confused with business failure. Indeed, disengagement can and
should take place when a business is still viable, rather than when
a desperate organization has no other choice.
In many organizations, the center of gravity is determined so
much by the businesses in “exploit” mode that the other parts of
this process are neglected. That matters, because different disciplines and skills sets are useful in different parts of this wave. The
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The End of Competitive Advantage
15
launch and ramp-up processes require innovators and experimenters who are comfortable with ambiguity and prepared to learn. The
exploitation phase needs people who thrive on designing effective
processes and making things systematic. The disengagement phase
requires those who are good at seeing early evidence of decline and
unafraid to make the sometimes-difficult decisions to stop doing
something.
In an organization of any complexity, part of the challenge from the
strategists’ point of view is that you will have many such waves ­playing
out, in different phases, all at the same time. The job of ­orchestrating
how these waves are managed is increasingly a crucial part of the
CEO’s challenge. That is what this book is about.
How to Win: Companies That Manage the Wave of
Transient Advantage Well
As part of the research for this book, I set out to find companies that
have figured out how to cope, even to thrive, amidst the ­challenge
of moving from one advantage to the next for a reasonably long
period of time.
In 2010, my research team tracked down every publicly traded
company on any global exchange with a market capitalization of over
$1 billion US dollars as of the end of 2009 (4,793 firms). Then we
examined how many of these firms had been able to grow revenue or
net income by at least 5 percent every year for the preceding five years
(in other words, from 2004 to 2009). Note that what we were interested in here was not total returns or compound annual growth, but
rather steady annual growth, year in, year out. The reason we picked
5 percent was that global gross domestic product (GDP) growth
hovered around 4 percent during this time period, and our thinking
was that truly outstanding companies should be able to exceed this
level.11 The results were surprising. Only 8 percent of the firms were
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16 THE END OF COMPETITIVE ADVANTAGE
above the revenue growth threshold of 5 percent every year, and only
4 percent of the firms were above the net income threshold.
“Well,” we thought, “perhaps we’re not being fair—after all, the
Great Recession that began in 2008 may have knocked normally wellmanaged firms for a loop.” So we redid the study, but this time from
2000 to 2004. The numbers were a little better, but not hugely so: 15
percent and 7 percent for revenue and net income, respectively. Now,
however, we were intrigued—companies that managed to grow consistently were evidently far from average. We then took the entire tenyear period (from 2000 to 2009) and examined how many firms were
able to deliver steady-as-you-go growth. Exactly ten managed to grow
net income consistently by at least 5 percent during the study period.
The companies that grew net income consistently were Cognizant
Technology Solutions (United States), HDFC Bank (India), FactSet
(United States), ACS (Spain), Krka (Slovenia), Infosys (India),
Tsingtao Brewery (China), Yahoo! Japan (Japan), Atmos Energy
(United States), and Indra Sistemas (Spain). I call this group of
extremely unusual firms (0.25 percent of the total) growth outliers
because their steady performance, even in the face of massive change
and uncertainty, was so unusual (table 1-2).
I took each firm and compared it first with its top three competitors (as indicated by Hoover’s Business Research) and then with each
other to glean insights about what allowed these firms to achieve
such consistent, steady growth. The major conclusion was that this
group of firms was pursuing strategies with a long-term perspective
on where they wanted to go, but also with the recognition that whatever they were doing today wasn’t going to drive their future growth.
Interestingly, they had identified and implemented ways of combining tremendous internal stability while motivating tremendous external agility, particularly in terms of business models. We will learn
more from them—and other companies that seem to have embraced
operating in this new environment—as the book unfolds. They are
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TABLE 1-2
How to win: the growth outliers
Outlier company
Original country
What it does
Cognizant
Technology
Solutions
United States
Founded in 1994 as Dun &
­ radstreet’s technology services arm
B
and spun off two years later. Began
with primarily application maintenance
work. Originally a “tactical source of
inexpensive talent,” according to the
company website.
HDFC Bank
India
Founded in 1994 with the dream of
becoming a world-class private ­Indian
bank.
FactSet
United States
Founded in 1978 to automate the
­creation of financial analysis reports for
analysts and companies (not ­individual
investors). Began with a short paper
­report on companies, circulated to a few
key clients, called “Company Factset.”
ACS
Spain
ACS is a Spanish construction and
services provider formed from the
merger and revitalization of formerly
struggling, separate companies.
