critical thinking essay|Business Finance – Management
Questions: write in two postgrad level essays, each around 800 words (must read this reading)
In 2013, Rita McGrath published an article in the Harvard Business Review arguing that ‘Sustainable competitive advantage is now the exception, not the rule. Transient advantage is the new normal.’
a) Drawing on relevant academic literature, explain what a sustainable competitive advantage is and how it might be created.
b) Using examples to illustrate your answer, evaluate Rita McGrath’s argument that ‘transient advantage is the new normal’.
The questions are asking for:
a) An explanation of sustainable competitive advantage, drawing on academic sources.
Show that you can explain the major approaches to competitive advantage (and how they are different from each other).
This question assesses your understanding of the literature, though you can provide examples to illustrate the strategy approaches.
b) An understanding of the limits of ‘sustainable competitive advantage’.
An ‘evaluation’ i.e. examine the issue and make an overall argument that is supported by evidence you present.
You need to acknowledge McGrath’s argument but your evaluation can also draw on other arguments and sources about short term vs long term advantages.
You need to use some examples to illustrate your argument. Think about which examples can be used and for what purpose.
Requirements:
Essay answers – introduction (how you are addressing the question; clear structure that develops a coherent argument; conclusion.
Academic i.e. drawing on some reading & using evidence
· An answer to the question (make sure you are clear about what is being asked)
· An argument – something informative, interesting and insightful to say
· Evidence of reading. Use citations; refer to what you have read – academic sources. E.g. FT, Rosenzweig
· Appropriate use of company examples
· Use company examples in a way that supports the argument. Use extended examples e.g. don’t just cite a company but explain how it is relevant to your argument. Be specific: use some empirical evidence e.g. don’t just talk about ‘sales trend’, provide some data
· Use a range of examples where appropriate; relevance of all examples needs to be explained.
· No need to provide a list of references or exact citations with page numbers (eg FT in January 2008 or Rosenzweig 2007 is fine)
Transient
Advantage – HBR.pdf
COMPETITIVE STRATEGY
Transient Advantage by Rita Gunther McGrath
FROM THE JUNE 2013 ISSUE
S
PHOTOGRAPHY: COURTESY OF PACE GALLERY
ARTWORK: TARA DONOVAN, UNTITLED (STYROFOAM CUPS), 2008, STYROFOAM CUPS AND GLUE, INSTALLATION DIMENSIONS VARIABLE
trategy is stuck. For too long the
business world has been obsessed with
the notion of building a sustainable
competitive advantage. That idea is at the core of
most strategy textbooks; it forms the basis of
Warren Buffett’s investment strategy; it’s central
to the success of companies on the “most
admired” lists. I’m not arguing that it’s a bad idea
—obviously, it’s marvelous to compete in a way
that others can’t imitate. And even today there are
companies that create a strong position and
defend it for extended periods of time—firms such
as GE, IKEA, Unilever, Tsingtao Brewery, and
Swiss Re. But it’s now rare for a company to
maintain a truly lasting advantage. Competitors
and customers have become too unpredictable,
and industries too amorphous. The forces at work
here are familiar: the digital revolution, a “flat”
world, fewer barriers to entry, globalization.
Strategy is still useful in turbulent industries like consumer electronics, fast-moving consumer
goods, television, publishing, photography, and…well, you get the idea. Leaders in these businesses
can compete effectively—but not by sticking to the same old playbook. In a world where a
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The Wave of Transient Advantage Companies in high-velocity industries must learn to cycle rapidly through the stages of competitive advantage. They
competitive advantage often evaporates in less than a year, companies can’t afford to spend months
at a time crafting a single long-term strategy. To stay ahead, they need to constantly start new
strategic initiatives, building and exploiting many transient competitive advantages at once. Though
individually temporary, these advantages, as a portfolio, can keep companies in the lead over the
long run. Firms that have figured this out—such as Milliken & Company, a U.S.-based textiles and
chemicals company; Cognizant, a global IT services company; and Brambles, a logistics company
based in Australia—have abandoned the assumption that stability in business is the norm. They
don’t even think it should be a goal. Instead, they work to spark continuous change, avoiding
dangerous rigidity. They view strategy differently—as more fluid, more customer-centric, less
industry-bound. And the ways they formulate it—the lens they use to define the competitive playing
field, their methods for evaluating new business opportunities, their approach to innovation—are
different as well.
