Fuji Photo Film Company had an inauspicious beginning. It was divested from Japan’s first cinematic film manufacturer in the 1930s because it was a chronic underperformer. Over the years, it improved its poor reputation for quality, became a significant global firm, and began to take on giants such as Eastman Kodak in film and film processing. The market for amateur and professional chemical-based photographic processes hadn’t really changed in over a hundred years, meaning that competition tended to devolve around distribution rather than products, and Fuji struggled to break into markets in which Kodak was entrenched. There were many innovations, to be sure—including roll film, 35-millimeter film, easy-to-load cartridges, and even disposable cameras—but the basic position of film at the center of the photography industry’s competitive universe hadn’t changed for decades.
In the 1970s, however, an event that subsequently proved seminal to the evolution of the photography business took place. Two members of one of America’s wealthiest families, Nelson Bunker Hunt and William Herbert Hunt, made a play to corner the silver market. They were interested in using silver as a hedge against inflation (a big issue at the time) and also as a diversifying asset class given that they had large holdings in oil. They began to make investments in silver in 1973, at which point the price of an ounce of silver was just under $2. In early 1979, the price had risen to about $5. By the time their plans were publicly exposed at the end of 1979, they had amassed more than 100 million ounces (6.25 million pounds) of silver, which observers guessed was about half the world’s supply. Their actions caused the price of silver to jump to a mind-boggling number of over $50 per ounce.1
The consternation among manufacturers was palpable—what would happen if silver, a key ingredient in film processing, proved far more expensive than their economic models had predicted? Further, what if the investors in silver had such a lock on the market that there would not be enough of the material to go around? Their anxiety didn’t last long, however, because in March of 1980 the price of silver collapsed precipitously, bringing with it collateral damage in the form of one of the sharpest declines in the Dow Jones Industrial Average ever experienced.2 With the crisis over, most photography companies, Kodak among them, settled back into doing business as usual.
Minoru Ohnishi, who became CEO of Fuji Photo Film in 1980, remained deeply uneasy about the experience, however. He sensed that a fundamental change was potentially afoot in the photography business. The introduction of Sony’s first digital camera, the Mavica, in 1984 created the reality of photography that could do without film. He said later, “That’s when I realized film-less technology was possible.”3 He wasted no time moving on this insight. He invested heavily in building up expertise in digital technologies to prepare for the next round of competition in the photography business. His determination for the company to make this transition was described as “single-minded” by a writer for BusinessWeek, who observed that if one were to tally up Fuji’s investments by 1999 in research and technology dedicated to digital products, it would easily top $2 billion. The article went on to note a “mystical” belief among the company employees in the correctness of this strategy. This attitude was reflected by chief scientist and senior advisor Hirozo Ueda, who told the reporter, “We’re not going to quit, and we’re not going to lose this battle.”4 By 2003, Fujifilm had nearly five thousand digital processing labs in chain stores throughout the United States; at the time, Kodak had less than a hundred.5
Ohnishi was determined not only to keep his company relevant in digital technologies for photography, but also to extend its reach to opportunities outside the photography business. He pushed the company to establish a sales channel for new products such as magnetic tape optics and hybrid electronic systems. It became the first non-US company to produce videotape. Later diversification efforts took the firm into biotechnology and office automation. It entered floppy disk manufacturing. Ohnishi was an innovator in business processes at Fuji as well. In a Japanese context famous for its long-tenured “salarymen,” Ohnishi championed a lean headquarters staff, even going to great lengths to benchmark how well Fuji compared with forty other Japanese companies with respect to how many staff were involved in overhead functions. Although Fuji came in at 9 percent (and the average of the rest was 16.7 percent), Ohnishi was determined to bring this ratio down to 7 percent by asking the organization to cut its workload significantly and to eliminate 50 percent of the time-consuming consensus building and documentation that were standard business practice at the time.6
The reconfiguration of the company continued after Ohnishi was replaced by Shigetaka Komori, with sometimes-painful transitions as jobs were lost and facilities closed. The firm aggressively pulled resources from the photographic film business, reportedly cutting more than $2.5 billion in costs in order to invest those resources in new businesses.7 Today, Fujifilm has significant health care and electronics operations and obtains some 45 percent of its revenue from document solutions and office printers.8 All this was accomplished during several decades in which Japan’s domestic industries were moribund and the country seemed unable to escape stagnation. In 2011, Fujifilm generated $25 billion in revenue, employed more than 78,000 people, and ranked 377th on Fortune’s Global 500 list. Kodak has gone bankrupt.
