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TransienAchieving a sustainable competitiveedge is nearly impossible these days.A playbookfor strategy in a high-velocity world by Rita Günther McGrath

62 Harvard Business R

ARTWORK Tara Donovan, Untitted(Styrofoam Cups), aoo8, Styrofoam cups•and glue, installation dimensions variable

SPOTLIGHT ON STRATEGY FOR TURBULENT TIMES

Each month we illustrateour Spotlight packagewith works from anaccomplished artist. Wehope that the lively, cerebralcreations of these photogra-phers, painters, and instal-lation artists will infuse thepages with additional energyand intelligence and amplifywhat are often complex andabstract concepts.

This month we showcaseTara Donovan, a Brooklyn-based artist known for herlarge sculptures and installa-tions. Donovan, whose workis composed of everydayobjects like pencils andtoothpicks, has explained,

"It's all about perceiving thismaterial from a distance andclose up and how the lightinteracts with it."

View more of the artist'swork at pacegaUery.com.

STRATEGY IS STUCK. For too long the business worldhas been obsessed with the notion of building a sus-tainable competitive advantage. That idea is at thecore of most strategy textbooks; it forms the basisof Warren Buffett's investment strategy; it's centralto the success of companies on the "most admired"lists. I'm not arguing that it's a bad idea—obviously,it's marvelous to compete in a way that others can'timitate. And even today there are companies thatcreate a strong position and defend it for extendedperiods of time—firms such as GE, IKEA, Unilever,Julius Berger, and Swiss Re. But it's now rare for acompany to maintain a truly lasting advantage. Com-petitors and customers have become too unpredict-able, and industries too amorphous. The forces atwork here are familiar: the digital revolution, a "flat"world, fewer barriers to entry, globalization.

Strategy is still useful in turbulent industrieslike consumer electronics, fast-moving consumergoods, television, publishing, photography, and...well, you get the idea. Leaders in these businessescan compete effectively—but not by sticking to thesame old playbook. In a world where a competitiveadvantage often evaporates in less than a year, com-panies can't afford to spend months at a time craft-ing a single long-term strategy. To stay ahead, theyneed to constantly start new strategic initiatives,building and exploiting many transient competitiveadvantages at once. Though individually temporary,these advantages, as a portfolio, can keep companiesin the lead over the long run. Firms that have figuredthis out—such as Milliken & Company, a U.S.-basedtextiles and chemicals company; Cognizant, a globalIT services company; and Brambles, a logistics com-pany based in Austraha—have abandoned the as-sumption that stability in business is the norm. Theydon't even think it should be a goal. Instead, theywork to spark continuous change, avoiding danger-ous rigidity. They view strategy differently—as morefluid, more customer-centric, less industry-bound.And the ways they formulate it—the lens they use todefine the competitive playing field, their methodsfor evaluating new business opportunities, their ap-proach to innovation—are different as well.

I'm hardly the first person to write about howfast-moving competition changes strategy; indeed,I'm building on the work of Ian MacMillan (a long-time coauthor), Kathleen Eisenhardt, Yves Doz,George Stalk, Mikko Kosonen, Richard D'Aveni, PaulNunes, and others. However, the thinking in thisarea—and the reality on the ground—has reached

an inflection point. The field of strategy needs to ac-knowledge what a multitude of practitioners alreadyknow: Sustainable competitive advantage is now theexception, not the rule. Transient advantage is thenew normal.

The Anatomy of a Transient AdvantageAny competitive advantage—whether it lasts twoseasons or two decades—goes through the samelife cycle. (See "The Wave of Transient Advantage.")But when advantages are fleeting, firms must rotatethrough the cycle much more quickly and more often,so they need a deeper understanding of the early andlate stages than they would if they were able to main-tain one strong position for many years.

A competitive advantage begins with a launch pro-cess, in which the organization identifies an oppor-tunity and mobilizes resources to capitalize on it. Inthis phase a company needs people who are capableof filling in blank sheets of paper with ideas, who arecomfortable with experimentation and iteration, andwho probably get bored with the kind of structure re-quired to manage a large, complex organization.

In the next phase, ramp up, the business idea isbrought to scale. This period calls for people who canassemble the right resources at the right time withthe right quality and deliver on the promise of theidea.

Then, if a firm is fortunate, it begins a period of ex-ploitation, in which it captures profits and share, andforces competitors to react. At this point a companyneeds people who are good at M&A, analytical deci-sion making, and efficiency. Traditional establishedcompanies have plenty of talent with this skill set.

Often, the very success of the initiative spawnscompetition, weakening the advantage. So the firmhas to reconfigure what it's doing to keep the advan-tage fresh. For reconfigurations, a firm needs peoplewho aren't afraid to radically rethink business mod-els or resources.

