The End of Competitive Advantage: Is Your Digital Transformation Strategy Stuck in the Past?

An interview with Rita Gunther McGrath: an on-going series of thought-provoking conversations with big thinkers, authors, scholars, and visionaries on all things digital transformation.

McGrath is a globally recognized expert on innovation and growth strategies with an emphasis on corporate entrepreneurship. Her work and ideas help CEOs and senior executives chart a pathway to success in today’s rapidly changing digital economy.

She has been recognized as one of the Top 10 Most Influential Business Thinkers by Thinkers50. She has also been inducted into the Strategic Management Society “Fellows” in recognition of her impact on the field.

Here’s the thing. Strategy is stuck. Most leaders are using frameworks that were designed for yesterday’s economy and based on a single dominant idea—that the purpose of strategy is to achieve a sustainable competitive advantage.

In a world where a 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. McGrath argues that it’s time to go beyond the old-school concept of sustainable competitive advantage and forge a new path to winning instead.

She shows how to compete and win in the digital economy with a new set of practices based on the notion of transient competitive advantage.

 Read the full Q&A below.

Appian: Your latest book, “The End of Competitive Advantage,” has been called a new playbook for strategy, based on new assumptions about how the world works.What are these new assumptions? And what motivated you to write the book?

McGrath: What I started to see in my work with companies and in my own research is a disconnect in what we’re teaching in our classrooms, and what’s happening out there in the real world. In our classrooms, we were teaching things like sustainable competitive advantage, and create barriers to entry to milk an advantage for as long as you can.

But what was happening in the real world was that in many sectors of our economy, the pace of change had sped up significantly. And barriers to entry were actually disappearing.

So, I felt that somebody needed to lay out the implications of this for leaders and for strategists. And that was the motivation for writing the book.

Appian: You’ve written that the old days where the competitive environment was stable, and where there were no major disruptions are over…

McGrath: “Well, you can still find them. But what’s fascinating to me is the juxtaposition now of firms like Google and Facebook, which have a very, very firm hold on the markets that they control—versus other firms which are facing disruption.

Appian: But, what about the traditional, non-tech companies? How can they compete in this volatile, digital, environment?

Change Is the New Normal

McGrath: “Well, they need to go beyond “innovation theater.” They need to be able to detect changes that are coming. They need to be able to mobilize their resources to create new advantages to replace the ones that have gone away. And they have to do all of that much faster than they had to in the past.

Established companies are really built around ongoing operations. The people that make decisions in those companies are operating people. They execute, and they do it very well. But, that’s different than the skill set you need to manage something that’s new, something that needs to be managed in an emergent way.

Appian: So, what are some of the key assumptions that today’s business leaders need to update to succeed in this environment?

McGrath: Well, the first is the notion of stability. In the past, stability was the normal thing, and change was the weird thing. Today, it’s the other way around. We’re shifting to an environment where change is increasingly seen as the norm.

Another change is that the old forms of competitive advantage are no longer as powerful as they once were. Think about it. Today, you’ve got YouTube that can get videos to millions of people at no cost.

“You’ve got Facebook that can get a message to billions of people at no cost…In the past, you had to own a major media company or publishing house to get that kind of outcome. Today, all it takes is two kids in a garage. So, I think there are a lot of assumptions about how many resources you need to create truly formidable competitive offerings. And that opens the door to a lot of disruption.”

Appian: So why is it that traditional companies and business leaders get stuck in old-school assumptions about building a competitive advantage?

McGrath: There are a number of reasons. The most obvious being that many senior leaders are not looking for the longer term. They’re focusing on how to make it through the next two or three years. It sounds cynical, but I think there’s a lot of short-term thinking going on out there.

 Winning Strategy: Reward Long-Term Investing

Another issue to consider is that many people are not rewarded for investing for the long term.

So, if you’ve got an activist investor on your doorstep, and they’re wanting all of the cash you can summon out of your company, and they want it in the next 18 months, talking about how you’re going to manage innovation for the long term is a hard conversation to have. So we’ve got an incentive mismatch.