Fuji’s story suggests 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 the company were huge—it risked undermining its existing advantages, and had to make a bet on a highly uncertain future. Yet, ultimately, it was Fuji’s approach—investing in new advantages and pulling resources from declining ones—that proved to be more robust in the face of change. It didn’t get it right every time, and sometimes the transitions were painful. But the company didn’t get trapped by its past.
When competitive advantages don’t last, or last for a much shorter time than they used to, the strategy playbook needs to change. Leaders have inherited a lot of ideas that may have made sense at one point but aren’t keeping up with the pace of strategic change today. Although executives realize that rapid change is the norm, the strategies they use to compete still draw on frameworks and practices that were most effective decades ago. Executives need a new set of strategy frameworks and practices for winning over the long haul, even as sustainable competitive advantages have become a thing of the past.
This book is about the dynamics of transient, rather than sustainable, competitive advantage. It shows the new strategic logic—where to compete, how to compete, and how to win—when competitive advantages are temporary, and shows what we can learn from companies that have learned to ride the wave from one transient advantage to another.
Sony. Research In Motion (RIM). Blockbuster. Circuit City. Even the New York Stock Exchange. The list of once-storied organizations that are either gone or are no longer relevant is a long one. Their downfall is a predictable outcome of practices that are designed around the concept of sustainable competitive advantage. The fundamental problem is that deeply ingrained structures and systems designed to extract maximum value from a competitive advantage become a liability when the environment requires instead the capacity to surf through waves of short-lived opportunities. To compete in these more volatile and uncertain environments, you need to do things differently.
When I got my start in the strategy field, there were two foundational assumptions we took practically as gospel. The first was that industry matters most. We were taught that industries consist of relatively enduring and stable competitive forces—take the time and effort to deeply understand these forces, and voilà, you can create a road map for your other decisions that is likely to last for some time. The emphasis in strategy was therefore analytical: because industries were assumed to be relatively stable, you could get a decent payoff by investing in analytical capabilities to spot industry trends and design your strategy accordingly. Those were the days of the five-year plan. A major assumption was that the world of five years from now was to some extent comprehensible today.
For instance, the traditional network television model in the United States was successful for many decades because the limited and expensive broadcast spectrum meant that a few players (in this case the major networks) dominated the few channels to customers. Constraints having to do with geography, syndication rights, and ratings all kept the model in place for years. For advertisers, this meant that television stations offered the promise of extremely large mass markets. Over the last thirty years, the constraints that held this model in place have eroded. Cable television eliminated the constraint of limited channels, fragmenting the mass market. Video rentals allowed viewers to watch content at their own convenience. The ability to record programs and skip the commercials was later embraced by a public weary of intrusive advertisements. More recently, the internet has facilitated an explosion of “channels” that viewers might look to for entertainment. This relaxation of constraints has fundamentally undermined the networks’ business model. Indeed, the most important dynamic wasn’t network-to-network competition but an invasion from other industries.
The second assumption was that once achieved, advantages are sustainable. Having achieved a solid position within an industry, companies were encouraged to optimize their people, assets, and systems around these advantages. In a world of lasting advantage, it made sense to promote people who were good at running big businesses, operated with greater efficiency, wrung costs out of the system, and otherwise preserved the advantage. Management structures that directed resources and talent to strong core businesses, often called “strategic business units,” were associated with high performance. The core assumption here was that you could optimize your systems and processes around a set of sustainable advantages.
There are indeed examples of advantages that can be sustained, even today. Capitalizing on deep customer relationships, making highly complicated machines such as airplanes, running a mine, and selling daily necessities such as food are all situations in which some companies have been able to exploit an advantage for some time. But in more and more sectors, and for more and more businesses, this is not what the world looks like any more. Music, high technology, travel, communication, consumer electronics, the automobile business, and even education are facing situations in which advantages are copied quickly, technology changes, or customers seek other alternatives and things move on.
The assumption of sustainable advantage creates a bias toward stability that can be deadly. My research suggests that rather than stability being the normal state of things and change being the abnormal thing, it is actually the other way around. Stability, not change, is the state that is most dangerous in highly dynamic competitive environments.
Think about it: the presumption of stability creates all the wrong reflexes. It allows for inertia and power to build up along the lines of an existing business model. It allows people to fall into routines and habits of mind. It creates the conditions for turf wars and organizational rigidity. It inhibits innovation. It tends to foster the denial reaction rather than proactive design of a strategic next step. And yet “change management” is seen as an other-than-normal activity, requiring special attention, training, and resources. A Google search on the phrase “change management” turns up 21,600,000 results—that’s twenty-one million citations.
