by Rod Collins
Few of us would dispute that we live in a time of great change. In recent years we have witnessed the sudden shrinking or even disappearance of established enterprises such as Blockbuster, Border’s, the Encyclopedia Britannica, Tower Records, and countless newspapers. Each of these once thriving companies became prisoners of their products while they were suddenly and rapidly disrupted by innovative start-ups leveraging the technologies of the digital revolution. While most business leaders readily acknowledge the wide-ranging impact of the technology revolution, too few grasp that this revolution has thrust us into a new world with a completely different set of rules. Consequently they fail to recognize that business in the digital age works very differently from the established norms that guided companies in the industrial age. This failure may represent the single greatest threat to the survival of many companies.
One of the most fundamental rules of industrial age business was the rule of sustainable competitive advantage. According to this rule, the secret to corporate growth and longevity is finding a way to differentiate your products from those of the competitors in your industry and exploiting that difference to sustain the advantage. In her most recent book, The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business, Rita Gunther McGrath explains why this industrial age rule no longer works in a rapidly changing world. McGrath points out that the old rule is based on two foundational assumptions that have become obsolete. The first assumption is that “industry matters most.” This premise is based on the conventional wisdom that a company’s competitors are the other players in its industry. Today, competition can come from anywhere, which is why McGrath proposes a new and broader level of strategic analysis she calls the “arena.”
In contrast to industries, which are prescribed by products made, arenas are defined by customer needs. In the relatively more stable times of industrial age business, company strategy followed the mantra that what we make is what we do. However, the companies who have figured out how to cope with accelerating change—McGrath calls them “outlier companies”—follow a different rule. They focus first on what’s most important to customers and subscribe to the principle that what the customer needs is what we do. McGrath explains, “Arenas are characterized by particular connections between customers and solutions, not by the conventional descriptions of offerings that are near substitutes for one another.”
This shift of focus from industry to arena is critically important because, in a rapidly changing world customer needs continually evolve in response to a steady stream of technological innovations. Thus, any competitive advantage gained is temporary at best. Accordingly, McGrath advises business leaders to become nimble at “transient competitive advantage,” by developing the skills to succeed in volatile and uncertain markets and by redesigning their organizations for speed and innovation.
Designing companies for innovation may be particularly challenging for business leaders seasoned in the ways of traditional management because they will need to radically change their thinking about the relationship of strategy and innovation. In the past, innovation was focused on creating new opportunities and was kept separate from the core operations of the business. Today, the core operations are likely to become the fuel of a company’s demise if they aren’t iteratively renewed or proactively displaced by company-grown innovations. When businesses focus on arenas, strategy and innovation continually reshape each other, products made evolve with the times, and, most importantly, customers don’t suddenly disappear to novel competitors.
Like it or not, we live in a new world with new rules. If business leaders want their companies to be sustainable in a rapidly changing world, they need to understand the most sustainable competitive advantage is not to have a sustainable competitive advantage. Only then will they make sure that their companies never become prisoners of their products.
Rod has more than 30 years of experience in management positions of increasing responsibility in the healthcare industry. Rod is an innovative executive leader with sustained success in achieving financial, operational, and market growth objectives in challenging environments. He has extensive experience in serving as a catalyst for positive change and in building highly collaborative organizations.
Rod is also a member of our Speakers Bureau.
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