Research Technology Management Reviews End of Competitive Advantage
Porter’s five forces and Hamel and Prahalad ’ s core competencies remain central concepts in corporate strategy. But in this book, Rita Gunther McGrath questions whether these ideas—both based on a belief in the need to create and defend a permanent competitive advantage—are still relevant. The 21st century has seen the emergence of such an intensely, globally competitive environment that McGrath believes that a transient advantage is all that is possible.
In The End of Competitive Advantage, she explores how strategy should be approached when any advantage is temporary and all companies must be constantly preparing for new realities and moving beyond past successes to future strongholds.
As McGrath points out, strategy and innovation have traditionally been seen and pursued as separate disciplines. In the past, it has been possible to strategize about the future without necessarily bringing new innovations to the table. This approach, she believes, will no longer work. In this new business environment, advantages will be based on innovation and remain advantages only as long as the corporate foundation remains innovative and defensible. Once that foundation has eroded, a company must abandon well-established advantageous positions and move into the unknown, looking for the next defensible position. This constant search for transient competitive advantage will characterize successful businesses in this century.
To survive in this environment, McGrath prescribes a few key activities. The first is continuous reconfiguration, driven by a healthy willingness to disengage from existing businesses, products, and practices. Companies can no longer count on holding on to a product or even an industry. As an example, McGrath offers the dying Nokia of the 1980s—a company that abandoned all of its traditional markets to bet the entire company on cellular telephones, which were not its strong point at the time.
Second is a practice of allocating internal resources based on the pursuit of new arenas of business, rather than on the market position of current products. The traditional practice of spending heavily in the company ’ s largest market, says McGrath, will drain away the resources needed to pursue new arenas. McGrath cites as a successful example of this IBM’s decision to exit the entire PC business in order to free up assets to pursue more promising opportunities in software integration and services.
Third is building innovation proficiency. Every company needs to approach innovation as a core function that must be well managed and well resourced, rather than as an episodic practice that comes into play only when the company ’ s position is crumbling. Fourth, leaders must make decisions quickly and “roughly right.” There is no time to find the perfect answer to a pressing problem. Companies must try new ideas faster in order to feel out the right direction along a poorly lit path.
Finally, companies must recognize that significant competitive advantage is often in the hands of key employees. McGrath cites the unique talents of an office of Wall Street bond traders who have been part of multiple corporate acquisitions, and whose function has remained unchanged simply because none of the parent companies have understood how the work was done, and so were not in a position to interfere with the work that happened behind closed doors. Every company has talent pools like this, people who hold knowledge on which business success relies, knowledge that cannot always be transferred to corporate processes.
McGrath proposes that these practices will better equip a company to move quickly, remain innovative, shake off the business models of the midtwentieth century, and prosper in a competitive world that can breach any moat of defensive competitive advantage. The world she describes is almost Malthusian in its anticipation of the destruction of the work of centuries. To the degree that this is accurate, it certainly calls for a different perspective on strategy, planning, and market positioning. But it also opens companies up to a much faster rate of significant business change, and the opportunity to get the change wrong with every shift to a new position. Such frequent changes represent increased risks, but she believes that the traditional approach to strategy formation is no longer relevant and has already exposed the company to a significant risk of obsolescence.