I’m hardly the first person to write about how fast-moving competition changes strategy; indeed,
I’m building on the work of Ian MacMillan (a longtime coauthor), Kathleen Eisenhardt, Yves Doz,
George Stalk, Mikko Kosonen, Richard D’Aveni, Paul Nunes, and others. However, the thinking in
this area—and the reality on the ground—has reached an inflection point. The field of strategy needs
to acknowledge what a multitude of practitioners already know: Sustainable competitive advantage
is now the exception, not the rule. Transient advantage is the new normal.
The Anatomy of a Transient Advantage
Any competitive advantage—whether it lasts two seasons or two decades—goes through the same
life cycle. (See “The Wave of Transient Advantage.”) But when advantages are fleeting, firms must
rotate through the cycle much more quickly and more often, so they need a deeper understanding of
the early and late stages than they would if they were able to maintain one strong position for many
years.
A competitive advantage begins with a launch
process, in which the organization identifies an
opportunity and mobilizes resources to capitalize
on it. In this phase a company needs people who
are capable of filling in blank sheets of paper with
ideas, who are comfortable with experimentation
also need the capacity to develop and manage a pipeline of initiatives, since many will be short-lived.
and iteration, and who probably get bored with
the kind of structure required to manage a large,
complex organization.
In the next phase, ramp up, the business idea is
brought to scale. This period calls for people who
can assemble the right resources at the right time
with the right quality and deliver on the promise
of the idea.
Then, if a firm is fortunate, it begins a period of exploitation, in which it captures profits and share,
and forces competitors to react. At this point a company needs people who are good at M&A,
analytical decision making, and efficiency. Traditional established companies have plenty of talent
with this skill set.
Often, the very success of the initiative spawns competition, weakening the advantage. So the firm
has to reconfigure what it’s doing to keep the advantage fresh. For reconfigurations, a firm needs
people who aren’t afraid to radically rethink business models or resources.
In some cases the advantage is completely eroded, compelling the company to begin a
disengagement process in which resources are extracted and reallocated to the next-generation
advantage. To manage this process, you need people who can be candid and tough-minded and can
make emotionally difficult decisions.
For sensible reasons, companies with any degree of maturity tend to be oriented toward the
exploitation phase of the life cycle. But as I’ve suggested, they need different skills, metrics, and
people to manage the tasks inherent in each stage of an advantage’s development. And if they’re
creating a pipeline of competitive advantages, the challenge is even more complex, because they’ll
need to orchestrate many activities that are inconsistent with one another.
Milliken & Company is a fascinating example of an organization that managed to overcome the
competitive forces that annihilated its industry (albeit over a longer time period than some
companies today will be granted). By 1991 virtually all of Milliken’s traditional competitors had
vanished, victims of a surge in global competition that moved the entire business of textile
manufacturing to Asia. In Milliken, ones sees very clearly the pattern of entering new, more
promising arenas while disengaging from older, exhausted ones. Ultimately, the company exited
most of its textile lines, but it did not do so suddenly. It gradually shut down American plants,
starting in the 1980s and continuing through 2009. (Every effort was made, as best I can tell, to
reallocate workers who might have suffered as a result.) At the same time the company was
investing in international expansion, new technologies, and new markets, including forays into new
arenas to which its capabilities provided access. As a result, a company that had been largely
focused on textiles and chemicals through the 1960s, and advanced materials and flameproof
products through the 1990s, had become a leader in specialty materials and high-IP specialty
chemicals by the 2000s.
Facing the Brutal Truth
In a world that values exploitation, people on the front lines are rarely rewarded for telling powerful
senior executives that a competitive advantage is fading away. Better to shore up an existing
advantage for as long as possible, until the pain becomes so obvious that there is no choice. That’s
what happened at IBM, Sony, Nokia, Kodak, and a host of other firms that got themselves into
terrible trouble, despite ample early warnings from those working with customers.
To compete in a transient-advantage economy, you must be willing to honestly assess whether
current advantages are at risk. Ask yourself which of these statements is true of your company:
I don’t buy my own company’s products or services.
We’re investing at the same or higher levels and not getting better margins or growth in return.
Customers are finding cheaper or simpler solutions to be “good enough.”
Competition is emerging from places we didn’t expect.
Customers are no longer excited about what we have to offer.
We’re not considered a top place to work by the people we’d like to hire.
Some of our very best people are leaving.
Our stock is perpetually undervalued.
If you nodded in agreement with four or more of these, that’s a clear warning that you may be facing
imminent erosion.
But it isn’t enough to recognize a problem. You also have to abandon many of the traditional notions
about competitive strategy that will exacerbate the challenge of strategy reinvention.
Seven Dangerous Misconceptions
Most executives working in a high-velocity setting know perfectly well that they need to change
their mode of operation. Often, though, deeply embedded assumptions can lead companies into
traps. Here are the ones I see most often.
