The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business Hardcover – Jun 4 2013
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Unlocking the secrets of competitiveness In her new book, McGrath debunks the notion of sustainable competitive advantage. It no longer has relevance she says, and instead organizations now need to find ways of leveraging temporary advantages to remain fluid and innovative enough to change tack when those advantages no longer remain.” Decision
There are a number of valuable lessons in The End of Competitive Advantage that IT leaders can heed and inculcate. It also stands as a challenge for them to shed old, reactionary ways of doing business, and instead assume strategies that differentiate their organizations as innovative thought centers.” CIO Digest
intriguing look at the future” BizEd magazine
The End of Competitive Advantage is one of the best business strategy books in recent years. It is readable, well organised and capable of delivering observations that can be absorbed the next strategy meeting. But beyond that it rather importantly updates our assumptions about what will and won't work in that fast moving world.” Engineering and Technology Magazine
The End of Competitive Advantage fits beautifully into the ongoing discussion about what defines successful companies today, and what will continue to in the future.” 800 CEO READ
The book is well written, well argued, assumes knowledge on the part of the reader without sliding into either corporate speak or the long words of academia, and the argument hard to refute... More importantly, the solutions offered here are immediately actionable.” Business Traveller (businesstraveller.com)
ADVANCE PRAISE for The End of Competitive Advantage:
Francisco D’Souza, CEO, Cognizant
If competitive advantage was ever sustainable, that time has passed. McGrath’s book not only captures the shortcomings of traditional, static models, but lays out the tools that fuel leading performance. The End of Competitive Advantage will give you an entirely new perspective on how to think about strategy.”
William D. Green, former Chairman, Accenture
This smart, readable book addresses today’s most significant strategy reality: that we are living in an era of transient advantage. Rita McGrath provides a playbook for this new landscape, showing how you can identify opportunities fast, execute against them at scale, and be unafraid to move on when the situation changes.”
Sanjay Purohit, Senior Vice President, Infosys Ltd.
The urge to hold on to one’s established competitive advantage is a vicious trap. McGrath clearly establishes the factors central to building a dynamic competitive edge for an enterprise of tomorrow. Refreshing, insightful, and a must-read.”
Nancy McKinstry, CEO and Chairman, Executive Board, Wolters Kluwer nv
McGrath’s groundbreaking work is aptly timed for today’s dynamic markets, where winning requires continuous reconfiguration.”
Klaus C. Kleinfeld, Chairman and CEO, Alcoa
The End of Competitive Advantage makes clear that high-performance teams have to stay vigilant. Are your leaders seizing new opportunities or just trying to optimize an outdated strategy? Keep your head up and stay alert, or a transient advantage might pass you by.”
Clayton M. Christensen, Kim B. Clark Professor of Business Administration, Harvard Business School
As a long-time member of the Rita McGrath fan club, I was delighted to see this book. Her approach to strategy is fresh and practical and is exactly what managers need today. It acknowledges competitive realities but shows a clear path forward. It is one of the most illuminating takes on how to deal with disruption that I have ever read.”
About the Author
McGrath has coauthored several popular books, including Discovery-Driven Growth: A Breakthrough Process to Reduce Risk and Seize Opportunity (2009), MarketBusters: 40 Strategic Moves That Drive Exceptional Business Growth (2005), and The Entrepreneurial Mindset: Strategies for Continuously Creating Opportunity in an Age of Uncertainty (2000). In 2009 McGrath was inducted as a Fellow of the Strategic Management Society, an honor accorded to those who have had a significant impact on the field.
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She makes several other important points when asserting that "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 [begin italics] arena [end italics]. Arenas are characterized by particular connections between customers and solutions, not be the conventional description of offerings that are near substitutes for one another." Moreover, companies that compete in several different markets, especially if those markets are both domestic and international, will almost certainly not take the same approach in all or even most of them.