Krka
Slovenia
Founded in 1954, Krka is a Slovenian
pharmaceutical manufacturer
expanding from its base to
­neighboring regional markets.
Infosys
India
Founded by six engineers in India
in 1981, Infosys began as an Indiabased information technology services
provider with one client.
Tsingtao Brewery
China
The Tsingtao Brewery was founded in
1903 by German settlers in Qingdao,
China.
Yahoo! Japan
Japan
US–based Yahoo! and Tokyo-based
Softbank set up internet portal Yahoo!
Japan in 1996 as a joint venture. It is an
independent, publicly listed company.
Atmos Energy
United States
Atmos Energy is the largest gas-only
utility in the United States. It has
both a regulated arm, which distributes natural gas, and a nonregulated
­subsidiary, Atmos Energy Services.
Indra Sistemas
Spain
Indra Sistemas is a diversified global
technology company that operates in a
wide range of sectors, including transport and traffic, energy and industry,
public administration and health care,
financial services, security and defense,
and telecommunications and media.
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18 THE END OF COMPETITIVE ADVANTAGE
operating with a new playbook for strategy—a playbook based on
new assumptions of competing in arenas (not industries alone) and
exploiting temporary competitive advantages, not sustainable ones.
The New Strategy Playbook
The end of competitive advantage means that the assumptions that
underpin much of what we used to believe about running organizations are deeply flawed. The rest of this book will explore what
that means for business leaders and how the world will look different
(table 1-3). Some of the new playbook is well understood already,
such as the need to pursue innovation (although firms still struggle to get it right in practice). Other elements of the new playbook
have received little emphasis in conversations about strategy, such as
the practice of continuous reconfiguration and disengagement. I’ll
take up those topics first in the discussion that follows, and then
spend some time on the more general challenges of the new strategy
playbook.
“Continuous Reconfiguration” (chapter 2) explores how ­companies
can build the capability to move from arena to arena, rather than trying to defend existing competitive advantages. Companies that can
do this show a remarkable degree of both stability and dynamism.
Moving from advantage to advantage is seen as quite normal, not
exceptional. Clinging to older advantages is seen as potentially dangerous. Exits are seen as intelligent, and failures as potential harbingers of useful insight. Most important, companies develop a rhythm
for moving from arena to arena, with each one being managed as
its particular life cycle stage suggests. And rather than the wrenching downsizings and restructurings that are so common in business
today, disengagements occur in a steady rhythm, rather than in
high dramas.
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The End of Competitive Advantage
19
TABLE 1-3
The new strategy playbook
Continuous reconfiguration (chapter 2)
Healthy disengagement
(chapter 3)
Using resource allocation
to promote deftness
(chapter 4)
Building an innovation
­proficiency (chapter 5)
From
To
Extreme downsizing or
restructuring
Continuous morphing
Emphasis on exploitation
phase
Equal emphasis on entire
wave
Stability or dynamism
alone
Stability combined with
dynamism
Narrowly defined jobs and
roles
Fluidity in allocation of
talent
Stable vision, monolithic
execution
Stable vision, variety in
execution
Defending an advantage
to the bitter end
Ending advantages
­frequently, formally, and
systematically
Exit viewed as strategically undesirable
Emphasis on retaining
learning from exits
Exits occur unexpectedly
and with great drama
Exits occur in a steady
rhythm
Focus only on objective
facts
Focus on subjective early
warnings
Resources held hostage
in business units
Key resources under central control
Squeezing opportunities
into the existing structure
Organizing around
­opportunities
Attempts to extend the
useful life of assets for as
long as possible
Aggressive and proactive
retirement of competitively obsolete assets
Terminal value
Asset debt
Capital budgeting
­mind-set
Real options mind-set
Investment-intensive strategic initiatives
Parsimony, parsimony,
parsimony
Ownership is key
Access is key
Build it yourself
Leverage external
­resources
Innovation is episodic
Innovation is an ongoing,
systematic process
Governance and budgeting done the same way
across the business
Governance and
­budgeting for innovation
separate from business
as usual
(continued )
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20 THE END OF COMPETITIVE ADVANTAGE
The new strategy playbook (continued )
Leadership and mind-set
(chapter 6)
Personal meaning of
transient advantage
(chapter 7)
Resources devoted
primarily to exploitation
A balanced portfolio of
initiatives that support the
core, build new platforms,
and invest in options
People work on innovation in addition to their
day jobs
Resources dedicated to
innovation activities
Failure to test assumptions; relatively little
learning
Assumptions continually
