The End of Competitive Advantage: A Review, Part II

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.

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.

How Do You Find an Innovative New Vendor? (Repost)

Last summer, Brian Sommer over on ZDNet ran a great post on how to easily identify the up and coming innovative vendors in the space. All you have to do is look at who the big established players are trash talking! After all, if the company isn’t innovative, they have nothing to fear from the competitor, and will say something like “yes they also have a solution suite that could potentially help you, but” … “they are missing these key features that we have found to be instrumental to customer success” or “we have done more implementations in your space” or “we have a more mature professional services organization” or “we fit better with the platforms and processes that you have in place” or “we are more committed to customer success” or “we have won more awards proving the maturity of our solution” and just shrug them off. But if the company is innovative and poses a real threat, they will try to trash-talk it out of your candidate pool. And they will use predictable language like “what they are offering is a cool feature, not an application” or “they’re inconsequential” or “their solution is immature and / or will never catch on“. These phrases are your first clue that this is a vendor you should be looking at. It might not be mature enough to meet all of your needs today, but maybe if you can bolt on the innovative new features they are offing to your existing ERP, you can, with a little elbow grease, extract more value and, as the company grows, be the first to take advantage of their new features and applications as an early adopter preferred customer.

And not only did Brian do a great job of pointing this out, he also created a great table that summarizes all of the common phrases an established, fairly un-innovative, company will use to trash talk an innovative startup in its infancy, a rapidly growing new competitor, and an upstart that’s all grown up now. And then, to complete the picture, he also points out what they say when the decide to acquire the grown up upstart because it has a more innovative solution.

Click on the image to be taken to the full table, and click this link to read Brian’s full post on the Software Smack Talk Playbook. It’s awesome.

The Complete Software Smack Talk Playbook

A Proven Blueprint for Country-Based Global Domination of a Chosen Industry

  1. Become a leading outsourcing destination through low-cost labour.
  2. Patiently build up your cash reserve over a couple of decades.
  3. Through raw material subsidies and free loans, flood the global market with cheap, excess capacity so you become the primary source.

This is exactly how China became:

  • a global leader in solar, steel, glass, paper and auto parts,
  • the world’s largest exporter in 2009 (when it surpassed Germany),
  • the world’s second largest manufacturer in 2010 (when it overtook Japan), and
  • built up the largest foreign-exchange reserves in the world in that same year.

As per this recent post over on the HBR blogs on How Chinese Subsidies Changed the World, since 2001, when China joined the WTO, subsidies have financed over 20% of the expansion of the country’s manufacturing capacity. The state has willingly paid the price of economic inefficiency to accomplish political, social, economic, and diplomatic goals. As a result, huge Chinese subsidies have led to massive excess global capacity, increased exports, and depressed worldwide prices, and have hollowed out other countries’ industrial bases. For example, in 2000, China was a net importer of steel with 13% of world imports and 16% of global output. By 2007, after 27B of energy subsidies, it had become the world’s largest producer, consumer, and exporter of steel. It now produces 50% of the world’s steel, and with no scale economy or technological edge, still sells steel for 25% less than the U.S. or the EU.

This government support of private industry has helped China skyrocket to the second largest producer of GDP faster than anyone expected and will quickly propel it into the top spot. But there is hope for America. All it has to do to regain it’s glory as the largest economic superpower in the world is to:

  1. Take advantage of China’s rising wages and increasing unemployment and start promoting its “low cost labour”.
  2. Patiently wait as China, India, and other fast-growing economies follow its example and outsource everything over the next two decades, grabbing as much renminbi, rupee, and other foreign currency as it can over the next two decades.
  3. Subsidize raw material, manufacturing, and energy production like mad in key industries and begin the climb back up the GDP ladder.

At the rate things are going, China is going to overtake the US before Obama’s term is up, not in the 2020’s like everyone was originally predicting. There’s no stopping them. America’s only hope is to realize economies are often cyclical and take advantage of its next opportunity to get back on top.

Can Trucking Clean Up Its Act?

