In The End of Competitive Advantage, the first rule Rita Gunther McGrath lays down is to compete in arenas, not industries. Using a typical strategy playbook, a company will define its most important competitors as other companies within the same industry. This doesn’t make sense when industries compete, business models compete, and new categories appear. For example, FujiFilm’s biggest competitor was not Kodak and its stranglehold on film distribution channels in many markets, but Sony and other future manufacturers of digital cameras that negated the need for its products! Industry level analysis needs to be replaced with a level of analysis that reflects the connection between (target) market segment, (product/service) offer, and (target) geographic location(s). This intersection is an arena. The middle-class end consumer (market) in North America (geography) who uses a mobile phone (product offer) is one arena. Small Businesses (market) in Asia (geography) who need cellular high-speed internet (service offer) is another. For those of you with military or defense experience, battles are fought in particular geographic locations, with particular equipment, to beat particular rivals. Today’s business needs the same level of precision in its strategy to compete. To use the author’s metaphor, the game of chess has been replaced with the Japanese game of Go.
The next rule that Gunther McGrath lays down is to focus on temporary, not sustainable, competitive advantages. To coin a popular phrase, you need to get while the gettin’s good, because it won’t be good for ever. (This also means you need to plan to get out while the gettin’ out’s good.) Your organization needs to rive the waves of temporary advantage. In each wave it needs to design a new product or service that will define the next arena it will successfully compete it, launch that product, ramp up, exploit the temporary advantage the product or service gives it, begin to exit (and re-allocate resources to the next wave), and then disengage (by discontinuing the product, upgrading the customer to a new product, or selling the product line off). Business that focus on temporary sustainable advantages are in a state of continuous reconfiguration and masters of healthy disengagement.
The third rule that comes across loud and clear in Gunther McGrath’s book on The End of Competitive Advantage is to use resource allocation to promote deftness and build an innovation proficiency. In order to ride the waves of temporary advantage successfully, an organization has to constantly innovate the next product and/or service that will take it into the next arena and it has to do so with agility and grace — which requires a deftness in resource allocation not present in an average organization. In an organization that has mastered resource allocation for temporary advantages, resources are under central control, and not business units, and can be reallocated as needed. They are organized around opportunities, accessible when needed, and may even be external to the organization as access, and not ownership, is key.
The fourth, and final rule that can not be broken is that you must have the support of the leadership team that must believe in the rules and processes required. Gunther McGrath’s playbook will not work without the support of a leadership team that believes in it. An organization cannot be reconfigured to ride the waves of temporary advantage as a skunkworks project or a one-off. Without full leadership support, it will be impossible to dynamically reallocate resources from one arena to another, to engage with (and disengage from) new (and old) opportunities as the markets shift, to get support to leverage external resources when time is of the essence, etc. If people are still stuck in business units, if opportunities are force-fit into age-old structures, and the CFO is still capital-budgeting against sustainable advantages, there is no way your organization will be able to move from one temporary advantage to another (and if your organization is competing in an industry where there are no more sustainable advantages or an industry that is shrinking by the day due to cannibalization from other industries and external business models, it’s time is running out). Not only is this a playbook only for those companies that no longer have sustainable advantages to exploit, but it is also only a playbook for those willing to adapt to a new operating reality.
In Part III, we’ll dive into continuous reconfiguration, disengagement options, and building an innovation proficiency.