tested; learning informs
major business decisions
Failures avoided and not
discussable
Intelligent failures
encouraged
Planning orientation
Experimental orientation
Begin with our offerings
and innovate to extend
them to new areas
Begin with customers and
innovate to help them get
their jobs done
Assumption that existing
advantages will persist
Assumption that existing
advantages will come
under pressure
Conversations that reinforce existing perspectives
Conversations that candidly question the status
quo
Relatively few and homogenous people involved in
strategy process
Broader constituencies
involved in strategy process, with diverse inputs
Precise but slow
Fast and roughly right
Prediction oriented
Discovery driven
Net present value ­oriented
Options oriented
Seeking confirmation
Seeking disconfirmation
Talent directed to solving
problems
Talent directed to
identifying and seizing
opportunities
Extending a trajectory
Promoting continual shifts
Accepting a failing
trajectory
Picking oneself up quickly
Emphasis on analytical
strategizing
Emphasis on rapid
­execution
Organizational systems
Individual skills
A stable career path
A series of gigs
Hierarchies and teams
Individual superstars
Infrequent job hunting
Permanent career
­campaigns
Careers managed by the
organization
Careers managed by the
individual
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The End of Competitive Advantage
21
As Sanjay Purohit, the head of planning for Infosys, recounted
at a recent Columbia executive education course at which he
was a guest speaker, about every two to three years the company
reorganizes. By doing this, it breaks up a lot of the inertia and
complexity that grow in any organization over time. In addition, it
continuously moves people out of projects and activities that do
not meet its threshold for continuously adding value into highervalue-added activities. Infosys is quite disciplined about its selection of customers, refusing to serve those who do not help the
company to develop new sources of value. Some might question
the disorganization and cost of so much reorganizing, to which
Sanjay replies, “The cost of reorganizing the company is nothing
compared to the growth potential it unleashes. We work out what
our new axis of growth will be, then reorganize the company to
deliver to these axes.”
One of the most significant differences between the assumption
of sustainable competitive advantage and more dynamic strategy is
that disengagement—the process of moving out of an exhausted
opportunity—is as core to the business as innovation, growth, and
exploitation are. Particular arenas are evaluated for withdrawal regularly, rather than advantages being defended to the bitter end. Early
warnings are paid heed to, rather than ignored. Disengagement is
seen as a way to free up and repurpose valuable resources rather than
a dismaying signal of lost glory. Chapter 3, “Healthy Disengagement,”
explores this topic.
I asked Makiko Hamabe, Yahoo! Japan’s head of investor relations,
about how the company handles disengagement. She suggested
that part of what allows this process to work for it is transparency
in data about how people are using the service and how profitable
it is. All the business heads, she explained, know how to look at
traffic numbers to see what is profitable and what isn’t and can also
understand when a business creates conflict with key customers. At
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22 THE END OF COMPETITIVE ADVANTAGE
that point, the decision to exit is well understood and accepted, and
people move on to other opportunities.
“Using Resource Allocation to Promote Deftness” (chapter 4)
gets at the huge difference a world of transient advantage implies
for how you manage assets and how you organize. Access to
assets, not ownership of assets, will be a big theme. Assets that
are variable and multiuse will in many cases be seen as more
attractive than those that are fixed and dedicated. Preventing
resources from being held hostage by the leaders of a particular
advantage will become more standard as firms become aware
of the dangers of a leader hanging on to an old advantage for
too long.
One would think that construction and management of large
projects would be about as rigid and hierarchical as it gets. And yet
ACS’s CEO Florentino Perez maintains that “constructing firms
have diversified into activities requiring the same culture as that
of the contractor . . . entering services, infrastructure, concessions
and more recently, energy.” ACS was cited as having a pivotal role
to play in the restructuring of several sectors in Spain, diversifying
into both new industries and new geographies, building flexibility
into how those sectors are served now.12
“Building an Innovation Proficiency” (chapter 5) suggests that in a
world of temporary advantage, innovation needs to be a continuous,
core, well-managed process rather than the episodic and tentative
process it is in many companies. An experimental orientation that is
open to struggle and the odd failure, a defined process for managing
each innovation phase, and career paths for innovators are all likely
developments.