The first-mover trap. This is the belief that being first to market and owning assets create a sustainable position. In some
businesses—like aircraft engines or mining—that’s still true. But in most industries a first-mover
advantage doesn’t last.
The superiority trap. Almost any early-stage technology, process, or product won’t be as effective as something that’s
been honed and polished for years. Because of that disparity, many companies don’t see the need to
invest in improving their established offerings—until the upstart innovations mature, by which time
it’s often too late for the incumbents.
The quality trap. Many businesses in exploit mode stick with a level of quality higher than customers are prepared to
pay for. When a cheaper, simpler offer is good enough, customers will abandon the incumbent.
The hostage-resources trap.
Is Your Company Prepared for the Transient-Advantage Economy? To seize transient advantages, companies need a new mode of operations. The diagnostic below can help pinpoint areas where change is required. Simply position
In most companies, executives running big, profitable businesses get to call the shots. These people
have no incentive to shift resources to new ventures. I remember holding a Nokia product that was
remarkably similar to today’s iPad—in about 2004. It hooked up to the internet, accessed web pages,
and even had a rudimentary app constellation. Why did Nokia never capitalize on this
groundbreaking innovation? Because the company’s emphasis was on mass-market phones, and
resource allocation decisions were made accordingly.
The white-space trap. When I ask executives about the biggest barriers to innovation, I often hear, “Well, these things fall
between the cracks of our organizational structure.” When opportunities don’t fit their structure,
firms often simply forgo them instead of making the effort to reorganize. For instance, a product
manufacturer might pass up potentially profitable moves into services because they require
coordination of activities along a customer’s experience, rather than by product line.
The empire-building trap. In a lot of companies, the more assets and employees you manage, the better. This system promotes
hoarding, bureaucracy building, and fierce defense of the status quo; it inhibits experimentation,
iterative learning, and risk taking. And it causes employees who like to do new things to leave.
The sporadic-innovation trap. Many companies do not have a system for creating a pipeline of new advantages. As a result,
innovation is an on-again, off-again process that is driven by individuals, making it extraordinarily
vulnerable to swings in the business cycle.
The assessment “Is Your Company Prepared for the Transient-Advantage Economy?” will give you a
sense of whether your organization is vulnerable to these traps.
Strategy for Transient Advantage: The New Playbook
Companies that want to create a portfolio of
transient advantages need to make eight major
shifts in the way that they operate.
1: Think about arenas, not industries.
your organization’s current way of working between the two statements in the assessment. If you score in the lower part of the range in an area, you might want to take a hard look at it.
One of the more cherished ideas in traditional
management is that by looking at data about other
firms like yours, you can uncover the right
strategy for your organization. Indeed, one of the
most influential strategy frameworks, Michael
Porter’s five forces model, assumes that you are
mainly comparing your company to others in a
similar industry. In today’s environment, where
industry lines are quickly blurring, this can
blindside you.
I’ve seen untraditional competitors take
companies by surprise over and over again. In the
1980s, for instance, no money-center bank even
saw the threat posed by Merrill Lynch’s new cash-
management accounts, because they weren’t
offered by any bank. Millions in deposits flew out
the door before the banks realized what was going on. But in recent years, the phenomenon has
become more common. Google’s moves into phone operating systems and online video have created
consternation in traditional phone businesses; retailers like Walmart have begun edging into health
care; and the entire activity of making payments is being disrupted by players from a variety of
industries, including mobile phone operators, internet credit providers, and swipe-card makers.
Today strategy involves orchestrating competitive moves in what I call “arenas.” An arena is a
combination of a customer segment, an offer, and a place in which that offer is delivered. It isn’t that
industries aren’t relevant anymore; it’s just that industry-level analysis doesn’t give you the full
picture. Indeed, the very notion of a transient competitive advantage is less about making more
money than your industry peers, as conventional definitions would have it, and more about
responding to customers’ “jobs to be done” (as Tony Ulwick would call it) in a given space.
2: Set broad themes, and then let people experiment.
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The shift to a focus on arenas means that you can’t analyze your way to an advantage with armies of
junior staffers or consultants anymore. Today’s gifted strategists examine the data, certainly, but
they also use advanced pattern recognition, direct observation, and the interpretation of weak
signals in the environment to set broad themes. Within those themes, they free people to try
different approaches and business models. Cognizant, for instance, clearly spells out the
competitive terrain it would like to claim but permits people on the ground considerable latitude
within that framework. “The Future of Work” is Cognizant’s umbrella term for a host of services
intended to help clients rethink their business models, reinvent their workforces, and rewire their
operations—all with the firm’s assistance, of course.
