Wednesday, May 29, 2013

"The End of Competitive Advantage" - win by skillfully managing the decline of old businesses

"The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business" by Rita Gunther McGrath is the first book I've read that essentially equates strategy and innovation. There are many books on each topic, but only one - this one - that describes what I observe in company after company (especially high-growth startups): strategy is an outgrowth of the ability to sense market need and create, market and manage new offerings. While startups do this instinctively, established companies do not. It's new, therefore, to connect the world of big-company strategy (a la McKinsey) to the innovation process (IDEO), to argue that, rather than being an outlier in the company structure, innovation must be central to current and future success in more and more businesses. Sustainable competitive advantage is disappearing, Rita writes. In its place is a much scarier cousin - transient competitive advantage.

Most pertinent to this site, Rita's striking assertion is that skillfully managing declining businesses is terribly important. In the frame of transient competitive advantage, a declining business isn't a failure or a tragedy; it's a fact of life, and handling decline thoughtfully - resetting expectations, reducing investment, shifting resources to new growth areas, possibly divesting - can in itself create strategic advantage, by enabling more investment and focus on vital new businesses. This is especially important because companies tend to embrace the alternative - investing more to get less, hanging onto old successes too long, isolating and protecting businesses in "strategic business unit" lockboxes.

Metaphorically, a company in the "transient competitive advantage" world is less like an edifice and more like a sports team. We expect buildings to last, unchanged, for decades. We expect sports teams to look different from year to year. A team that's successful for a long time (the New England Patriots or the San Antonio Spurs, for example) will turn over its roster regularly. It will always be looking for new players to plug in and will be wary of relying on too many players past their primes. A less successful team will hold onto its players too long, hoping the poor results from this season are not the signs of a prolonged decline but instead are an aberration.

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