I agree with McGrath: "The imagery of arena-based strategy is more of an orchestration than of plotting a compelling victory, and implementation on the ground by those actually confronting conditions within a specific arena becomes increasingly important.Read more ›
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That sounds good, but obviously doesn't fit any industry with large capital or customer reputation investment requirements - they must have a sustainable niche to ensure worthwhile financial returns. Further, what does a large company such as H-P, with 330,000 employees do when confronted with adversity, a position Meg Whitman finds herself now in? Her predecessor found himself out on the street when he proposed selling off its floundering core PC business that now lacks a sustainable competitive advantage, as author McGrath's thesis might lead one to do. Instead, Whitman declared that H-P was going to start by fixing what it had. (H-P's $19 billion in acquisitions over the past decade have been disasters, not the paths towards new transitory competitive advantages that McGrath proposes.)
McGrath is also too quick to dismiss Michael Porter - he identified the threat of substitutes decades ago. And his concepts of supplier power and buyer power are still essential, even if technology has made competitive advantage less sustainable today. As for the 'empire building' trap she cites - we learned long ago that conglomerates and acquisitions may be good for egos, not so good for ROA. The 'quality trap' - old news, the TQM fad faded almost 20 years ago.
Further, McGrath's focus on 'transitivity' is hardly new - as she herself points out, Blockbuster, Circuit City, broadcast TV, and others (eg. Sears, Borders, G.M., Chrysler, and KMart) have stumbled because others moved into their territory and/or innovated into new segments. I suspect Apple will soon find itself in the same situation - where do you go from relatively high-priced cell-phones and iPads conceived in relatively weak competitive environment, once strong (fast, lower-priced) competitors (eg. Samsung) enter?
However, anything that reinforces the need for leaders to be more alert to new competitors is valuable. For example, Clayton Christensen predicts as more than half our colleges and universities will be bankrupt in 15 years, thanks to massive on-line open courses - yet, many college presidents (including at my alma mater) are doing little to save their schools. McGrath suggests leaders need to changing their thinking from 'competing in industries' to 'competing in areas,' and those areas include near-substitutes. The book does a good job outlining how Fujifilm successfully evolved after facing the innovation of digital cameras, while Kodak did not.
Rather than trying to defend existing competitive advantages, McGrath sees exits as potentially more intelligent. Intel's exiting the DRAM market in 1985 would be a classic example of such. However, in that situation Intel had somewhere to go - the much less cost-competitive CPU market. There it has successfully stayed for almost three decades. Where can Sony, H-P, JCPenney, Sears, KMart go, given their lost lustre and considerable capital investments?
McGrath would likely contend that if they'd followed her prescription of earlier exiting declining sectors today's potential wrenching downsizings and restructurings could have been avoided. She cites Milliken as an example - it moved out of carpets into specialty fibers and additives when attacked by Asian low-cost producers. Perhaps. On the other hand, she provides no data on the financial consequences of it having done so, and neither does Milliken (privately-held). Faced with a fire-sale, such as Whitman's predecessor was, maybe toughing it out is the best alternative.
And don't forget Detroit's lesson. G.M., Chrysler, and Ford all strategically retreated from small cars because they couldn't make money on them vs. the Japanese. However, failing to bite the bullet and make the best they could of that business meant that G.M. and Chrysler almost lost everything. Similarly, maybe H-P needs to hold onto PCs to help it learn lessons that keep it competitive in servers.
Regardless, McGrath suggests that early warnings of fading advantage include customers finding cheaper/simpler solutions that are 'good enough' (Christensen's 'disruptive innovators'), slowing or reversed growth, and sagging profits. She recommends budgeting for quarters instead of years, or even on a rolling basis.
