In Part II of our review, we laid out the four rules for competing in the new landscape of temporary advantages when your organization has reached
The End of Competitive Advantage. In summary, they were:

1. Compete in arenas, not industries.
2. Get (out) while the gettin (out)’s good!
3. Use resource allocation to promote deftness.
4. Don’t try to tame temporary advantages without the support of a leadership team that believes in temporary advantages (and doing what is necessary to tame them).

Today we want to dive in to what is meant by gettin’ (out) while the gettin (out)’s good, how resources need to be viewed, and what defines a leadership team that will believe in, and support, the continuous pursuit of temporary advantages, according to the book’s author, Rita Gunther McGrath.

A company that gets while the gettin’s good focusses on continuous reconfiguration and healthy disengagement to constantly move from one temporary advantage to another. The reconfiguration process can be thought of as the secret sauce that allows a company to remain relevant in a situation of temporary advantages, because it is through (this) reconfiguration that assets, people, and capabilities make the transition from one advantage to another.

A company that is continuously reconfiguring is constantly morphing. Instead of (extreme) downsizing or restructuring, the plagues of companies that try to hold onto competitive advantages that aren’t sustainable, continually morphing companies shift resources from one wave of temporary advantage to another, as needed. Business units are replaced by opportunities managed by appropriate leaders, execution strategies are adapted to the situation, and the wave rises and falls with the transient nature of the competitive life cycle of the arena. In the beginning, resources are assigned to define and develop the product. When production begins, more resources are assigned. When it’s time to launch, support resources are assigned and added as needed until the product peaks and R&D resources are taken off to being work on the next wave. Once the peak is reached, resources are successively taken off of the wave and assigned to other waves where they can add more value. At some point, the product line, and support, is ended or sold off, the remaining resources are reassigned, and the leadership team is refocussed on other projects.

As the temporary advantage wanes, the leadership begins to look at disengagement strategies in an effort to identify the one(s) that it will pursue. The right strategy for disengagement is typically defined by the value of the capability and the time pressure. If the capability is in decline and there is little time pressure, the leadership team will probably choose to run-off and be well paid to maintain support for customers while decreasing investment. However, if the capability is core to the future of the business and the time pressure is intense, the leadership will have no choice but to pursue a hail mary and divest formerly core capabilities as part of an effort to find a new core to migrate too. For example, if you were in film processing when everyone went digital, you found a new core or you filed for bankruptcy. In between these extremes, the company may pursue an orderly migration, garage sale, fire sale, or last man standing disengagement strategy.

A company that competes in arenas can only win if it is innovative and deft. A company deft at resource allocation follows the new strategy playbook for resource allocation. This means the following:

• It manages resources centrally, not in business unit silos.
• It organizes around opportunities, not an organizational structure.
• It aggressively and proactively retires competitively obsolete assets, and moves the talent that was supporting them to new opportunities.
• It has a real options mind-set structured around variable costs and flexible investments.
• It’s all about parsimony, parsimony, parsimony. It invests only when the time is right.
• It knows that access trumps ownership.
• It leverages what is available, wherever it is. Inside or outside, it doesn’t matter.

When it comes to innovation, it has more or less mastered the process. It has obtained a level of proficiency where innovation is ongoing, fueled by an ideation pipeline, and supported by the leadership team that spins up new operating groups as needed to explore potentially viable ideas, and that then spins them down, without negative repercussions to the team, if it is later determined that they are not sufficient to conquer the target arena(s). There are no failures, just learning experiences that guide, and increase the chances of success of, the next idea.

The book also summarizes a process for managing the ideation and innovation process, which was outlined in more detail in the author’s previous co-authored book on Discovery-Driven Growth, the core competencies required by the leadership team, and what transient advantage means for your, personally, but we’ll leave that to your review of the book.

This three-part review concludes with the statement that this book, packed with relevant examples and case studies, not only makes a great case for transitioning away from sustainable advantage strategies when the industry your organization was operating in no longer supports them, but also does a great job in laying out the rules and framework your organization will have to adopt if it wants to ride the waves of temporary advantage that will otherwise wash it out to sea if it’s not prepared. It is well thought out, well written, and a must read for anyone that wants to adapt to the constant change many business have to, and will soon have to, cope with. I recommend this for any business leader that wants to stay on top of her game (because even if she has a sustainable advantage today, it may wither tomorrow) and strongly recommend this for every Supply Management professional because history has shown that supply chain advantages (which depend on labour costs, the price of oil, global market dynamics, etc.) are always temporary.

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.

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.