Competitive Advantage Is Fleeting (And It's Okay to Admit It)
For as long as I've been working in the field of strategy, a taken-for granted assumption among executives, students and academics has been that the goal of a great strategy is achieving a "sustainable competitive advantage."
As the field migrated from a subject called "Business Policy," having to do mostly with the job of the general manager, to the current conception of "Strategic Management," we picked up a vast number of tools, frameworks and analytical approaches that promised to make the world of strategy one of greater rigor, science and analytical depth. The ultimate goal was to pinpoint a path to achieving a highly profitable position which could then be sustained. The logic accompanying this goal was impeccable: within the context of stable industry boundaries, identify an attractive position and learn to defend it against rivals so that the stronghold could be preserved for a long time. And actually, many of our traditional manufacturing industries — from autos to steel to industrial equipment — did very well with that set of assumptions for a very long time.
The idea was so successful, in fact, that its premises have become embedded in many of the ways we do business today. From our financial models, such as using net present value analysis to value projects, to our investment models, which presume more or less predictable and long life-spans for given business activities, we have built a lot of operating frameworks on the idea that our lines of business will be around for a while. And not only around, but profitable.
All this began to change in the early 1990's, when a number of scholars, such as my colleague Ian MacMillan and his co-author Rich D'Aveni, started talking about a phenomenon they called "Hypercompetition." In hyper-competitive environments, to paraphrase Hobbes, the life of a competitive advantage is nasty, brutish and short. In other words, advantages don't last for very long before competitive entry, imitation and matching erode their edge, or customers move on, or the environment changes in such a way that the advantage becomes irrelevant. I don't think there is much disagreement that this dynamic characterizes many categories.
One implication of hypercompetition that has not yet gotten the attention it deserves is that the skill of getting out of things and re-focusing your organization is likely to be just as important as spotting opportunities and moving to capture them.
I suggest that the vast majority of companies struggle with letting go, while the more adroit strategists make the necessary judgment calls and move on. For instance, in taking the Max Factor line out of the United States, Procter & Gamble's management has made a really tough call. Max Factor, the person, was a Hollywood legend, and the cosmetics company that bore his name built a highly recognizable brand. P&G acquired the brand in 1991 but has struggled to build its US market share, even as the company's competing "Cover Girl" brand seemed to dominate the hearts and minds of American shoppers. Internationally, in contrast, Max Factor does rather well in markets like the UK and Russia, which generate the bulk of its billion dollars plus in sales. The less-than-stellar US performance was not for want of trying on P&G's part — indeed, the company invested millions. Nonetheless, the advantage Max Factor once possessed in the US market was continuing to erode, at which point the company made the call to get out.
Now consider what a decisive exit from an eroding advantage does: it frees up precious time and attention (today's most scarce managerial commodities); it sends a strong signal about what is strategically valued; it reduces competition for attention for potentially stronger operations; and it allows staff who might have been loyally sticking to a once-important business a way out. Sometimes, you can almost hear the collective sigh of relief when such a decision is finally made. You can easily think of your own contrast cases of companies who stuck with declining categories for far too long. General Motors is of course a vivid recent example, but we can conjure many more.
I think we can all accept that getting talent and resources out of declining areas and into more promising ones is a good thing. So here's the problem: we are still coping with many systems, from the way we hire, promote and develop people, to the way we value assets, that fail to take into account the fragility of competitive advantage.
For instance, the Wall Street Journal recently reported that "Many Companies Hire as They Fire." The article outlined how, in search of skills that can support growing areas, firms are firing people who were associated with previous successful operations and seeking to hire people with the right skill sets for those that represent the company's future. In effect, firms are imposing the costs of adapting to the temporary-advantage phenomenon on their employees, who often join a company under what I'll call the sustainable advantage thesis. There is both a mismatch of expectations and an asymmetry of burdens.
Perhaps we need to start thinking about building the reality of temporary advantages into the way we hire, develop and allocate talent.
Surely, if an employee knew that a declining advantage for a firm could mean their skills were no longer interesting or relevant, that would pique their interest in continuously improving on talents that would be relevant. Surely it would be more attractive for firms to be able to avoid the trauma of mass layoffs and the uncertainty of being able to find the skills they need on the open market. Indeed, the Journal article reports that companies are increasingly finding it difficult to find just the right external candidates, a difficulty that can impede their own future growth.
Perhaps there is a role here for corporate policy, or public-sector policy, on how the dislocations produced by declining advantages are to best be met. An interesting case in point is Denmark, which makes substantial public-sector investment in upgrading skills of unemployable people so that they can be attractive to growing, rather than declining, businesses.
So what are your ideas for how we can get better at letting go, get better at minimizing the trauma for people caught in the backlash, and get better at making those tough calls in the first place?
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