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.1 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.
In this book, I take on the idea of sustainable competitive advantage and argue that executives need to stop basing their strategies on it. In its place, I offer a perspective on strategy that is based on the idea of transient competitive advantage: that to win in volatile and uncertain environments, executives need to learn how to exploit short-lived opportunities with speed and decisiveness. I argue that the deeply ingrained structures and systems that executives rely on to extract maximum value from a competitive advantage are liabilities—outdated and even dangerous—in a fast-moving competitive environment.
This much at least seems to be well understood. But then why hasn’t basic strategy practice changed? Most executives, even when they realize that competitive advantages are going to be ephemeral, are still using strategy frameworks and tools designed for achieving a sustainable competitive advantage, not for quickly exploiting and moving in and out of advantages.
This book addresses that problem. It offers a new set of practices based on the notion of transient, not sustainable, competitive advantage. With this book, you’ll get a new playbook for strategy—one that is based on a new set of assumptions about how the world works—and learn how some of the most successful companies in the world use the new playbook to compete and win when competitive advantages are transient.
How did the idea of sustainable competitive advantage get so entrenched in the first place? Let me retrace how this concept evolved and, in parallel, show how my own work—both in academia and in the world of management practice—has led up to this book.
Historically, strategy and innovation have been thought of as two separate disciplines, in both research and practice. Strategy was all about finding a favorable position in a well-defined industry and then exploiting a long-term competitive advantage. Innovation was about creating new businesses and was seen as something separate from the business’s core set of activities. Initially, I studied the corporate innovation process, much of which is laid out in my previous coauthored books.2 At the time, relatively few serious scholars were studying “corporate venturing,” with a few exceptions such as Bob Burgelman; Kathy Eisenhardt; and, of course, my coauthor, mentor, and colleague Ian C. MacMillan.3 Instead, most of my PhD colleagues were busy studying positional dynamics within industries (with the goal of understanding how to achieve sustainable competitive advantages).
My academic work at that time had mostly to do with fostering entrepreneurial behavior within large firms. A major insight from those days was that when you’re trying to enter fields in which you don’t have a broad-based platform of experience—in other words, areas in which the ratio of assumptions you have to make relative to knowledge that you possess is high—a different set of disciplines needs to be employed. Ian MacMillan and I wrote a suggested approach to tackling this dilemma in “Discovery-Driven Planning,” a best-selling article in Harvard Business Review that has since become a staple of entrepreneurship and innovation courses.4 We didn’t realize it at the time, but we were laying the foundations for a new approach to strategy, in which sustainable competitive advantage wasn’t really the point.
I had the opportunity to apply many of these ideas with consulting clients as we sought to help them develop an innovation proficiency. But this is when it started becoming obvious to us that most companies we were working with were really having trouble with their basic strategy for competing in their core businesses. Diverse clients such as DuPont, 3M, Nokia, Intel, and IBM were all beginning to recognize that traditional approaches to strategy and innovation weren’t keeping pace with the speed of the markets in which they were competing.
But even as management tools to supposedly help cope with the pace of competition proliferated, executives didn’t use them. Executives reported to the consultancy Bain “that the speed of the new economy has caused people and firms to believe they don’t have time to implement tools,” and firms, particularly in North America, were feeling “understaffed,” with the consequence that they were sticking increasingly to tools they had already had experience with. Ironically, at the time, despite a lot of innovation in management tools and approaches, firms were increasing their reliance on strategy tools that they had inherited from the past.5 So although they talked about using increasingly sophisticated approaches, if you looked at what they were really working with you would still find SWOT analyses, industry analyses, and rather conventional competitive analysis.6 Although executives realized the need for new approaches to strategy, they were still using old ones—or none at all.