A preference for equilibrium and stability means that many shifts in the marketplace are met by business leaders denying that these shifts mean anything negative for them. Consider the reaction of executives from Research In Motion (the parent company of BlackBerry devices) to the 2007 introduction of the iPhone. Jim Balsillie, the company’s co-CEO, told a Reuters reporter that the launch of Apple’s iPhone wasn’t a major threat, simply the entry of yet another competitor into the smartphone market.9 Five years later, the company is at risk for its very survival, facing a slew of disappointing product launches, subscriber defection, continuing service outages, and shareholders in open revolt. Its former leaders have been replaced. Yet this company’s products were so beloved by its corporate users that asking them to put away their BlackBerries was like asking them to amputate a limb. What happened? A long track record of relatively stable success caused the ambition to hungrily search for new opportunities to atrophy. Once that’s gone, it’s hard to regain quickly in the face of fast competitive onslaughts.
It’s typical for leaders to deny there is an issue until far too late, at which point there is an “all hands on deck” full-blown crisis. As one of my interview respondents from a major medical device manufacturer observed, “We had seen it coming, and decided to ignore it and put our fingers into our ears until it became so obvious that we could no longer ignore it.” Only then are resources mobilized, teams formed, and a sense of urgency created. Unfortunately, by that time it is often too late. Strategy today instead needs to be based on a new set of assumptions and practices.
One of the biggest changes we need to make in our assumptions is that within-industry competition is the most significant competitive threat. Companies define their most important competitors as other companies within the same industry, meaning those firms offering products that are a close substitute for one another. This is a rather dangerous way to think about competition. In more and more markets, we are seeing industries competing with other industries, business models competing with business models even in the same industry, and entirely new categories emerging out of whole cloth. This is most obvious in those markets that have embraced the digital revolution—just look at the shrinking CD section of your local bookstore (if, of course, your local bookstore is still around) and you’ll see what I mean. Indeed, a reporter for the Wall Street Journal recently observed that if you look at categories of purchases for the average American family, vehicle purchases, apparel and services, entertainment, and food away from home are all shrinking, some at double-digit rates. What’s growing? Spending on telephone services, up by 11 percent since the 2007 introduction of the iPhone.10
It isn’t that industries have stopped being relevant; it’s just that using industry as a level of analysis is often not fine-grained enough to determine what is really going on at the level at which decisions need to be made. A new level of analysis that reflects the connection between market segment, offer, and geographic location at a granular level is needed. I call this an arena. Arenas are characterized by particular connections between customers and solutions, not by the conventional description of offerings that are near substitutes for one another.
To use a military analogy, battles are fought in particular geographic locations, with particular equipment, to beat particular rivals. Increasingly, business strategies need to be formulated with that level of precision. The driver of categorization will in all likelihood be the outcomes that particular customers seek (“jobs to be done”) and the alternative ways those outcomes might be met. This is vital, because the most substantial threats to a given advantage are likely to arise from a peripheral or nonobvious location.
This further raises the issue that a firm may not have a single approach that holds for all the arenas in which it participates. Instead, the approach may be adapted to the particular arena and competitors it is facing. For example, consider the strategy of language-teaching firm Berlitz. As Marcos Justus, their former Brazilian president, told me, in Brazil, competition for the mass market was fierce, but competition for customers in the upper income brackets was less so. There, a strategy of focusing on the upper echelons and positioning the brand as an elite product made sense. In the United States, where the majority of customers are somewhere in the middle, a different positioning featuring convenience and flexibility made sense. These are two different strategies, responding to the exigencies of the two different arenas. Both of these strategies, however, drive Berlitz’s evolution toward the cultural consultancy it aspires to become.
The arena concept also suggests that conventional ideas about what creates a long-lived advantage will change. Product features, new technologies, and the “better mousetrap” sorts of sources of advantage are proving to be less durable than we once thought. Instead, companies are learning to leverage more ephemeral things such as deep customer relationships and the ability to design irreplaceable experiences across multiple arenas. They will be focused on creating capabilities and skills that will be relevant to whatever arenas they happen to find themselves operating in. And they may even be more relaxed about traditional protections and barriers to entry, because competition will devolve around highly intangible and emotional factors.