HDFC Bank, a rapidly growing Indian bank, stresses the
importance of making innovation systematic and something that
is on the leadership agenda. As its CEO, Aditya Puri, describes,
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The End of Competitive Advantage
23
“We plan our growth across three horizons: one that I can see
in front of me; second, what I can see in front of me but will
become a big business five years from now; third, at the bottom
of the pyramid, which will become a big business, maybe five
years from now.”13
Competing in volatile markets has implications for the mind-set
leaders bring to their businesses, a topic explored in chapter 6. As
the pace of competition becomes faster, decisions that are made
quickly and in “roughly right” mode are likely to beat a decisionmaking process that is more precise, but slower. Prediction and
being “right” will be less important than reacting quickly and ­taking
corrective action. And unlike most corporate decision-making
­processes today, in which people seek out information that suggests
they are correct, in a world of transient advantage the most valuable
information is often disconfirming—it helps highlight where the
greatest risks in being wrong are.
Tales of how hard-headed and candid the leaders in the growth
outlier companies are are legendary. Take Cognizant and its CEO,
Francisco D’Souza. If former CEO Lakshmi Narayanan is to be
believed, there isn’t even a hint of complacency in the way D’Souza
sifts through a plan. Says Narayanan, “Any recommendation that
goes to him will be challenged. The conclusion will be challenged,
the reasoning behind the conclusion will be challenged, the data
that supports the reasoning will be challenged, and the source of
the data will be challenged. And, on a bad day, the methods and
motives of the source will be challenged … [I]t makes everyone
think and look at alternatives dispassionately.”14 HDFC Bank’s
Aditya has a similar approach: “I tell people, please treat the CEO
visit as a dentist visit. There will be pain. While you will get a lot
of encouragement, my job is to tell you what’s working and what
is not.”15
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24 THE END OF COMPETITIVE ADVANTAGE
Finally, chapter 7 will consider what all this means for you,
whether you are a leader, an employee, a client, or simply an
observer of the scene. One reality is that we are starting to see a
two-part world. For some people, the end of competitive advantage
is going to mean painful downward adjustments in what they can
aspire to at work because they don’t possess rare or valuable skills.
They are likely to be vulnerable to organizations’ ruthlessly trimming
fixed costs to maximize their own flexibility. For people with valuable, rare, or i­n-demand skills, however, the rewards are likely to be
rich indeed. This last chapter of the book discusses how you should
be thinking about your personal career strategy in light of transient
advantages.
Before going further, you may want to assess your company’s
strategy. Are you trapped in an aging competitive advantage? Are
you competing based on outdated assumptions? Find out with the
assessment tool in the sidebar. And then enjoy learning how other
firms have overcome the challenges.
Assessment
Is Your Company Trapped in a Competitive
­Advantage?
Good companies can be trapped into aging advantages and be
­surprised when things change. The diagnostic in table 1-4 can help
pinpoint areas in which you might be at risk of being blindsided and
suggest changes that you might want to make. Simply position your
organization’s current way of working on the scale between the two
statements in the assessment. Those areas that fall to the left of the
scale are the ones you might want to take a good hard look at.
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The End of Competitive Advantage
25
TABLE 1-4
Our organization’s current way of working
Focused on extending
existing advantages
Scale
Capable of coping with
­transient advantages
Budget, people, and other
­resources are largely controlled by
heads of established businesses.
1234567
Critical resources are controlled
by a separate group from those
who run businesses.
We tend to extend our ­established
advantages if we possibly can.
1234567
We tend to move out of an
­ stablished advantage early,
e
with the goal of moving on to
something new.
We don’t have a systematic
­process for disengaging from a
business.
1234567
We have a systematic way of
exiting businesses.
Disengagements tend to be
­ ainful and difficult.
p
1234567
Disengagements are just part of
the normal business cycle.
We try to avoid failures, even in
uncertain situations.
1234567
We recognize that failures are
unavoidable and try to learn
from them.
We budget annually or for even
longer.
1234567
We budget in quick cycles, either
quarterly or on a rolling basis.
We like to stick to plans once they
are formulated.
1234567
We are comfortable with
­ hanging our plans as new
c
information comes in.
We emphasize optimization in our
approach to asset utilization.
1234567
We emphasize flexibility in our
approach to asset utilization.
Innovation is an on-again,
­off-again process.
1234567
Innovation is systematic, a core
process for us.
It is difficult for us to pull
­resources from a successful
­business to fund more uncertain
opportunities.
1234567
It is quite normal for us to pull
resources from a successful
business to fund more uncertain
opportunities.
