The End of Competitive Advantage

Innovation is not optional in a world of fleeting advantages. Innovation is competency that needs to be professionally built and managed. Where in years past we often thought of strategy only with respect to existing advantages, in a transient-advantage economy innovation can't be separated from effective strategy.

INTRODUCTION

KEY TAKEAWAYS

• Strategy needs to change because customers and markets are changing faster than ever.
• Strategy is stuck. [.] chances are you'd hear a lot of strategic thinking based on ideas and frameworks designed in, and for, a different era.
• 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.
• 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. [.] 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structures and systems that executives rely on to extract maximum value from a competitive advantage are liabilities -outdated and even dangerous in a fast moving competitive environment.
• Most executives, even when they realize that competitive advantages are going to be ephemeral, are still using strategy frameworks and tools designed for achieving sustainable competitive advantage, not for quickly exploiting and moving in and out of advantages
• 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 different set of disciplines needs to be employed.
• traditional approaches to strategy and innovation weren't keeping pace with the speed of the markets in which they were competing.
• What matters, though, when you have been taken by surprise or something negative occurs, is what you do next.
• It's 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.
• 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.
• advantages are copied quickly, technology changes, or customers seek other alternatives and things move on.
• 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 granular level is needed. 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.
• [..] arena-based strategy is more that of orchestration than of plotting a compelling victory
• The job of orchestrating how these waves are managed is increasingly a crucial part of the CEO's challenge
• "We plan our growth across three horizons; one that I can see front of me; second, what 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."
• The reconfiguration process is the secret sauce of remaining relevant in a situation of temporary advantage, because it is through reconfiguration that assets, people, and capabilities make the transition from one advantage to another
• Organizations that get this right are shape shifters. You don't see dramatic downsizings or restructurings, you don't see people sticking with one role for long periods of time, and you don't see confusion about the company's evolutionary path. p. 28
• Although dynamism and rapid change are all around us, people are not very effective when facing extreme uncertainty - it tends to be paralyzing.
• A second source of stability is the investment these firms make in creating a common identity, culture, and commitment to leadership development. They pay considerable attention to values, culture, and alignment. They also invest in training, training, and more training.
• Another factor in play in companies that can move from one set of advantages to another is that they consciously set out to educate and up-skill their people. "We hire for learnability - we deliberately select people for their capacity to learn new things."
• All too often in companies intent on exploitation, innovation is an afterthought. In the outlier companies, rather than innovation being an episodic, on-again, off-again endeavor, innovation is continuous, mainstream, and part of everyone's job.
• In contrast to their competitors, the outlier firms also appeared to have fewer big, high-risk all-or-nothing bets, which is also consistent with an options orientation.
• Evidence that a business or business model is going into decline is usually quite clear long before it creates a corporate crisis. If one is interested in looking, there is usually a lot of good information to be found.
• The first clear warning sign is when next-generation innovations offer smaller and smaller improvements in the user experience.
• A second clear warning sign is when you start to hear customers saying that new alternatives are increasingly acceptable to them. Or worse, that cheaper alternatives are just as good as what you have to offer and that there is little differentiation between them.
• If you want to shape the way an organization behaves, an extraordinarily robust conclusion from academic research is that the resource allocation process is key. Firms built to thrive under transient-advantage conditions handle resources differently from firms designed for exploitation. In an exploitation-oriented firm, reliable performance, scale, and replication of processes from one place to another make a lot of sense because you can operate more efficiently and gain the benefits of scale. A transient-advantage-oriented firm, on the other hand, allocates resources to promote what I call deftness the ability to reconfigure and change processes with a certain amount of ease, quickly.
• keeping legacy systems running is a major barrier to the reconfiguration that companies need to do to gain deftness, because legacy systems reinforce legacy structures and operations.

"Organizations have habits. And they will cling to their habits at the expense sometimes of their own survival." - Brad Anderson, former CEO of Best Buy

• Established organizations tend to put far too much money behind new ideas, treating them as though they know exactly what will happen, even though they are highly uncertain. One of the unfortunate, consequences is that when things don't go as planned, there is an overwhelming tendency to persist, because the sunk costs look frightening to write off. A more effective approach in uncertain environments is to allow resources to be invested only when uncertainty is reduced
• The companies led by entrepreneurs are often forced, by dint of simply not having a lot of resources, to operate in lean, parsimonious way. To cite MacMillan, "They spend their imaginations before they spend money."
• [Under Armour] The doors of the company's product design area are overshadowed by a sign reading "We Have Not Yet Built Our Defining Product" - a symbol of a company that is keenly aware that advantages can be transient.
• The fundamental problem is that in a world dominated by those pursuing exploitation, the innovation process is light amusement at best, a dangerous threat at worst.
• So, if you want to get it right, innovation needs to be continuous, ongoing, and systematic. Set aside a regular budget for it. Make it part of good people's career paths. Actively manage a portfolio in which innovations are balanced with support for the core business. And build it into the organizational processes that sustain anything else that is important in your company
• The goal of the ideation process is to identify a pipeline of promising ideas that a company might consider as vectors for their innovation effort. It encompasses the processes of analyzing trends, connecting innovations to the corporate strategy, scoping potential market opportunities, and eventually defining arenas in which a company may want to participate. Effective innovation begins with a clear definition of where it should be focused.
• in fast-moving competitive markets an inefficient innovation process could be your undoing.
• The core idea is that the starting point for innovation should be figuring out what outcome customers are really seeking and working backward into how your organization might make that outcome happen. […] the jobs-to-be-done perspective starts with what customers want to accomplish, but can't get done
• Moreover, what many companies don't realize is that crucial aspects of the innovation system require real expertise that needs to be built up over years. Trend analysis, market sizing, options analysis and valuation, designing prototypes, creating discovery driven plans, running pilots, leveraging opportunities, and making the transition to a scalable business are all activities that take time, effort, and experience to get good at. In most companies, there is simply no career path that consistently helps people to develop these skills.
• Innovation is not optional in a world of fleeting advantages. Innovation is competency that needs to be professionally built and managed. Where in years past we often thought of strategy only with respect to existing advantages, in a transient-advantage economy innovation can't be separated from effective strategy.
• Absolute candor and a willingness to accept the idea that a once-successful model needs to change are critical to leadership in a transient-advantage-oriented firm.
• "How do we make sure that bad news travels faster?" It is often surprisingly difficult for senior people to get unfiltered information.
• it makes sense to think about how the offer will evolve in the face of competitive response and user adoption. At Apple, for instance, young designers are expected to mock up how their designs might evolve in a second or third generation. Rather than innovating for a moment, they have a pipeline of innovation ready for subsequent ramp-ups. The idea is that having gone to the trouble of developing deep customer insight, you might want to utilize it in developing a series of innovations.
• people with the skills and capabilities to help organizations surf successive waves are being rewarded more richly than they ever have before.
• Firms now put themselves in the position of being beholden to people who have the rare, valuable knowledge, skills, and connections that help to create new advantages.

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