3: Adopt metrics that support entrepreneurial growth. When advantages come and go, conventional metrics can effectively kill off innovations by imposing
decision rules that make no sense. The net present value rule, for instance, assumes that you will
complete every project you start, that advantages will last for quite a while, and that there will even
be a “terminal value” left once they are gone. It leads companies to underinvest in new
opportunities.
Instead, firms can use the logic of “real options” to evaluate new moves. A real option is a small
investment that conveys the right, but not the obligation, to make a more significant commitment in
the future. It allows the organization to learn through trial and error. Consider the way Intuit has
made experimentation a core strategic process, amplifying by orders of magnitude its ability to
venture into new spaces and try new things. As Kaaren Hanson, the company’s vice president of
design innovation, said at a recent conference at Columbia Business School, the important thing is to
“fall in love with the problem you are trying to solve” rather than with the solution, and to be
comfortable with iteration as you work toward the answer.
4: Focus on experiences and solutions to problems. As barriers to entry tumble, product features can be copied in an instant. Even service offerings in
many industries have become commoditized. Once a company has demonstrated that demand for
something exists, competitors quickly move in. What customers crave—and few companies provide
—are well-designed experiences and complete solutions to their problems. Unfortunately, many
companies are so internally focused that they’re oblivious to the customer’s experience. You call up
your friendly local cable company or telephone provider and get connected to a robot. The robot
wants to know your customer number, which you dutifully provide. Eventually, the robot decides
that your particular problem is too difficult and hands you over to a live person. What’s the first
thing the person wants to know? Yup, your customer number. It’s symptomatic of the disjointed and
fragmented way most complex organizations handle customers.
Companies skilled at exploiting transient advantage put themselves in their customers’ place and
consider the outcome customers are trying to achieve. Australia’s Brambles has done a really great
job of this even though it is in a seemingly dull industry (managing the logistics of pallets and other
containers). The company realized that one of grocers’ biggest costs was the labor required to shelve
goods delivered to their stores. Brambles designed a solution: plastic bins that can be filled by
growers right in the fields and lifted directly from pallets and placed on shelves, from which
customers can help themselves. It has cut labor costs significantly. Better yet, fruits and vegetables
arrive at the point of purchase in better shape because they aren’t manhandled repeatedly as they go
from field to box to truck to warehouse to storage room to shelf. Although seemingly low-tech, this
initiative and others like it have generated substantial profits and steady growth for the company—
not to mention customers’ appreciation.
5: Build strong relationships and networks. One of the few barriers to entry that remain powerful in a transient-advantage context has to do with
people and their personal networks. Indeed, evidence suggests that the most successful and sought-
after employees are those with the most robust networks. Realizing that strong relationships with
customers are a profound source of advantage, many companies have begun to invest in
communities and networks as a way of deepening ties with customers. Intuit, for example, has
created a space on its website where customers can interact, solve one another’s problems, and
share ideas. The company goes so far as to recognize exemplary problem solvers with special titles
and short profiles of them on the site. Amazon and TripAdvisor both make contributions from their
communities a core part of the value they offer customers. And of course, social networks have the
power to enhance or destroy a firm’s credibility in nanoseconds as customers enjoy an
unprecedented ability to connect with one another.
Transient-advantage firms seldom engage in restructuring, downsizing, or mass firings.
Firms that are skilled at managing networks are also notable for the way they preserve important
relationships. Infosys, for instance, is choosy about which customers it will serve, but it maintains a
97% customer retention rate. Sagentia, a technical consultancy in the UK, is extremely
conscientious about making sure that people who are let go remain on good terms with the firm and
land well in new positions. Even at a large industrial company like GE, the senior leaders spend
inordinate amounts of time building and preserving relationships with other firms.
6: Avoid brutal restructuring; learn healthy disengagement. In researching firms that effectively navigate the transient-advantage economy, I was struck by how
seldom they engaged in restructuring, downsizing, or mass firings. Instead, many of them seemed to
continually adjust and readjust their resources. At Infosys, I was told, people don’t really believe in
“chopping things off.” Rather, when an initiative is wound down, they say it “finds its way to
insignificance.”
Sometimes, of course, downsizing or sudden shifts can’t be avoided. The challenge then is
disengaging from a business in the least destructive, most beneficial way. Netflix’s efforts to get out
of the DVD-shipping business and into streaming movies, which its management passionately
believes represents the future, offer an interesting lesson in the wrong way to do this. In 2011 the
company’s management made two decisions that infuriated customers. It imposed a massive price
increase across the board, and it split the DVD and streaming businesses into two separate
organizations, which forced customers to duplicate their efforts to find and purchase movies. Let’s
assume that Netflix’s leaders are right that eventually the DVD part of the business will shrivel up.