There is a big difference between thinking about strategy in terms of arenas as opposed to industries. In industry analysis, the goal is often to determine one’s relative position with respect to other players in the same industry. It’s good to have a large market share. And competitive threats are of the traditional kind—moves regarding product introductions, pricing, promotions, and so on. It’s very easy to be blindsided. In the 1980s, for instance, no money-center bank even saw the threat of Merrill Lynch’s cash management account offering because it wasn’t offered by a bank; millions in deposits flew out the door before anybody realized what was going on. More recently, Google’s moves into telephone operating systems and online video have created consternation in traditional phone businesses; retailers such as Walmart are edging into health care; and the entire activity of making payments is being contested by players from a bunch of different industries, including mobile phone operators, internet credit providers, swipe card makers, and, of course, traditional credit and debit card providers.
Although this is oversimplifying things a bit, you can think of traditional strategic analysis as being somewhat like the game of chess, which is quite sophisticated and nuanced but in which the goal is to achieve a powerful competitive advantage in a major market, akin to checkmating one’s opponent. Arena-based strategy is much more akin to the Japanese game of Go, in which the goal is to capture as much territory as possible—the winner in Go lays the strategic groundwork by adroit placement of pieces on a board, eventually capturing enough territory to overwhelm one’s opponent.
The imagery of arena-based strategy is more that of orchestration than of plotting a compelling victory, and implementation on the ground by those actually confronting conditions within a specific arena becomes increasingly important (table 1-1).
TABLE 1-1
Where to compete: industry perspective versus arena perspective
| Industry | Arena | |
| Goal | Positional advantage | Capturing territory |
| Measure of success | Market share | Share of potential opportunity spaces |
| Biggest threat | Intraindustry competitive moves | Interindustry moves; disruption of existing model |
| Definition of customer segment | Demographic or geographic | Behavioral |
| Key drivers | Comparative price, functionality, quality | “Jobs to be done” in total customer experience |
| Likely acquisition behavior | Within-industry consolidation or beyond-industry diversification | Bolt-on for new capability acquisition, often across industry boundaries |
| Metaphor | Chess | Japanese game of Go |
You can think of the evolution of a particular competitive advantage in several phases, as illustrated in figure 1-1. During the launch process, a firm organizes to grasp a new opportunity. During launch, opportunities are identified, resources allocated, and a team is assembled to create something new. This is where innovation comes in.
If the opportunity gets traction, the advantage begins to enjoy a period of ramping up: from the initial few segments, more and more are captured, and the business gains ground. Systems and processes to get the business to scale are implemented. Experiments become full-scale market introductions. Speed is often critical here: ramp up too slowly, and competitors can quickly match what you are doing and destroy your differentiation.
After a successful ramp-up, the company can enjoy a period—sometimes quite a long period—of exploitation, in which the business is operating well and generating reasonable profits. During the exploitation phase of a transient advantage, a firm has established a clear point of differentiation from competitors in a way that its customers appreciate and is enjoying the benefits. During exploitation, market share growth and profitability typically expand, more and more customers are adopting, prices and margins are attractive, and competitors see your organization as the one to beat. The goal is to understand how this period can be extended for as long as possible while simultaneously being mindful that it will eventually erode.
FIGURE 1-1
How to compete: the wave of transient advantage
Managing the exploitation phase well means focusing on those few key areas in which a firm has achieved meaningful competitive separation. Within those spaces, managers need to manage competitive moves and countermoves, build highly scalable competencies for the next innovation, make sure that new advantages are eventually integrated into the firm’s core offerings as a legitimate part of the company, and remain alert to threats and opportunities from different areas. One really wants to prevent excessive build-up of assets and people during the exploitation phase, because these will create barriers to moving on to the next advantage. Even as the existing advantages are generating good results, leaders need to be pulling assets and resources out of them to create resource space for the next advantage, just as Fuji did with its film-based photography business.
With temporary advantages, the existing model will always come under pressure, suggesting the need for reconfiguration and renewal of the advantage (in essence, launching a new wave). The reconfiguration process is central to succeeding in transient-advantage situations, because it is through reconfiguration that assets, people, and capabilities make the transition from one advantage to another. During reconfiguration, teams that might have been engaged to ramp up or exploit an advantage are shifted to some other set of activities, assets are changed or redeployed, and people move from one assignment to the next. Rather than viewing such reorganizations as negative, as they often are in a sustainable-advantage context, they are taken for granted as necessary and useful in a transient-advantage world. Indeed, not having such dynamism in the structures and processes in place in an organization can be seen as negative by the employees.