Then, we’ve got a skills mismatch, which I alluded to earlier. Which is: “If I got to where I am, as the senior leader of a company by being an outstanding operator, why do I need to know about lean methodologies…That’s unfamiliar territory to me.”

“And, so, people under stress, tend to drop back to what they know. And, what they often know is ramping up efficiency in core operations, rather than exploring new territory.”

Appian: But, as you point out, the notion of competing on the basis of scale, scope optimization and efficiency won’t cut it anymore…

McGrath: Yeah, pretty much.

Appian: On a related note, would you elaborate on your notion of “Transient Competitive Advantage”?…How do you define it, and why is it important?

McGrath: Well, Transient Advantage is the conscience recognition that you’re going to have something that creates an advantage for you.You want to get it into the market, so you have a ramp up period. Then, you have a period of exploitation. But…you’re very conscience of the fact that it’s going to go away.

And, so you prepare yourself to pull resources out of it—I call that disengagement. And, you invest those resources in the next opportunity. So, Transient Advantage really about managing through these cycles, these waves of competitive advantage.

Appian: You’ve also identified what you call the six key elements of Transient Advantage. What are these elements, and why do they matter?

McGrath: The first is this idea of Continuous Configuration, the notion that we want to always be in motion. This is a tip of the hat to the notion of inertia—that things in motion want to stay in motion…and things at rest, want to stay at rest.

“In the digital economy, you don’t want to be a company staying at rest. You want to be continuously re-configuring.”

The second element is: “Healthy Disengagement.” Which is about pulling resources out of an exhausted enterprise, and putting them where they can do the most good.

The third element is related to that. I call it: “Deft Resource Allocation.”

They get trapped in the divisions that generate the profits at specific points in time.

Or, they get trapped by powerful people who want to use them for their own benefit.

So you need some counterweight to that. I’ll give you an example. I was talking to a woman who is the Chief Digital Officer (CDO) of a large financial service institution.

She reports up through Marketing, and her CEO has given her a very clear mandate: “Make sure we’re digital, that we’re responding to customers, that we appeal to Millennials, blah, blah, blah.”

But this CDO runs headlong into resistance from the existing IT organization, which has zero interest in her mandate. So, you’ve got to have some way of breaking through that. Otherwise, the person who has the resources wins. And the person who doesn’t gets stuck.

Get Good at Innovation—Really Good

The fourth element is: “Making innovation a proficiency.” We don’t want innovation theater, which is what a lot of companies are doing now. This is where you send executives off to Silicon Valley to get their picture taken next to the Facebook sign.

But that’s not real proficiency. To build proficiency, you need to build a governance system. You need to have funding mechanisms, you need the right kind of metrics. And you need training to build the capability.

“The fifth thing you need is what the role of a leader is about. It has gone from command and control and the godlike leader who knows everything, to leaders who can set a broad direction, and influence where the company goes.”

These leaders are not telling people what to do, as much as facilitating the process. Which is a whole new way of thinking about leadership.

Lastly, we have to rethink what careers are all about.

You can’t slot people into a career anymore. It’s much more about what some people call the tour of duty career. You may take on an assignment, and when you’re done, you may leave the company. You may decide to move on. You may decide to leave and come back. I think we’re getting to a more project oriented view of what careers are all about.

Traditional Assumptions Won’t Cut It Anymore

Traditional assumptions are about retention being good, and turnover being bad. But many of these mindsets are no longer useful.

Appian: You recently published an article in the Harvard Business Review, called “Old Habits Die Hard, But they Do Die.” In it, you said that our expectations for the basic, underlying, job we expect products to do won’t change. But, the specifics of how the job gets done can change dramatically.

McGrath: That’s right. Why do we buy things?