A recent article over on Inbound Logistics on Going Green to Save Green (which you all know is true after reading SI for years) had a scary statistic: freight trucks are on pace to increase their carbon emissions by 40 percent over the coming decades, according to the Department of Energy’s Annual Energy Outlook. Ouch!

With strict new fuel economy standards for passenger vehicles, which were never the big emission culprit in the first place (they just took the blame for all the pollution caused by ocean shipping, which contributes approximately 3,500* times the pollution produced by all personal automobiles on the planet, and ground transport), this means that trucks are going to become the biggest producer of road sector emissions. The logistics sector constitutes about 6% of the total man-made GHG emissions, with transport as a whole constituting about 12%. This says that the personal automobile, which is 50% to 60% of road sector emissions, depending on the source, accounts for less than 2% of total CO2 and GHG emissions as road transport is only about 25% of logistics emissions (with the rest coming from rail, aviation, and ocean shipping) and that trucking will soon account for more than 2% of total CO2 and GHG emissions.

This does not bode well for the trucking industry which is already hard hit with an impending driver shortage of 240,000, a 100%+ annual turnover, and onerous regulations. With the growing desire of the Millennials (Generation Y) to only work for companies that are socially responsible, this is going to make it even harder to recruit young drivers (which is a must! How long do you think an industry with an average new graduate age of 54 can last without fresh blood?)

So what can it do? While hybrid is an option for smaller trucks, such as UPS and Fedex parcel delivery trucks, it’s not a great option for 18 wheelers (which have to roll on, and will have to continue to do so even after America rediscovers rail). The first thing the trucking industry needs to do is switchover to clean diesel (ULSD) vehicles as fast as possible. Not only is it 97% cleaner than regular diesel, but a well-designed diesel engine can be 40% more efficient than a gasoline engine.

The next thing it needs to do is switch to lightweight pallets and containers. For example, as illustrated in the Inbound Logistics article, a heavy-duty plastic container has only one third the weight of a steel container, and is just as effective. Lower shipment weight translates into a lower fuel requirement which translates into lower emissions.

The third, and most important, thing it needs to do is eliminate empty miles. An empty trailer can weigh as much as 7.5 tons / 15,000 lbs, which is almost 20% of the maximum allowed weight of 40 tons on most US highways. This says that if a truck has to return to its origin point empty, it’s using 120% of the fuel requirement. So how does it do this? First of all, it only works with buyers who recycle containers and pallets so that at least one trip out of every X is full just with reusable containers and pallets. Secondly, it balances its routes by way of the right mix of contract and spot-market deliveries. As hinted at in our recent post on BuyTruckLoad.com which noted that you could expect to pay an average of 15% less on the spot market, an optimization-powered spot-market hub which analyzes a buyer’s need against all of the “empty miles” of all carriers in the area can help a carrier identify the right customers to insure that it’s trucks stay full.

And while trucking may not be able to keep pace with the passenger automobile, if it does these three things, it will be pretty close. Clean diesel has at most half the sulfur content of gasoline (which has to average 30 ppm from any single manufacturer, compared to 15 ppm for clean diesel), diesel engines will be (on average) one third more efficient, lighter weight packaging has the potential to reduce emissions by one sixth, and eliminating empty miles by 80%+ (which spot-market hubs have have the potential to do) will reduce GHGs by another one-sixth. Put this altogether and the GHG emissions from clean diesel engines, which are already twice as clean as gasoline engines, can be effectively reduced by about another five sixths, or 83%. In other words, a 40% GHG reduction is within reach, and close to the mandated 45% reduction from the federal vehicle standards which mandate a fuel economy increase of new passenger vehicles from approximately 30 mpg in 2011 to 54.5 mpg in 2025.

So, if it wants to, Trucking can clean up its act. The question is, will it?

* As per this historical post on SI, 15 of the world’s biggest cargo ships emit more pollution than the roughly 750 Million cars in operation around the globe. The world fleet in 2011 was 104,304 ships. Some are Post-Panamax and emit more pollution than 50 million cars, some are much smaller. Given the average size, the factor of 3,500 is a good approximation.