Finally, when an advantage is exhausted, the opportunity undergoes a process of erosion, suggesting the need for disengagement. Through the disengagement process, a firm disposes of the assets and other capabilities that are no longer relevant to its future, either by selling them, shutting them down, or repurposing them. The objective is to manage this process gracefully and quickly. Long, drawn-out disengagements do little more than consume resources without making the end result any more pleasant. In a transient-advantage context, unlike a conventional one, disengaging is not confused with business failure. Indeed, disengagement can and should take place when a business is still viable, rather than when a desperate organization has no other choice.
In many organizations, the center of gravity is determined so much by the businesses in “exploit” mode that the other parts of this process are neglected. That matters, because different disciplines and skills sets are useful in different parts of this wave. The launch and ramp-up processes require innovators and experimenters who are comfortable with ambiguity and prepared to learn. The exploitation phase needs people who thrive on designing effective processes and making things systematic. The disengagement phase requires those who are good at seeing early evidence of decline and unafraid to make the sometimes-difficult decisions to stop doing something.
In an organization of any complexity, part of the challenge from the strategists’ point of view is that you will have many such waves playing out, in different phases, all at the same time. The job of orchestrating how these waves are managed is increasingly a crucial part of the CEO’s challenge. That is what this book is about.
As part of the research for this book, I set out to find companies that have figured out how to cope, even to thrive, amidst the challenge of moving from one advantage to the next for a reasonably long period of time.
In 2010, my research team tracked down every publicly traded company on any global exchange with a market capitalization of over $1 billion US dollars as of the end of 2009 (4,793 firms). Then we examined how many of these firms had been able to grow revenue or net income by at least 5 percent every year for the preceding five years (in other words, from 2004 to 2009). Note that what we were interested in here was not total returns or compound annual growth, but rather steady annual growth, year in, year out. The reason we picked 5 percent was that global gross domestic product (GDP) growth hovered around 4 percent during this time period, and our thinking was that truly outstanding companies should be able to exceed this level.11 The results were surprising. Only 8 percent of the firms were above the revenue growth threshold of 5 percent every year, and only 4 percent of the firms were above the net income threshold.
“Well,” we thought, “perhaps we’re not being fair—after all, the Great Recession that began in 2008 may have knocked normally well-managed firms for a loop.” So we redid the study, but this time from 2000 to 2004. The numbers were a little better, but not hugely so: 15 percent and 7 percent for revenue and net income, respectively. Now, however, we were intrigued—companies that managed to grow consistently were evidently far from average. We then took the entire ten-year period (from 2000 to 2009) and examined how many firms were able to deliver steady-as-you-go growth. Exactly ten managed to grow net income consistently by at least 5 percent during the study period.
The companies that grew net income consistently were Cognizant Technology Solutions (United States), HDFC Bank (India), FactSet (United States), ACS (Spain), Krka (Slovenia), Infosys (India), Tsingtao Brewery (China), Yahoo! Japan (Japan), Atmos Energy (United States), and Indra Sistemas (Spain). I call this group of extremely unusual firms (0.25 percent of the total) growth outliers because their steady performance, even in the face of massive change and uncertainty, was so unusual (table 1-2).
I took each firm and compared it first with its top three competitors (as indicated by Hoover’s Business Research) and then with each other to glean insights about what allowed these firms to achieve such consistent, steady growth. The major conclusion was that this group of firms was pursuing strategies with a long-term perspective on where they wanted to go, but also with the recognition that whatever they were doing today wasn’t going to drive their future growth. Interestingly, they had identified and implemented ways of combining tremendous internal stability while motivating tremendous external agility, particularly in terms of business models. We will learn more from them—and other companies that seem to have embraced operating in this new environment—as the book unfolds. They are operating with a new playbook for strategy—a playbook based on new assumptions of competing in arenas (not industries alone) and exploiting temporary competitive advantages, not sustainable ones.
