Your Company’s Competitive Advantage Is About to Expire: So What’s Next?
June 6, 2013
Say goodbye to the days of sustainable competitive advantage. Strategy expert Rita Gunther McGrath explains why competitive advantages have fallen victim to shorter and shorter shelf lives, and why you need to embrace a transient competitive strategy instead.
For years, entrepreneurs who founded — or were planning to found — a business have heard a common refrain: Every business strategy must work toward developing a sustainable competitive advantage.
In fact, as Columbia Business School professor and globally recognized strategy expert Rita Gunther McGrath points out, that long-time strategic best practice is at the core of Warren Buffet’s investment approach, and it is still the primary argument made in numerous strategy textbooks.
But as McGrath reveals in her new book, The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business, in a quickly evolving world with fewer barriers to entry and much greater competition, that once-dominant idea is losing its relevance. In fact, the very concept of sustainability relative to competitive advantage is becoming more of a relic than a business imperative.
“It used to be that American businesses could work to attain a competitive advantage and then simply use their size and scope to dominate competition,” McGrath says. “Today, innovation and market unpredictability has leveled the playing field. It’s accelerated everything and knocked down many of the barriers that used to stand in the way of creating a competitive advantage.”
What does that mean for growth-stage companies and the Goliath corporations they must compete against?
“If you’re a big company, you can’t be lazy and just assume that your competitive advantage will last for years to come,” McGrath explains. “And if you’re a startup or growth-stage company, you have to continue to experiment, innovate, and create a pipeline of competitive advantages that can be quickly implemented before your competitors have time to react.”
Why Businesses Must Begin Embracing Transient Competitive Advantage
“Instead of waiting for the curtain to fall on an opportunity, the smartest companies . . . develop [a] perpetual pipeline of advantages.”
Rita Gunther McGrath, author of The End of Competitive Advantage
In essence, the strategy McGrath describes above encompasses what she calls “transient competitive advantage.”
What does that mean exactly?
At a high level, McGrath says the notion of transiency essentially boils down to a core idea: Yes, competitive advantages are still attainable, but the lifecycle of those advantages is much more abbreviated. As a result, businesses must continually prepare to rethink or reshape their strategies if they hope to stay fresh and relevant in their target market’s mind.
“There are still companies whose competitive advantages may last for years, but the number of businesses that can count on that is dwindling,” McGrath says. “With transient competitive advantage, the idea is to manage waves of change. And to do that, you must possess the ability to innovate and disengage from an outdated or dying competitive advantage.”
That latter point is particularly important, McGrath says, and it’s also the source of many companies’ struggles to innovate.
After all, early-stage businesses must invest a significant amount of time and effort into developing a competitive advantage, so kissing it goodbye and moving on before it feels like it has run its course can be difficult.
“Disengaging from what you thought was a sustainable competitive advantage can be very difficult, but I’ve found that the best companies are able to do that,” McGrath says. “In the book, I refer to that process as continual reconfiguration. Instead of waiting for the curtain to fall on an opportunity, the smartest companies are more proactive — extracting resources from old opportunities and infusing them into new ones to develop this perpetual pipeline of advantages.”
The Dangers of a Stagnant Strategy
In the end, McGrath says the overarching idea of transient competitive advantage is that you need to prepare yourself well in advance for your competitive advantage to fade away.
A good example of a business that does this well, McGrath says, is Apple. In the last decade specifically, Apple has largely managed to outpace a highly competitive industry by quickly — and radically — rethinking the products and features that customers will want in the future, rather than simply tweaking the ones they already have today.
By contrast, Research in Motion (RIM) spent much of the last decade sticking to its “sustainable” guns. It chose not to innovate at the same velocity that companies like Apple, Google, and Samsung have, and the business certainly didn’t prepare for its competitive advantage to run out of gas.
The result? In relatively short order, RIM went from king of the hill to bottom of the barrel.
“Examples like RIM should really serve as a cautionary tale for big corporations and small startups alike,” McGrath says. “Once RIM’s competitive advantage dissolved, the company was left with nothing to fall back on. It didn’t have a backup plan and it couldn’t innovate quickly enough to keep pace once it realized what was happening.”
While mastering this concept of transiency might seem challenging for growth-stage companies with fewer resources than their larger competitors, McGrath says avoiding the fate of companies like RIM boils down to a relatively simple approach.
“You have to look at developing a competitive advantage as creating a series of placeholders or hedges that buy you the right to continue being relevant in your space,” McGrath explains. “You have to make exploring new options or opportunities a key part of your corporate strategy. If you do that, you should be able to see the next generation of features, options, and products before your competitors do. Ultimately, that insight is a huge competitive advantage in and of itself.”