Our best talent spends most of
their time solving problems and
handling crises.
1234567
Our best talent spends most of
their time working on new opportunities for our organization.
We try to keep our organizational
structure relatively stable and
to fit new ideas into the existing
­structure.
1234567
We reorganize when new
­ pportunities require a different
o
structure.
We tend to emphasize analysis
over experimentation.
1234567
We tend to emphasize experimentation over analysis.
It isn’t easy to be candid with our
senior leaders when something
goes wrong.
1234567
We find it very easy to be
­candid with senior leaders when
something goes wrong.
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2
Continuous
Reconfiguration:
Achieving Balance
between Stability
and Agility
The reconfiguration process is the secret sauce of remaining
­relevant in a situation of temporary advantage, because it is through
reconfiguration that assets, people, and capabilities make the transition from one advantage to another (table 2-1). Because this is
quite different from the thinking in conventional strategy, I thought
it would make a suitable point of departure for the rest of the
book. Organizations that get this right are shape shifters. You don’t
see dramatic downsizings or restructurings, you don’t see people
sticking with one role for long periods of time, and you don’t see
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28 THE END OF COMPETITIVE ADVANTAGE
TABLE 2-1
The new strategy playbook: reconfiguration
From
To
Extreme downsizing and restructuring
Continuous morphing and changing
Bulk of emphasis on arenas in ­exploitation
phase
Equal emphasis on all phases of a
­ ompetitive life cycle within an arena
c
Stability or dynamism alone
Stability combined with dynamism
Narrowly defined jobs and roles
Fluidity in allocation of talent
Stable vision, monolithic execution
Stable vision, variety in execution
confusion about the company’s evolutionary path. Instead, there is
a consistent reevaluation of current activities with the understanding that some may need to give way to new ones.
Continuous Morphing Rather Than Extreme
Downsizing or Restructuring
A pattern to look for in organizations that have mastered ­transientadvantage environments is the continual freeing up of resources
from old advantages in order to fund the development of new ones.
For instance, Infosys moved its talent and people out of a business
model that largely leveraged low-cost Indian labor into new business models that included services such as independent s­oftware
testing and enterprise applications. Alan Mullally, the CEO of Ford
Motor Company, announced that, although it would close its iconic
Mercury brand (which went from selling 580,000 cars in its peak
year, 1978, to just 92,000 in 2009), it would plow the resources freed
up into its Lincoln and other brands. Telephone operator Verizon
extracted resources from cash-generating but low-growth arenas such
as ­telephone books and landlines to grow businesses based on fiber
optic service ­technology (FIOS) and wireless connectivity.1
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CONTINUOUS RECONFIGURATION 29
A fascinating case of a company that managed to overcome competitive forces that have decimated its entire industry is Milliken &
Company, a privately held textile business. I was first introduced
to the company by a participant in one of my courses at Columbia.
He talked about “Mr. Milliken,” the company’s then-CEO, with a
fervor usually reserved for cult figures or rock stars. Upon studying the company, it becomes clear why their leader inspired such
enthusiasm. All of Milliken’s traditional competitors have vanished,
victims of a surge in global competition that essentially moved the
entire business of textile manufacturing to Asia—by 1991, 58
percent of all fabric and apparel sold at retail in the United States
was imported.2 Roger Milliken, who originally tried to stem the tide
of imports with aggressive public relations and lobbying activities
(indeed, he founded the influential “Crafted with Pride in the USA”
campaign), eventually decided that the future lay in reconfiguration
of the company’s business.3 It had a long history of innovative activities, beginning with the establishment of its first research center
in 1958 and the adoption of management practices so innovative
that the company routinely won awards for its cutting-edge ideas.