Bottom-Line: 'The End of Competitive Advantage' is basically an overplayed redux of Clayton Christensen's 'disruptive innovation.' Her thoughts simply reflect the evident life-cycle of innovators - they start out with a competitive advantage that allows paying high salaries and good benefits, and then that advantage is competed away by new entrants. Think Henry Ford - evolving from early innovator to commodity producer. En route, he tried moving into airplane production - it didn't work. Personally, I like Meg Whitman's decision to stand her/H-P's ground and fight it out with Lenovo rather than pursue her predecessor's obviously suicidal 'McGrath exit strategy.'
My problem with the book is in three parts:
1. The book provides insufficient argument and data to prove its thesis.
2. The book ignores the fact that Porter’s work was shown to be lacking at least as far back as 2006.
3. The simple analysis and lack of research into what is driving the shift results in trite recommendations.
The usual response to these points is are along the lines of:
. ‘But everyone is using Porter still’ – which is an observations and not an argument.
. They point out that the book is from a professor at Columbia Business School and published by HBR – which is just appealing to credentials.
. ‘But the book is based on lots of analysis’ – which it is, but the analysis is riddled with holes.
Let’s handle the second point first. Do Porter’s theories still work?
Porter’s work on competitive strategy might be one of, if not the most, cited works by business academics. This doesn’t mean that it’s any good.
Academia is riddle with frameworks that either have little or no evidence behind them, or which have been proved to be irrelevant in the modern context. This hasn’t stopped them being used as the foundation for new work.
Abraham Maslow and his pyramid of needs, for example, has been shown to have no basis in fact – it’s just something Maslow made up one day – and yet it’s taught in every b-school in the world. There’s similar problems with business value, technology adoption, and a whole range of topics.
Just because everyone uses Porter’s five forces doesn’t mean it works or has any basis in fact.
As Matthew Stewart pointed out in 2009 in his book The Management Myth, the idea of being able to locate and explot a sustainable competitive advantage was ‘lacking any foundation in fact or logic’. It’s rent seeking of the worst form. There’s an earlier article by the same author from 2006 that points out many of the same flaws. Even earlier in 2000 Pankaj Ghemawat conducted a survey of the history of business strategy which found that ‘In the case of the five forces, a survey of empirical literature in the late 1980s—more than a decade after Porter first developed his framework—revealed that only a few points were strongly supported by the empirical literature generated by the IO [industrial organisation] field.’ The report he drew this from (and which I don’t have in my hands yet) is from 1989.
The market even rejected Porter’s theories conclusively in November 2012 when Monitor Group, the firm that Porter founded to consult around his theories, filed for bankruptcy. As Steve Denning over at Forbes commented:
"Monitor wasn’t killed by any of the five forces of competitive rivalry. Ultimately what killed Monitor was the fact that its customers were no longer willing to buy what Monitor was selling. Monitor was crushed by the single dominant force in today’s marketplace: the customer."
It was Drucker who pointed out that the whole point of a company is to create a customer, not to try and squat in some magical place that would allow a firm to extract rents without any effort. Porter appears to have ignored this.
So no one wanted to buy the sustainable competitive advantage snake oil from Monitor, nor was Monitor able to apply the theory to its own situation and save itself. The idea has no basis in fact, the market rejected it, and it doesn’t work. And all this happened well before The End of Competitive Advantage was written or published.
Let’s set aside the idea that Prof McGrath’s book is the first time that Porter’s theories have been shown to lack potency: clearly she’s a decade or so late to that party.
The second problem I have with the book is the poor quality of the analysis. Generally, the approach used by The End of Competitive Advantage is of the same level as Good to Great, which is another business bible that typically can’t be questioned but is riddled with holes. A lot of data might have been used, but the process is clearly deeply flawed.
The End of Competitive Advantage is built on a set of ‘growth outlier’ companies which out-performed the market. As is stated in the book:
"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)."
These firms were then compared with their top three competitors and then with each other to identify what made them different. (Comparing a firm with its top three competitors is not the same as controlling for natural industry or geography growth, but we’ll let that one slide. At least there was some attempt to normalise the results. We can also set aside the question of why a five year period was used, even though it seems completely arbitrary.) The rest of the book presents what was learned, and provides the reader with some advice and a simple framework that you too can use to copy these growth outliers’ success. (This is why some reviewers think that the book is an extended ad for consulting services, as the information presented is not much more than a teaser.)