TABLE 1-2
How to win: the growth outliers
| Outlier company | Original country | What it does |
| Cognizant Technology Solutions | United States | Founded in 1994 as Dun & Bradstreet’s technology services arm and spun off two years later. Began with primarily application maintenance work. Originally a “tactical source of inexpensive talent,” according to the company website. |
| HDFC Bank | India | Founded in 1994 with the dream of becoming a world-class private Indian bank. |
| FactSet | United States | Founded in 1978 to automate the creation of financial analysis reports for analysts and companies (not individual investors). Began with a short paper report on companies, circulated to a few key clients, called “Company Factset.” |
| ACS | Spain | ACS is a Spanish construction and services provider formed from the merger and revitalization of formerly struggling, separate companies. |
| Krka | Slovenia | Founded in 1954, Krka is a Slovenian pharmaceutical manufacturer expanding from its base to neighboring regional markets. |
| Infosys | India | Founded by six engineers in India in 1981, Infosys began as an India-based information technology services provider with one client. |
| Tsingtao Brewery | China | The Tsingtao Brewery was founded in 1903 by German settlers in Qingdao, China. |
| Yahoo! Japan | Japan | US–based Yahoo! and Tokyo-based Softbank set up internet portal Yahoo! Japan in 1996 as a joint venture. It is an independent, publicly listed company. |
| Atmos Energy | United States | Atmos Energy is the largest gas-only utility in the United States. It has both a regulated arm, which distributes natural gas, and a nonregulated subsidiary, Atmos Energy Services. |
| Indra Sistemas | Spain | Indra Sistemas is a diversified global technology company that operates in a wide range of sectors, including transport and traffic, energy and industry, public administration and health care, financial services, security and defense, and telecommunications and media. |
The end of competitive advantage means that the assumptions that underpin much of what we used to believe about running organizations are deeply flawed. The rest of this book will explore what that means for business leaders and how the world will look different (table 1-3). Some of the new playbook is well understood already, such as the need to pursue innovation (although firms still struggle to get it right in practice). Other elements of the new playbook have received little emphasis in conversations about strategy, such as the practice of continuous reconfiguration and disengagement. I’ll take up those topics first in the discussion that follows, and then spend some time on the more general challenges of the new strategy playbook.
“Continuous Reconfiguration” (chapter 2) explores how companies can build the capability to move from arena to arena, rather than trying to defend existing competitive advantages. Companies that can do this show a remarkable degree of both stability and dynamism. Moving from advantage to advantage is seen as quite normal, not exceptional. Clinging to older advantages is seen as potentially dangerous. Exits are seen as intelligent, and failures as potential harbingers of useful insight. Most important, companies develop a rhythm for moving from arena to arena, with each one being managed as its particular life cycle stage suggests. And rather than the wrenching downsizings and restructurings that are so common in business today, disengagements occur in a steady rhythm, rather than in high dramas.
TABLE 1-3
The new strategy playbook
| From | To | |
| Continuous reconfiguration (chapter 2) | Extreme downsizing or restructuring | Continuous morphing |
| Emphasis on exploitation phase | Equal emphasis on entire wave | |
| Stability or dynamism alone | Stability combined with dynamism | |
| Narrowly defined jobs and roles | Fluidity in allocation of talent | |
| Stable vision, monolithic execution | Stable vision, variety in execution | |
| Healthy disengagement (chapter 3) | Defending an advantage to the bitter end | Ending advantages frequently, formally, and systematically |
| Exit viewed as strategically undesirable | Emphasis on retaining learning from exits | |
| Exits occur unexpectedly and with great drama | Exits occur in a steady rhythm | |
| Focus only on objective facts | Focus on subjective early warnings | |
| Using resource allocation to promote deftness (chapter 4) | Resources held hostage in business units | Key resources under central control |
| Squeezing opportunities into the existing structure | Organizing around opportunities | |
| Attempts to extend the useful life of assets for as long as possible | Aggressive and proactive retirement of competitively obsolete assets | |
| Terminal value | Asset debt | |
| Capital budgeting mind-set | Real options mind-set | |
| Investment-intensive strategic initiatives | Parsimony, parsimony, parsimony | |
| Ownership is key | Access is key | |
| Build it yourself | Leverage external resources | |
| Building an innovation proficiency (chapter 5) | Innovation is episodic | Innovation is an ongoing, systematic process |
| Governance and budgeting done the same way across the business | Governance and budgeting for innovation separate from business as usual | |
| Resources devoted primarily to exploitation | A balanced portfolio of initiatives that support the core, build new platforms, and invest in options | |
| People work on innovation in addition to their day jobs | Resources dedicated to innovation activities | |
| Failure to test assumptions; relatively little learning | Assumptions continually tested; learning informs major business decisions | |
| Failures avoided and not discussable | Intelligent failures encouraged | |
| Planning orientation | Experimental orientation | |
| Begin with our offerings and innovate to extend them to new areas | Begin with customers and innovate to help them get their jobs done | |
