Daily Archives: June 17, 2013

The End of Competitive Advantage: A Review, Part I

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. 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.

     Rita Gunther McGrath, The End of Competitive Advantage

Consider the following case study of Fuji Photo Film Company and its inauspicious beginning in the 1930s when it was divested from Japan’s first cinematic film manufacturer because it was a chronic under-performer. Over the years, it improved its reputation and eventually began to take on giants such as Eastman Kodak in film and film processing. However, as the market for chemical-based photography changed little during the past hundred years, Fuji struggled to break into markets where Kodak was entrenched.

In the 1970s, Nelson Bunker Hunt and William Herbert Hunt made a play to corner the silver market as a hedge against inflation. They started to make investments in 1973, when silver was only $2 an ounce. By early 1979, the price had risen to $5 an ounce. By the time their plans were announced in 1979, they had amassed roughly half of the world’s supply. Their announcement caused the price of silver jumped to $50 per ounce! When the price collapsed in March of 1980, the Dow Jones Industrial average saw one of the sharpest declines in history.

The experience deeply troubled Minoru Ohnishi, the CEO of Fuji Photo Film, as silver was a key ingredient in film processing and another similar action could seriously damage any film processing business. Furthermore, he sensed a fundamental change might be coming. Four years later, Sony introduced the Mavica, one of the the first consumer digital cameras, and Mr. Ohnishi knew that film-less technology was possible. He immediately moved on the insight and invested heavily in building up expertise in digital technologies to prepare for the next round of competition in the photography business. By the end of 1999, the company had invested over 2 Billion in R&D and by 2003, it had nearly five thousand digital processing labs in chain stores in the US whereas Kodak had less than 100.

In addition, the company branched out and started to supply magnetic tape optics, hybrid electronic systems, and videotape (as the first non-US company to do so). Later still, the company branched into office automation and even biotechnology. Thirty years later, Kodak went bankrupt and Fujifilm, which obtains 45% of its revenue from document solutions and office printers, has significant electronics and healthcare operations.

The lesson is 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 Fujifilm, which risked undermining its existing advantages while betting on a highly uncertain future, were huge. But it was this approach, investing in new advantages and pulling resources from declining ones, that was more robust in the face of change. When competitive advantages don’t last, or last for a much shorter time, the strategy playbook needs to change.

And that’s what this book is really about, adapting to a changing competitive landscape in our modern, globally connected, world. In some industries, like logistics, products and services change slowly and competitive advantages can last for a long time. But in other industries, such as fashion and consumer electronics, products change quickly and competitive advantages last only until your competitor releases a new model with a feature your last product didn’t have. In these industries, where advantages are transient, a firm needs new rules and new models to determine where to compete, how to compete, and how to win. The old models don’t work, or at least don’t work on their own. In Part II, we’ll begin to discuss how an agile organization deals with the transient landscape.