In some cases the advantage is completelyeroded, compelling the company to begin a disen-gagement process in which resources are extractedand reallocated to the next-generation advantage.To manage this process, you need people who can becandid and tough-minded and can make emotion-ally difficult decisions.

For sensible reasons, companies with any degreeof maturity tend to be oriented toward the exploita-tion phase of the life cycle. But as I've suggested, theyneed different skills, metrics, and people to manage

64 Harvard Business Review June 2013

TRANSIENT ADVANTAGE HBR.ORG

The dominant idea in the field of strategy—that successconsists of establishing a unique competitive position,sustained for long periods of time—is no longer relevant formost businesses. They need to embrace the notion of transientadvantage instead, learning to launch new strategic initiativesagain and again, and creating a portfolio of advantages thatcan be built quickly and abandoned just as rapidly. Successwill require a new set of operational capabilities.

the tasks inherent in each stage of an advantage'sdevelopment. And if they're creating a pipeline ofcompetitive advantages, the challenge is even morecomplex, because they'll need to orchestrate manyactivities that are inconsistent with one another.

MOliken & Company is a fascinating example of anorganization that managed to overcome the competi-tive forces that annihilated its industry (albeit over alonger time period than some companies today willbe granted). By 1991 virtually all of Milliken's tradi-tional competitors had vanished, victims of a surge inglobal competition that moved the entire business oftextile manufacturing to Asia. In Milliken, ones seesvery clearly the pattern of entering new, more prom-ising arenas while disengaging from older, exhaustedones. Ultimately, the company exited most of its tex-tile lines, but it did not do so suddenly. It graduallyshut down American plants, starting in the 1980s andcontinuing through 2009. (Every effort was made, asbest I can tell, to reallocate workers who might havesuffered as a result.) At the same time the companywas investing in international expansion, new tech-nologies, zmd new markets, including forays into newarenas to which its capabüities provided access. As aresult, a company that had been largely focused ontextiles and chemicals through the 1960s, and ad-vanced materials and flameproof products throughthe 1990s, had become a leader in specialty materialsand high-IP specialty chemicals by the 2000s.

Facing the Brutal TruthIn a world that values exploitation, people on thefront lines are rarely rewarded for telling powerfulsenior executives that a competitive advantage isfading away. Better to shore up an existing advan-tage for as long as possible, unül the pain becomesso obvious that there is no choice. That's what hap-pened at IBM, Sony, Nokia, Kodak, and a host ofother firms that got themselves into terrible trouble.

despite ample early warnings from those workingwith customers.

To compete in a transient-advantage economy,you must be willing to honestly assess whether cur-rent advantages are at risk. Ask yourself which ofthese statements is true of your company:

• I don't buy my own company's products orservices.

• We're investing at the same or higher levels andnot getting better margins or growth in return.

• Customers are finding cheaper or simpler solu-tions to be "good enough."

• Competition is emerging from places we didn'texpect.

• Customers are no longer excited about what wehave to offer.

• We're not considered a top place to work by thepeople we'd like to hire.

• Some of our very best people are leaving.• Our stock is perpetually undervalued.

THE WAVE OF TRANSIENT ADVANTAGE

Companies in inigin-velocity industries must learn to

cycle rapidly through the stages of competitive advan-

tage. They also need the capacity to develop and manage

a pipeline of initiatives, since many will be short-lived.

LAUNCH RAMP IIP RECOHFieUM DISENBAOE

June 2013 Harvard Business Review 65


If you nodded in agreement with four or more ofthese, that's a clear warning that you may be facingimminent erosion.

But it isn't enough to recognize a problem. Youalso have to abandon many of the traditional notionsabout competitive strategy that will exacerbate thechallenge of strategy reinvention.

Seven Dangerous MisconceptionsMost executives working in a high-velocity settingknow perfectly well that they need to change theirmode of operation. Often, though, deeply embed-ded assumptions can lead companies into traps.Here are the ones I see most often.

The first-mover trap. This is the belief that be-ing first to market and owning assets create a sus-tainable position. In some businesses—like aircraftengines or mining—that's still true. But in most in-dustries a first-mover advantage doesn't last.

The superiority trap. Almost any early-stagetechnology, process, or product won't be as effec-tive as something that's been honed and polishedfor years. Because of that disparity, many compa-nies don't see the need to invest in improving theirestablished offerings—until the upstart innovationsmature, by which time it's often too late for theincumbents.

The quality trap. Many businesses in exploitmode stick with a level of quality higher than cus-tomers are prepared to pay for. When a cheaper, sim-pler offer is good enough, customers will abandonthe incumbent.