In Milliken, one sees very clearly the pattern of entering new,
more promising arenas even as it disengages from older and
exhausted ones. Although it eventually did exit most of its traditional textile lines, it did not do so suddenly. As foreign competition
launched its assault on American markets in the 1980s and 1990s,
Milliken engaged in a steady number of plant closures. Despite its
efforts to modernize its plants and make them competitive, one sees
a gradual withdrawal from those arenas, with seven plant closings in
the 1980s, several more in the 1990s, two in 2003, another in 2008,
and the disposal of an automotive body cloth division in 2009. Every
effort was made, as best I can tell, to reallocate the workers who suffered as a result. At the same time, Milliken invested in international
expansion, new technologies, and new markets, including forays into
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30 THE END OF COMPETITIVE ADVANTAGE
FIGURE 2-1
Milliken’s reconfiguration path
1980s–1990s
• Textiles
• Chemicals
• Advanced
materials
• Flameproof
products
• Specialty
materials
• High-IP specialty
chemicals
1940s–1960s
2000s on
new arenas to which its capabilities gave access. As a ­favorable Wall
Street Journal article observed in January 2012, “Milliken makes the
fabric that reinforces duct tape, the additives that make refrigerator
food containers clear and children’s art markers washable, the products that make mattresses fire resistant, countertops antimicrobial,
windmills lighter and combat gear protective.”4
Visually, you can think of Milliken’s reconfiguration path along
the lines shown in figure 2-1. At the same time, Milliken prided
itself on maintaining a legendary corporate culture, heavy on
training and internal development, employee engagement, and
­
deep pride in the company’s accomplishments. If Milliken could
transform its model from textiles to high-technology, there is hope
for other organizations facing decline as well.
Escaping the Competitive Advantage Trap
Reed Hastings, the CEO of Netflix, has been pilloried in the
­business press for making a couple of reconfiguration moves that
infuriated customers.5 The first was a big price increase in the
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CONTINUOUS RECONFIGURATION 31
summer of 2010. The idea was to give Netflix enough cash flow
to acquire more content as well as to cover the costs of shipping
DVDs in a world going increasingly digital. The resulting furor had
many subscribers desert the company. That move was followed by
one that caused over half a million to abandon ship—a decision
to split the streaming and DVD services into two separate companies. The new, streaming-oriented part of the firm would continue under the Netflix name. The DVD business would be dubbed
“Qwickster” and would have its own website, corporate structure,
and separate management. That idea made customers so angry
that Hastings joked at a weekend off-site meeting that he probably
should get a food taster. A speedy retreat ensued, with the idea for
the Qwickster service dropped.
Although there is much to be critical about in the way these decisions were handled and communicated, the Netflix story illustrates
a fundamental dilemma when competitive advantages shift: What
do you do when the early warning signs of an eroding advantage
make themselves known? How do you reconfigure the organization to simultaneously disengage from the original advantage while
moving resources into the next one?
In the case of Netflix, Hastings is convinced that streaming is
going to be the preferred vehicle for users to access content, whatever device they happen to use to do this. The DVD business, by
extension, is not going to be the core of Netflix’s future destiny. If
you believe this, parting the two areas makes sense. The job of the
Netflix leadership would be to manage rapid growth and access to
digital content, whereas the job of the Qwickster leadership would
be to manage the business for profits for as long as it lasts and
squeeze economies out of it. Two contradictory activities. From a
company point of view, it makes perfect sense.
Here’s the problem, though. From a customer point of view,
the switch was infuriating. Customers were used to populating
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32 THE END OF COMPETITIVE ADVANTAGE
their “queues” of movies and other content in one place, and were
enraged at the idea that they would be required to duplicate that
effort if they continued to want access to both formats. Further, the
movie choices in the DVD area were vastly richer than those available to stream, creating even more frustration because users would
need to check both places to see where they could get what they
were looking for. And content providers, wary of Netflix proving disruptive to things such as expensive cable television subscriptions,
were not particularly interested in Netflix’s streaming offering being
competitive with their networks.
The verdict is still out. To me, although the move to reduce
dependence on the DVD business makes sense over the long
haul, it was attempted too quickly. Critical though one might be of
the DVD-to-streaming transition, Netflix is managing transitions
in other realms with more skill. It has, for instance, reduced its
dependence on movies to begin to offer television shows and even
original programming. We’ll have a look at how Netflix might have
managed disengagement from the DVD business more gracefully
in the next chapter.
Growth Outliers: Equal Emphasis on
the Entire Wave Rather Than Focus on
Exploitation Alone
Some firms seem to be able to manage business model transitions
with reasonable grace. Recall the growth outliers from the opening
chapter, a rare group of ten firms, out of nearly five thousand, that
had managed to maintain steady growth rates despite huge upheavals in markets, economies, and industries in the period from 1999
to 2009 (table 2-2). A major conclusion from this study is that this
group of firms had identified and implemented ways of combining
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CONTINUOUS RECONFIGURATION 33
tremendous internal stability while motivating ­tremendous external agility, particularly in terms of business models. Let’s consider how they—and other companies with good track records of
navigating from advantage to advantage—combine stability with
dynamism.