As the book states:
"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."
The first issue we can call out with the analysis is a lack of disconfirming research. Consider, for example, if the CEOs of all the growth outliers wore red socks on Tuesdays. We might conclude that wearing red socks on a Tuesday will give us the edge we need. Humans have a natural confirmation bias so when you reach a conclusion you need to ask yourself ‘What would it take to prove this conclusion false?’ Can you find a significant number of firms where the CEO religiously wears red socks on Tuesday and which are not growth outliers? How do we know that the correlation they you’ve found isn’t just a happy accident, and that we’re reading a lot more into it than we should?
Next we have to consider survivorship bias. Someone has to win, but coming out on top does not imply that you were more skilful. There’s a lot of dumb luck in business; it’s not enough to be good at what you do, you need to be at the right place in the right time with the right product(s) and you still need a healthy does of luck. Did the growth outliers survive because they were good at what they do? Or is their success the result of happy accidents that took down their competition, or lucky coincidences that enabled them to leap ahead? Were they in the right places at the right time, moving into Asia when their competitors moved into South America, for example? Someone must survive, but there’s no rule that says that their skill was the only determinant of their survival.
Next we have the unknown unknowns. How do we know that the practices identified by Rita and her team are the right practices? Perhaps some of the outliers were more financially savvy and managed their cash flows better, something which is hard at the best of times and even more challenging in the current turbulent environment, and which is inherently boring. Or perhaps they made a couple of astute (or just plain lucky) bets on which sectors to play in, nudging them past their competition. How do we know the survey or practices was complete? What was the framework used to identify these practices, and link them to changes in the environment. Correlations don’t cut it.
Ultimately, identifying a common set of practices for a set of companies that performed well over a given time period does little more than confirm that over the last time period these companies did well. That was already obvious.
We need to build a model that allows us to feed in long term market trends (increasing competitive intensity, decrease in ROA – at least in the US – blurring of sectors, etc.) and ask questions like, ‘How would these companies have performed three or more periods back in the past, and how might they perform in the future as the market evolves?’. If we’re looking for a change in the market then there should be an earlier time period where these practices were counterproductive. It’s this sort of approach that makes Thomas Piketty’s new book so interesting.
If you’re going to write a book about what to do in the future than you need to do more than point out what worked in the past, even if it’s the recent past. The future, as they say, is a foreign country.
This is also the big mistake that Good to Great made: identify a group of profitable companies that have some shared characteristic, assume that what made them successful in the past will also make them successful in the future, and then call out the common elements from this set of companies. As Freakanomics, put it, a lot of the Good to Great companies went ‘From Good to Great … to Below Average’.
Given all this, the book introduces the idea of ‘areas’ as the basis for competition, rather than industries. Its a nice idea as it allows us to pull more context into our analysis of the market: industries modulated by a few different dimensions, such as geography, demographic, etc.
The concept falls down, though, as it ignores the fact that industry definitions have become fluid. (What? Apple is a PC maker, not a phone maker? And what’s this touch and apps store stuff?) This means that areas must also be a fluid concept, but the book does not look into the dynamics of how areas change. (I expect that this is left as an exercise for the reader, or they assume that you use Porter’s model to evaluate opportunity.)
The model for managing change across areas is a simple launch, ramp-up, sustain, ramp-down, disengage process. This doesn’t account for the pace in the current market. If your competitor can launch a new product in two to six weeks from a standing start (as many companies now can) then, while your carefully thought out launch process taking six months might seem modern, it’s largely irrelevant. There is no insight in the recommendations on what the change in market pace means other than ‘the end of competitive advantage’. (As mentioned earlier, we already knew that.)