“We buy things because there’s a job we have to get done in our lives. We need to get something managed. Or, we need to accomplish something. In Clay Christensen’s words, we hire products and services to do those things for us. What companies fail to realize is that the solution to that job, at some point, might become irrelevant.”

If you think about communicating across distances, that’s the job. Well, once upon a time, we did it with smoke signals. Then, we did it with the Pony Express. Then, we did it with the telegraph. And on and on and on, until we eventually get to the smartphone.

The point is, the job of communicating across distances hasn’t changed. But how we get that job done has morphed dramatically. So, if you lure yourself into thinking that the way you describe your product is not really the job, not really about getting information to people across long distances, disruption can take you by surprise.

How to Beat Disruption

The problem is, too many companies define themselves in terms of what they do, rather than what customers expect them to accomplish for them in their lives.

Appian: There’s an existential lesson in that story—if you stay focused on the job, and not the details of how the job gets done, you’ll have a better chance of beating disruption.

McGrath: Absolutely. I was working with a company the other day that creates visual displays for spaces in rooms. One of the new offerings they were developing is for conference rooms. And, they did all of this market research about how many conference rooms there are in the world, how much people spend on conference rooms, and the communications capabilities you can build into these rooms.

So, I asked them to tell me about the job they envisaged being done in these rooms…And they said, “conferencing.” But you don’t have conference rooms to conference. You have conference rooms to accomplish something. So, right from the get-go, the project was doomed, because they were looking at the wrong situation.

Appian: In rethinking assumptions about competition, you’ve said that companies should think about competing in arenas, not industries. Would did you mean by that?

McGrath: This really relates to the last point we discussed. Which is understanding the job to be done Your arena consists of your organization and all the organizations out there that might compete to do that job.

“So our traditional view of competition is built around the question of which industry you’re in? So, if I’m Whirlpool, and I make washers and dryers, I compete with Samsung or GE, because they also make washers and dryers.”

Well, if you think about why you want a washer, it’s because you need clean clothes. The point is, any way I can get clean clothes is conceivable competition for Whirlpool. So that’s the notion of arenas—the idea that your most significant competitor may not be in your industry at all.

What to Expect in 2018 and Beyond

Appian: In wrapping up our conversation, tell us what your top 3 predictions are for 2018, in terms of major strategy and innovation trends.

McGrath: Sure. First of all, I don’t really believe in predictions. I think it’s possible to anticipate things and make a move when you get enough information to know that things are about to shift.

So, I think in 2018, we’re going to see the emergence and disappointment in Artificial Intelligence and Machine Learning. Everybody’s all hyped up about it. They’re saying it’s going to replace accountants…it’s going to change who we are…the bots are going to design systems and make us irrelevant.

“But, what AI and Machine learning can do better than people is detect rich patterns that underlie massive amounts of data.”

In the 1990s, pundits predicted that internet commerce was going to take over the world. So, many companies dove into e-commerce. But if you think back to 1995, the complementary infrastructure to support ecommerce just wasn’t there.

We were accessing the internet through dial-up modems and AOL back then. And, so you had all of these retailers investing in this new technology. And, then they learned the wrong lesson, which was: “We tried ecommerce, and we’ll never do it again.” But the right lesson was: “It’s not ready yet.

And I think that’s where we are with AI and Machine Learning. I think the impact of these technologies is going to be very profound. But right now, we’re still in a heavy duty hype cycle.

Also, people are interacting with their technology in really different ways. I think Apple’s announcement of Face Recognition means that we’re getting away from needing a device to interact with our environment.

“With advances in the development of Facial Recognition, the environment becomes your device. Which means you don’t take your smartphone into a bank branch. You walk into the bank branch and they know who you are. And I think those are the kinds of things we’re going to see significant implications for in 2018.”

And the third one, which is really intriguing to me is the explosion we’re seeing in the application of drones. We’re going to see some very interesting developments around drones and other kinds of autonomously powered technology, that will change things in surprising and unsuspecting ways.

These are some of the trends to look for in 2018.