TABLE 2-2
The growth outliers
Growth
outlier
Industry
Headquarters
country
Market
capitalization (USD
MM), year
Founding ending
year
2009
Number of
employees
(2009)
Infosys
IT consulting
and other
services
India
1981
$31,894
113,800
Yahoo! Japan
internet
software and
services
Japan
1996
$20,334
4,882
HDFC Bank
Diversified
banks
India
1994
$16,554
51,888
ACS (Activedades Construccion y
­Servicios)
Construction
and engineering
Spain
1983
$15,525
142,176
Cognizant
Technology
Solutions
IT consulting
and other
services
United
States
1994
$13,312
78,400
Tsingtao
Brewery
Brewers
China
1903
$7,214
33,839
Indra
Sistemas
IT consulting
and other
services
Spain
1921
$3,666
26,175
Krka dd Novo
Mesto
Pharmaceuticals
Slovenia
1954
$3,186
7,975
FactSet
Application
software
United
States
1978
$3,009
4,116
Atmos ­
Energy
­Corporation
Gas utilities
United
States
1906
$2,614
4,913
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34 THE END OF COMPETITIVE ADVANTAGE
Sources of Stability
Although dynamism and rapid change are all around us, people are
not very effective when facing extreme uncertainty—it tends to be
paralyzing. The outliers, therefore, have crafted social architectures
that bound the amount of uncertainty and change their people have
to face. Indeed, in the outlier companies, employees actually spent
less time worrying about organizational roles and structures than
people in many of the typical organizations I’ve worked with.
Ambition
Common to the outlier firms was a public commitment to worldclass ambition, coupled with a clear sense of strategic direction in
every case. This is reflected in the reviews given to them by analysts
and external observers as reference companies. It’s almost tedious
to read the descriptions: the phrases “well managed,” “best practices,” and “benchmarks” come up over and over again. Relative
to competitors, their leadership appears to have outsize ambition,
which sets the bar high. Their leadership also promotes common
key themes that are the result of a compelling strategy diagnosis. At
Infosys, for instance, the leaders talk about Infosys 1.0 (basically
labor arbitrage), Infosys 2.0 (global expansion into services), and
now the emergence of Infosys 3.0.
HDFC Bank was founded with the explicit intention of becoming a truly global Indian bank with best-practice standards in all of
its operations. As its website proclaims, “HDFC Bank began operations in 1995 with a simple mission: to be a ‘World-class Indian
Bank’. We realised that only a single-minded focus on product
quality and service excellence would help us get there.” At Infosys,
the founding team was determined to create a modern Indian company with transparent and globally acceptable practices (its CEO
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CONTINUOUS RECONFIGURATION 35
was recognized in 2009 as one of the fifty most influential management thinkers in the world by Thinkers50, a management award).
Cognizant was “born global” as an offshoot of Dun & Bradstreet
and built ambitious growth targets into its strategy from the start.
Krka is ambitiously expanding far from its Eastern European roots,
with investments and partnerships across the globe (including partnerships in China and other countries to support the expansion of
its capabilities). Atmos Energy set itself the goal of achieving worldclass efficiency in the regulated part of its gas generation business
and steady growth in its unregulated units. ACS proudly notes that
it is “a world reference in the promotion, development, construction and management of infrastructures and services of all types.”6
Unsurprisingly, references to awards and recognition are to be
found liberally festooning the companies’ corporate websites. HDFC
Bank features an entire section dedicated to awards. It lists thirtyfour awards for 2010 alone. Note the subtle symbolism: nobody in
leadership would like to be in charge in a year for which no awards
were listed. Infosys regularly places in the top of rankings such as
Fortune’s Top 10 companies for leaders. FactSet has been featured
in the Fortune 100 list of best companies to work for, BusinessWeek’s
ranking of places to start a career, and so on. Indra Sistemas won
Computerworld’s best service company award in 2007. It is also
acknowledged as one of the world’s “most ethical companies,” an
award it won in 2010 after a string of “most sustainable” awards.
Krka proudly proclaims that it has won the Golden Otis Award of
Trust for its products, an award in which consumers indicate which
brands they trust most. The key point here is that the strategies for
each of these companies were grounded in a compelling ambition for
the firm, an ambition that provides an aiming point for their people.