The recommendations all but ignore the shift from stocks to flows, which has huge implications for how we think about, organise, govern and manage our business. There is, however, a brief mention to the idea of consuming services rather than building assets, and the book even name-checks Odesk. However, it doesn’t look into the implications that spring out of this. The coverage is only a few spare paragraphs and you’re left wondering if the author doesn’t really know what to make of the topic.
The rest of the book which follows is a fairly straightforward process of working through the stages of the model and providing a few points of sage sounding advice for each stage (‘Rotate you team through departments so that they don’t get comfortable’ type of thing). You’ll either nod and say yes to each of these (the Barnam effect in action) or go ‘meh’. Your mileage might vary.
So, as you can see, my opinion is based on the following pillars:
1. The main thesis that ‘sustainable competitive advantage is over’ is very old news.
2. The analysis is suspect, at least, and doesn’t prove the thesis.
3. The model and recommendations provided hold little value.
For me the book was a waste of money. Use the money to buy a coffee for a friend that you haven’t spoken to in a while; you’ll learn a lot more.
While the content might come from a major b-school and has been written up in respected journals, that doesn’t change the fact that we live on the internet now and we need proof that we can see. As Jay Rosen pointed out the other day, appealing to credentials doesn’t work in this day and age.
A version of this review is also published at [...]
1. William Kremer & Claudia Hammond (31 August 2013), Abraham Maslow and the pyramid that beguiled business, BBC World Service.↑
2. Matthew Stewart (2009), The Management Myth: Management Consulting Past, Present & Largely Bogus, W. W. Norton & Company.↑
3. Matthew Stewart (June 2006), The Management Myth, The Atlantic.↑
4. Pankaj Ghemawat (April 2000), Competition and Business Strategy in Historical Perspective, HBS Comp. & Strategy Working Paper No. 798010.↑
5. Richard Schmalensee, ‘Inter-Industry Studies of Structure and Performance’, in Richard Schmalensee and R. D. Willig, eds., Handbook of Industrial Organization, vol. 2 (Amsterdam: North-Holland, 1989).↑
6. Steve Denning (20 November 2012), What Killed Michael Porter’s Monitor Group? The One Force That Really Matters, Forbes.↑
7. Thomas Piketty (10 March 2014), Capital in the Twenty-First Century, Belknap Press.↑
8. Steven D. Levitt (28 July 2008), From Good to Great … to Below Average, Freakonomics.↑
9. Peter Evans-Greenwood (20 Feburary 2014), Setting Aside the Burdens of the Past, PEG.↑
10. From wikipedia: The Forer effect (also called the Barnum effect after P. T. Barnum’s observation that ‘we’ve got something for everyone’) is the observation that individuals will give high accuracy ratings to descriptions of their personality that supposedly are tailored specifically for them, but are in fact vague and general enough to apply to a wide range of people. This effect can provide a partial explanation for the widespread acceptance of some beliefs and practices, such as astrology, fortune telling, graphology, and some types of personality test.↑
11. Jay Rosen (March 2014), “I want it to be 25 years ago!” Newsweek’s blown cover story on bitcoin, PressThink.↑
Summary: Industries are no longer stable, and companies must be more flexible, dynamic, and innovative.
Kodak and Nokia stuck to what they were good at, their core competences, and branding - and died.
10 companies that have performed well (5%+ revenue or profit growth for 10 consecutive years) are analyzed. It turns out they all have innovation as a pervasive activity - change is the norm, and stability the exception. Trying and fast-failing is routine.
I would rather call this: the only sustainable advantage is being innovative, and take a broader view towards who may be your future competitors, customers, co-workers and ecosystem.
My key takeaway from this book is the concept: Options Inventory. That might become a buzzword.
The current book has the standard characteristics of a HBS Press book: top ranked business school academic writer, wide margins, line spacing above one, a few figures but not too many, great attention paid to a number of success stories. This book competes well with Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant in turning an article into a book. Buy these two books to understand what shallow means.
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