| Leadership and mind-set (chapter 6) | Assumption that existing advantages will persist | Assumption that existing advantages will come under pressure |
| Conversations that reinforce existing perspectives | Conversations that candidly question the status quo | |
| Relatively few and homogenous people involved in strategy process | Broader constituencies involved in strategy process, with diverse inputs | |
| Precise but slow | Fast and roughly right | |
| Prediction oriented | Discovery driven | |
| Net present value oriented | Options oriented | |
| Seeking confirmation | Seeking disconfirmation | |
| Talent directed to solving problems | Talent directed to identifying and seizing opportunities | |
| Extending a trajectory | Promoting continual shifts | |
| Accepting a failing trajectory | Picking oneself up quickly | |
| Personal meaning of transient advantage (chapter 7) | Emphasis on analytical strategizing | Emphasis on rapid execution |
| Organizational systems | Individual skills | |
| A stable career path | A series of gigs | |
| Hierarchies and teams | Individual superstars | |
| Infrequent job hunting | Permanent career campaigns | |
| Careers managed by the organization | Careers managed by the individual |
As Sanjay Purohit, the head of planning for Infosys, recounted at a recent Columbia executive education course at which he was a guest speaker, about every two to three years the company reorganizes. By doing this, it breaks up a lot of the inertia and complexity that grow in any organization over time. In addition, it continuously moves people out of projects and activities that do not meet its threshold for continuously adding value into higher-value-added activities. Infosys is quite disciplined about its selection of customers, refusing to serve those who do not help the company to develop new sources of value. Some might question the disorganization and cost of so much reorganizing, to which Sanjay replies, “The cost of reorganizing the company is nothing compared to the growth potential it unleashes. We work out what our new axis of growth will be, then reorganize the company to deliver to these axes.”
One of the most significant differences between the assumption of sustainable competitive advantage and more dynamic strategy is that disengagement—the process of moving out of an exhausted opportunity—is as core to the business as innovation, growth, and exploitation are. Particular arenas are evaluated for withdrawal regularly, rather than advantages being defended to the bitter end. Early warnings are paid heed to, rather than ignored. Disengagement is seen as a way to free up and repurpose valuable resources rather than a dismaying signal of lost glory. Chapter 3, “Healthy Disengagement,” explores this topic.
I asked Makiko Hamabe, Yahoo! Japan’s head of investor relations, about how the company handles disengagement. She suggested that part of what allows this process to work for it is transparency in data about how people are using the service and how profitable it is. All the business heads, she explained, know how to look at traffic numbers to see what is profitable and what isn’t and can also understand when a business creates conflict with key customers. At that point, the decision to exit is well understood and accepted, and people move on to other opportunities.
“Using Resource Allocation to Promote Deftness” (chapter 4) gets at the huge difference a world of transient advantage implies for how you manage assets and how you organize. Access to assets, not ownership of assets, will be a big theme. Assets that are variable and multiuse will in many cases be seen as more attractive than those that are fixed and dedicated. Preventing resources from being held hostage by the leaders of a particular advantage will become more standard as firms become aware of the dangers of a leader hanging on to an old advantage for too long.
One would think that construction and management of large projects would be about as rigid and hierarchical as it gets. And yet ACS’s CEO Florentino Perez maintains that “constructing firms have diversified into activities requiring the same culture as that of the contractor … entering services, infrastructure, concessions and more recently, energy.” ACS was cited as having a pivotal role to play in the restructuring of several sectors in Spain, diversifying into both new industries and new geographies, building flexibility into how those sectors are served now.12
“Building an Innovation Proficiency” (chapter 5) suggests that in a world of temporary advantage, innovation needs to be a continuous, core, well-managed process rather than the episodic and tentative process it is in many companies. An experimental orientation that is open to struggle and the odd failure, a defined process for managing each innovation phase, and career paths for innovators are all likely developments.
HDFC Bank, a rapidly growing Indian bank, stresses the importance of making innovation systematic and something that is on the leadership agenda. As its CEO, Aditya Puri, describes, “We plan our growth across three horizons: one that I can see in front of me; second, what I can see in front of me but will become a big business five years from now; third, at the bottom of the pyramid, which will become a big business, maybe five years from now.”13
Competing in volatile markets has implications for the mind-set leaders bring to their businesses, a topic explored in chapter 6. As the pace of competition becomes faster, decisions that are made quickly and in “roughly right” mode are likely to beat a decision-making process that is more precise, but slower. Prediction and being “right” will be less important than reacting quickly and taking corrective action. And unlike most corporate decision-making processes today, in which people seek out information that suggests they are correct, in a world of transient advantage the most valuable information is often disconfirming—it helps highlight where the greatest risks in being wrong are.