How might the firm have exited more gracefully?
Preparing customers to transition away from old advantages is a lot like getting them to adopt a new
product, but in reverse. Not all customers will be prepared to move at the same rate. There is a
sequence to which customers you should transition first, second, and so on.
If, rather than raising prices for everybody, Netflix had selectively offered price discounts to those
who would drop the DVD service, it would have moved that segment over to the new model. Then it
could have gone to the “light user” DVD consumers and suggested that instead of getting a new DVD
anytime they wanted it, they would get one once a month, say, for the same price. If they wanted the
instant service, their prices would go up. That would shift another group to lower DVD usage. Then
when those segments started to realize that all-streaming wasn’t so bad, Netflix could have
instituted the big price increase for the mainstream buyer. The point is that in trying to force many
customers to move faster than they were prepared to, the company enraged them.
7: Get systematic about early-stage innovation. If advantages eventually disappear, it only makes sense to have a process for filling your pipeline
with new ones. This in turn means that, rather than being an on-again, off-again mishmash of
projects, your innovation process needs to be carefully orchestrated.
Companies that innovate proficiently manage the process in similar ways. They have a governance
structure suitable for innovation: They set aside a separate budget and staff for innovation and allow
senior leaders to make go or no-go decisions about it outside the planning processes for individual
businesses. The earmarked innovation budget, which gets allocated across projects, means that new
initiatives don’t have to compete with established businesses for resources. Such companies also
have a strong sense of how innovations fit into the larger portfolio, and a line of sight to initiatives in
all different stages. They hunt systematically for opportunities, usually searching beyond the
boundaries of the firm and its R&D department and figuring out what customers are trying to
accomplish and how the firm can help them do it.
8: Experiment, iterate, learn. As I’ve said for many years, a big mistake companies make all the time is planning new ventures
with the same approaches they use for more-established businesses. Instead, they need to focus on
experimentation and learning, and be prepared to make a shift or change emphasis as new
discoveries happen. The discovery phase is followed by business model definition and incubation, in
which a project takes the shape of an actual business and may begin pilot tests or serving customers.
Only once the initiative is relatively stable and healthy is it ramped up. All too often, in their haste to
get commercial traction, companies rush through this phase; as a result whatever product they
introduce has critical flaws. They also spend way too much money before testing the critical
assumptions that will spell success or failure.
Speed is paramount. Fast and roughly right decision making must replace deliberations that are precise but slow.
Leadership as Orchestration
No leader could cognitively handle the complexity of scores of individual arenas, all at slightly
different stages of development. What great leaders do is figure out some key directional guidelines,
put in place good processes for core activities such as innovation, and use their influence over a few
crucial inflection points to direct the flow of activities in the organization. This requires a new kind
of leader—one who initiates conversations that question, rather than reinforce, the status quo. A
strong leader seeks contrasting opinions and honest disagreement. Diversity increasingly becomes a
tool for picking up signals that things may be changing. Broader constituencies may well become
involved in the strategy process.
Finally, transient-advantage leaders recognize the need for speed. Fast and roughly right decision
making will replace deliberations that are precise but slow. In a world where advantages last for five
minutes, you can blink and miss the window of opportunity.One thing about strategy hasn’t
changed: It still requires making tough choices about what to do and, even more important, what
not to do. Even though you are orchestrating scores of arenas, you can do only so many things. So
defining where you want to compete, how you intend to win, and how you are going to move from
advantage to advantage is critical. While we might be tempted to throw up our hands and say that
strategy is no longer useful, I think the opposite conclusion is called for. It’s more important than
ever. It just isn’t about the status quo any longer.
A version of this article appeared in the June 2013 issue of Harvard Business Review.
Rita Gunther McGrath, a Professor at Columbia Business School, is a globally recognized expert on strategy in uncertain and volatile environments. She is the author of the book The End of
Competitive Advantage (Harvard Business Review Press).
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AbdulKarim Musaliar 10 months ago
I am a teacher of strategic marketing at TKM Institute of Management, India. I find the article by Ms. Rita Gunther
McGrath very interesting. Although experimentations with marketing strategy are being done around the world, it is
seldom tried in India. One reason I find is that there are hardly any international size (barring a few) companies. I
would request Ms. McGrath to simplify the article somewhat, with more real-life examples, so that more companies
would adopt your theory.
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