The hostage-resources trap. In most compa-nies, executives running big, profitable businessesget to call the shots. These people have no incen-tive to shift resources to new ventures. I rememberholding a Nokia product that was remarkably similarto today's iPad—in about 2004. It hooked up to theinternet, accessed web pages, and even had a rudi-mentary app constellation. Why did Nokia nevercapitalize on this groundbreaking innovation? Be-cause the company's emphasis was on mass-marketphones, and resource allocation decisions weremade accordingly.

The white-space trap. When I ask executivesabout the biggest barriers to innovation, I often hear,

"Well, these things fall between the cracks of our or-ganizational structure." When opportunities don'tfit their structure, firms often simply forgo them in-stead of making the effort to reorganize. For instance,a product manufacturer might pass up potentially


profitable moves into services because they requirecoordination of activities along a customer's experi-ence, rather than by product line.

The empire-building trap. In a lot of compa-nies, the more assets and employees you manage,the better. This system promotes hoarding, bureau-cracy building, and fierce defense of the status quo;it inhibits experimentarion, iterative learning, andrisk taking. And it causes employees who like to donew things to leave.

The sporadic-innovation trap. Many compa-nies do not have a system for creating a pipeline ofnew advantages. As a result, innovation is an on-again, off-again process that is driven by individuals,making it extraordinarily vulnerable to swings in thebusiness cycle.

The assessment "Is Your Company Prepared forthe Transient-Advantage Economy?" wul give you asense of whether your organization is vulnerable tothese traps.

Strategy for Transient Advantage:The New PlaybookCompanies that want to create a portfolio of tran-sient advantages need to make eight major shifts inthe way that they operate.

/•ílí Think about arenas, not industries. One of

i the more cherished ideas in traditional man-agement is that by looking at data about other

firms like yours, you can uncover the right strategyfor your organization. Indeed, one of the most in-fluential strategy frameworks, Michael Porter's fiveforces model, assumes that you are mainly compar-ing your company to others in a similar industry.In today's environment, where industry lines arequickly blurring, this can blindside you.

I've seen untraditional competitors take compa-nies by surprise over and over again. In the 1980s, forinstance, no money-center bank even saw the threatposed by Merrill Lynch's new cash-management ac-counts, because they weren't offered by any bank.Millions in deposits fiew out the door before thebanks realized what was going on. But in recentyears, the phenomenon has become more common.Google's moves into phone operating systems andonline video have created consternation in tradi-tional phone businesses; retailers like Walmart havebegun edging into health care; and the entire activ-ity of making payments is being disrupted by playersfrom a variety of industries, including mobile phone


operators, internet credit providers, and swipe-cardmakers.

Today strategy involves orchestrating competi-tive moves in what I call "arenas." An arena is a com-bination of a customer segment, an offer, and a placein which that offer is delivered. It isn't that indus-tries aren't relevant anymore; it's just that industry-level analysis doesn't give you the full picture. In-deed, the very notion of a transient competitiveadvantage is less about making more money thanyour industry peers, as conventional definitionswould have it, and more about responding to cus-tomers' "jobs to be done" (as Tony Ulwick would callit) in a given space.

Set broad themes, and then let peopleexperiment. The shift to a focus on arenas

k.-OTî— means that you can't analyze your way to anadvantage with armies of junior staffers or consul-tants anymore. Today's gifted strategists examinethe data, certainly, but they also use advanced pat-tern recognition, direct observation, and the inter-pretation of weak signals in the environment to setbroad themes. Within those themes, they free peo-ple to try different approaches and business models.Cognizant, for instance, clearly spells out the com-petitive terrain it would like to claim but permitspeople on the ground considerable latitude withinthat framework. "The Future of Work" is Cognizant'sumbrella term for a host of services intended to helpclients rethink their business models, reinvent theirworkforces, and rewire their operations—all withthe firm's assistance, of course.

^ metrics that support entrepre-neurial growth. When advantages come andgo, conventional metrics can effectively kill off

innovations by imposing decision rules that make nosense. The net present value rule, for instance, as-sumes that you will complete every project you start,that advantages will last for quite a while, and thatthere will even be a "terminal value" left once theyare gone. It leads companies to underinvest in newopportunities.

Instead, firms can use the logic of "real options"to evaluate new moves. A real option is a small in-vestment that conveys the right, but not the obliga-tion, to make a more significant commitment in thefuture. It allows the organization to learn throughtrial and error. Consider the way Intuit has made ex-perimentation a core strategic process, amplifying by

orders of magnitude its ability to venture into newspaces and try new things. As Kaaren Hanson, thecompany's vice president of design innovation, saidat a recent conference at Columbia Business School,the important thing is to "fall in love with the prob-lem you are trying to solve" rather than with the so-lution, and to be comfortable with iteration as youwork toward the answer.