Along with this growing gap in practice, some scholars in academia started to question the idea of sustainable competitive advantage. Ian MacMillan was one of the first to tease out its specific implications for strategy. Competitive advantage, he reasoned, could best be thought of in waves, with the job of the strategist being to seize strategic initiative by launching ever-new waves.7 He and Rich D’Aveni coined the term “hypercompetition” to characterize markets in which a firm’s competitive advantage would be quickly competed away.8
In both business and academia there was an increasing sense that existing frameworks were not doing a great job helping leaders cope with the faster pace of competition. And then, with the advent of the internet and the knowledge-based economy in general, decreases in protective trade regulations, and technological advances, things seemed to move ever faster, and for some reason companies that you would think would be able to cope lost their edge. Max Boisot, a dear and now departed friend, summed up the implications for unstable advantage in knowledge-intensive industries, basically concluding that the most profitable point in the evolution of an advantage was also its most fragile.9 By the late 1990s, the connection between innovation and strategy went mainstream with the publication of Clay Christensen’s The Innovator’s Dilemma,10 which cited discovery-driven planning as a useful element of the strategists’ toolkit while trying to do innovative things.11
What was starting to happen was that the disparate fields of competitive strategy, innovation, and organizational change were all coming together. This in turn meant we needed to add new frameworks and tools for practicing strategy to the well-entrenched ones such as five forces analysis and the growth-share matrix. In my previous books, Harvard Business Review and journal articles, talks, and consulting, I’ve tried over the years to sketch out what a new way of practicing strategy might look like. Options reasoning, for instance, is a way of making investments in the future without having to risk massive losses.12 Intelligent failures can be helpful in facilitating learning.13 Opportunity recognition is a skill that can be enhanced and developed in a systematic way.14 The resource allocation process is perhaps the most significant way to influence what gets done in an organization and who does it.15 You need to think of customer “jobs to be done,” rather than rigid markets influenced by supply and demand.16 Business model innovation was every bit as important as R&D or product innovation.17 And different leadership behaviors need to be deployed in businesses with different levels of maturity.18
The implications of all these ideas came together in what I’m calling in this book a new playbook for strategy. The new playbook is based on a new set of assumptions about how the world works—a different set of assumptions from those that gave us the useful frameworks and tools we’ve been using for the past several decades. The strategy playbook today needs to be based on the idea of transient competitive advantage—that is, where you compete, how you compete, and how you win is very different when competitive advantage is no longer sustainable.
Basing your strategies on a new set of assumptions can seem daunting, even if you know it’s the right thing to do. Even more challenging is shifting the ultimate goal of your strategy from a sustainable competitive advantage to a transient one—you can no longer plan to squeeze as much as you can out of any existing competitive advantage unless you are already well into exploring a new one. But as you’ll see from the stories in this book from companies and leaders all over the world who are competing on transient advantages, once you start working with the new strategic playbook, changes in the configuration of your advantages don’t have to be intimidating at all. Some of the executives I interviewed actually seemed to be having fun—rather than being defensive and debilitated, they used the pursuit of transient competitive advantages to represent a compelling and engaging call to action for their people and a spur to innovation.
Fast-moving strategies have implications for managerial careers as well. A friend of mine working for a Brazilian company suggested a somewhat counterintuitive idea: “In Brazil,” he said, “we’ve been through it all—inflation, corruption, unpredictable governmental regulation, you name it. And you know, you get good at it.” He pointed out that managers whose only experience is with more tame types of competition would be flummoxed if they had to confront some of the challenges his generation of leaders in Brazil had to overcome on a routine basis.
Although it’s easy to see the devastation wreaked on companies whose leaders were not prepared to be dynamically competitive, I think it’s important to recognize the benefits, too. Sclerotic and inefficient industries get better when faced with genuine competitive threats. Would anyone want to go back to the days in which the government-owned telephone company dictated pricing and choices, for instance? In their quest to find the next opportunity, companies are getting better at figuring out what people really need and will pay for, at designing better experiences, and at wresting new efficiencies from existing assets. In a lot of cases, the value an average person gets for the same dollar, yen, or euro is vastly greater than it was even a decade or two ago. And there are more opportunities for new ideas and for young companies to thrive than ever before.
Before closing this preface, I’d like to acknowledge some of the people who have been instrumental in making this book a reality. Jill S. Dailey, of Accenture, proved invaluable as an intellectual sparring partner, a source of new ideas, and a resource for figuring out how these ideas could work in practice. The idea of arenas and of industries competing with industries is an idea we’ve worked on pretty intensively together. Ian MacMillan was a sounding board and an unapologetic critic of those ideas he didn’t feel made sense. I appreciated the suggestions and comments of the many people I interviewed for the book. Alison Norman, Xi Zhang, and Sooreen Lee provided invaluable research assistance. Melinda Merino and the team at Harvard Business Review Press have been true partners in crafting and shaping the ideas presented here.
I hope you enjoy this introduction to people and companies that I believe represent some of the best new strategic thinking and behavior for winning even when competitive advantages don’t last. They don’t always get it right—in fact, if my ideas about temporary advantage and learning from failure apply, it’s almost impossible for a company to call it correctly every time. What matters, though, when you have been taken by surprise or something negative occurs, is what you do next. The best firms look candidly at what happened, figure out how to do it better the next time, and move on. It’s a bit like surfing a wave—you might fall off and find yourself embarrassedly paddling back to shore, but great surfers get back on that board. So too with great companies. They move from wave to wave of competitive advantages, trying not to stay with one too long because it will become exhausted, and always looking for the next one. It has been fun getting to know them.
—Rita Gunther McGrath
Princeton Junction, New Jersey