Tales of how hard-headed and candid the leaders in the growth outlier companies are are legendary. Take Cognizant and its CEO, Francisco D’Souza. If former CEO Lakshmi Narayanan is to be believed, there isn’t even a hint of complacency in the way D’Souza sifts through a plan. Says Narayanan, “Any recommendation that goes to him will be challenged. The conclusion will be challenged, the reasoning behind the conclusion will be challenged, the data that supports the reasoning will be challenged, and the source of the data will be challenged. And, on a bad day, the methods and motives of the source will be challenged … [I]t makes everyone think and look at alternatives dispassionately.”14 HDFC Bank’s Aditya has a similar approach: “I tell people, please treat the CEO visit as a dentist visit. There will be pain. While you will get a lot of encouragement, my job is to tell you what’s working and what is not.”15
Finally, chapter 7 will consider what all this means for you, whether you are a leader, an employee, a client, or simply an observer of the scene. One reality is that we are starting to see a two-part world. For some people, the end of competitive advantage is going to mean painful downward adjustments in what they can aspire to at work because they don’t possess rare or valuable skills. They are likely to be vulnerable to organizations’ ruthlessly trimming fixed costs to maximize their own flexibility. For people with valuable, rare, or in-demand skills, however, the rewards are likely to be rich indeed. This last chapter of the book discusses how you should be thinking about your personal career strategy in light of transient advantages.
Before going further, you may want to assess your company’s strategy. Are you trapped in an aging competitive advantage? Are you competing based on outdated assumptions? Find out with the assessment tool in the sidebar. And then enjoy learning how other firms have overcome the challenges.
Assessment
Is Your Company Trapped in a Competitive Advantage?
Good companies can be trapped into aging advantages and be surprised when things change. The diagnostic in table 1-4 can help pinpoint areas in which you might be at risk of being blindsided and suggest changes that you might want to make. Simply position your organization’s current way of working on the scale between the two statements in the assessment. Those areas that fall to the left of the scale are the ones you might want to take a good hard look at.
TABLE 1-4
Our organization’s current way of working
| Focused on extending existing advantages | Scale | Capable of coping with transient advantages |
| Budget, people, and other resources are largely controlled by heads of established businesses. | 1 2 3 4 5 6 7 | Critical resources are controlled by a separate group from those who run businesses. |
| We tend to extend our established advantages if we possibly can. | 1 2 3 4 5 6 7 | We tend to move out of an established advantage early, with the goal of moving on to something new. |
| We don’t have a systematic process for disengaging from a business. | 1 2 3 4 5 6 7 | We have a systematic way of exiting businesses. |
| Disengagements tend to be painful and difficult. | 1 2 3 4 5 6 7 | Disengagements are just part of the normal business cycle. |
| We try to avoid failures, even in uncertain situations. | 1 2 3 4 5 6 7 | We recognize that failures are unavoidable and try to learn from them. |
| We budget annually or for even longer. | 1 2 3 4 5 6 7 | We budget in quick cycles, either quarterly or on a rolling basis. |
| We like to stick to plans once they are formulated. | 1 2 3 4 5 6 7 | We are comfortable with changing our plans as new information comes in. |
| We emphasize optimization in our approach to asset utilization. | 1 2 3 4 5 6 7 | We emphasize flexibility in our approach to asset utilization. |
| Innovation is an on-again, off-again process. | 1 2 3 4 5 6 7 | Innovation is systematic, a core process for us. |
| It is difficult for us to pull resources from a successful business to fund more uncertain opportunities. | 1 2 3 4 5 6 7 | It is quite normal for us to pull resources from a successful business to fund more uncertain opportunities. |
| Our best talent spends most of their time solving problems and handling crises. | 1 2 3 4 5 6 7 | Our best talent spends most of their time working on new opportunities for our organization. |
| We try to keep our organizational structure relatively stable and to fit new ideas into the existing structure. | 1 2 3 4 5 6 7 | We reorganize when new opportunities require a different structure. |
| We tend to emphasize analysis over experimentation. | 1 2 3 4 5 6 7 | We tend to emphasize experimentation over analysis. |
| It isn’t easy to be candid with our senior leaders when something goes wrong. | 1 2 3 4 5 6 7 | We find it very easy to be candid with senior leaders when something goes wrong. |