The finding that stretch ambitions are important to long-term
reconfiguration is consistent with what other observers have concluded is essential for preventing companies from becoming
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36 THE END OF COMPETITIVE ADVANTAGE
complacent and content to pursue yesterday’s advantages. Mikko
Kosonen, for instance, a long-time Nokia senior executive during its glory days and now a consultant and professor, argues that
stretch, instability, and multidimensionality are crucial to keep a
company from getting stuck. As he noted in an interview with me,
“Stretch and contradictory goals are important,” as are mechanisms
to keep complacency at bay, such as moving people around to facilitate their looking at the business in different ways from different
vantage points.
Identity and Culture
A second source of stability is the investment these firms make in
creating a common identity, culture, and commitment to leadership development. They pay considerable attention to values, culture, and alignment. They also invest in training, training, and more
training.
A recent MBA thesis examining the culture of HDFC Bank
found that its employees generally scored the firm highly on
cultural values such as organizational effectiveness, employee
engagement, and a supportive culture.7 At FactSet, the culture
is promoted on its website as a key draw for potential employees
to work with the firm. ACS’s chairman in a recent annual report
emphasized “recruiting and retaining the best talent” as one of
four “vectors” for the firm’s strategy. Bob Best, the then-CEO of
Atmos Energy, decided in 1997 that the creation of culture and
shared values was going to be a differentiator for the firm. As he
put it, “I do think that creating the right foundation for your culture allows you to make changes as you need to make changes.
Culture is the foundation for all success. This has been a very
important process to the long-term health and success of our
company.”8
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CONTINUOUS RECONFIGURATION 37
Deployment, Yes, but also Development
Another factor in play in companies that can move from one set of
advantages to another is that they consciously set out to educate
and up-skill their people. Kris Gopalakrishnan of Infosys explained
that the company places a heavy emphasis on training. When I
asked him how the company moves people from advantage to
advantage, he said, “We hire for learnability—we deliberately select
people for their capacity to learn new things.” As he observes, at
any given time Infosys has about 80 percent of its people deployed
in some way, which is good because that is how it makes money.
With the 20 percent of time that is not being used for deployment,
employees are expected to take advantage of education and training opportunities so that their skills can be kept upgraded and they
can potentially be moved from one kind of advantage to another.
Infosys is famous for its Infosys Education Center, a $120 million
facility that has the capacity to train 13,500 candidates at a time.
Smart companies recognize that continuous training and development is a mechanism to avoid having to fire people when competitive conditions shift, and they invest in training even as they
pursue deployment. Take CLS Communication. This Swiss-based
provider of language services was originally a spinoff of the inhouse translation services of Swiss Bank Corporation and Zurich
Financial Services in 1997. Since then, it has been growing rapidly,
even as the underlying technologies for its core businesses of writing, editing, and translation have undergone tremendous shifts. I
asked its CEO, Doris Albisser, how she handles the human side of
business model and technology shifts. She emphasized continuous
training and also moving people around the firm as needs changed.
She mentioned training specifically in conjunction with the introduction of a new technology—machine translation coupled with
text databases. Although her own people resisted adopting the new
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38 THE END OF COMPETITIVE ADVANTAGE
approach, they finally achieved a breakthrough when one of the
more senior translators actually started training the others.
The point is that when you realize that shifts are inevitable,
training people to be able to move from advantage to advantage
becomes a cost of doing business. It’s just as important a bill to pay
as the one you pay to keep the lights on and the computers running.
Investing in people’s capacity to move around removes a tremendous barrier to change and suggests a redirection of emphasis from
pure deployment to creating transition capability.
Strategy and Leadership
The stability of the outlier firms’ strategy statements through the
course of our study period is remarkable. This was a tumultuous
time that began with the internet bubble bursting and included the
tragedy of 9/11, the global housing and credit bubbles, the introduction of the euro, wars in Iraq and Afghanistan, the explosion
of the internet as a vehicle for commerce, and the great recession
of 2008. Yet, these firms appear not to have internalized the chaos
in their environments. Interviews with their leaders are peppered
with references to a few clear and simple strategic priorities, to
the importance of building culture and developing talent, and to
leveraging a few core capabilities. The CEOs and executive teams
create a tremendous force for stability, even in the midst of major
change.
At Tsingtao Brewery, for instance, despite the sudden death
of its hard-driving CEO in 2001, subsequent leaders committed
to following through on his international expansion strategy. The
then-CEO of Spain’s ACS at its 1983 founding expressed his commitment to making it Spain’s most profitable public construction
company. Today, that stra…

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