4Focus on experiences and solutions toproblems. As barriers to entry tumble, prod-

: • uct features can be copied in an instant. Evenservice offerings in many industries have becomecommoditized. Once a company has demonstratedthat demand for something exists, competitorsquickly move in. What customers crave—and fewcompanies provide—are well-designed experiencesand complete solutions to their problems. Unfortu-nately, many companies are so internally focusedthat they're oblivious to the customer's experience.You call up your friendly local cable company ortelephone provider and get connected to a robot.The robot wants to know your customer number,which you dutifully provide. Eventually, the robotdecides that your particular problem is too difficultand hands you over to a live person. What's the firstthing the person wants to know? Yup, your customernumber. It's symptomatic of the disjointed and frag-mented way most complex organizations handlecustomers.

Companies skilled at exploiting transient ad-vantage put themselves in their customers' placeand consider the outcome customers are trying toachieve. Australia's Brambles has done a really greatjob of this even though it is in a seemingly dull in-dustry (managing the logistics of pallets and othercontainers). The company realized that one of gro-cers' biggest costs was the labor required to shelvegoods delivered to their stores. Brambles designeda solution: plastic bins that can be filled by growersright in the fields and lifted directly from pallets andplaced on shelves, from which customers can helpthemselves. It has cut labor costs significantly. Bet-ter yet, fruits and vegetables arrive at the point ofpurchase in better shape because they aren't man-handled repeatedly as they go from field to box totruck to warehouse to storage room to shelf. Al-though seemingly low-tech, this initiative and otherslike it have generated substantial profits and steadygrowth for the company—not to mention customers'appreciation.



Transient-advantagefirms seldomengage inrestructuring,downsizing,or massfirings.

5Build strong relationships and networks.One of the few barriers to entry that remainpowerful in a transient-advantage context

has to do with people and their personal networks.Indeed, evidence suggests that the most successfuland sought-after employees are those with the mostrobust networks. Realizing that strong relationshipswith customers are a profound source of advantage,many companies have begun to invest in communi-ties and networks as a way of deepening ties withcustomers. Intuit, for example, has created a spaceon its website where customers can interact, solveone another's problems, and share ideas. The com-pany goes so far as to recognize exemplary problemsolvers with special titles and short profiles of themon the site. Amazon and TripAdvisor both make con-tributions from their communities a core part of thevalue they offer customers. And of course, social net-works have the power to enhance or destroy a firm'scredibility in nanoseconds as customers enjoy anunprecedented ability to connect with one another.

Firms that are skilled at managing networks arealso notable for the way they preserve importantrelationships. Infosys, for instance, is choosy aboutwhich customers it will serve, but it maintains a97% customer retention rate. Sagentia, a technicalconsultancy in the UK, is extremely conscientiousabout making sure that people who are let go remainon good terms with the firm and land well in newpositions. Even at a large industrial company likeGE, the senior leaders spend inordinate amountsof time building and preserving relationships withother firms.

6Avoid brutal restructuring; learn healthydisengagement. In researching firms thateffectively navigate the transient-advantage

economy, I was struck by how seldom they engagedin restructuring, downsizing, or mass firings. In-stead, many of them seemed to continually adjustand readjust their resources. At Infosys, I was told,people don't really believe in "chopping things off."Rather, when an initiative is wound down, they sayit "finds its way to insignificance."

Sometimes, of course, downsizing or suddenshifts can't be avoided. The challenge then is disen-gaging from a business in the least destructive, mostbeneficial way. Netflix's efforts to get out of the DVD-shipping business and into streaming movies, whichits management passionately believes representsthe future, offer an interesting lesson in the wrong

way to do this. In 20U the company's managementmade two decisions that infuriated customers. Itimposed a massive price increase across the board,and it split the DVD and streaming businesses intotwo separate organizations, which forced customersto duplicate their efforts to find and purchase mov-ies. Let's assume that Netflix's leaders are right thateventually the DVD part of the business will shrivelup. How might the firm have exited more gracefully?

Preparing customers to transition away fromold advantages is a lot like getting them to adopt anew product, but in reverse. Not all customers willbe prepared to move at the same rate. There is asequence to which customers you should transitionfirst, second, and so on.

If, rather than raising prices for everybody, Netflixhad selectively offered price discounts to those whowould drop the DVD service, it would have movedthat segment over to the new model. Then it couldhave gone to the "light user" DVD consumers andsuggested that instead of getting a new DVD anytimethey wanted it, they would get one once a month,say, for the same price. If they wanted the instantservice, their prices would go up. That would shiftanother group to lower DVD usage. Then when thosesegments started to realize that all-streaming wasn'tso bad, Netflix could have instituted the big price in-crease for the mainstream buyer. The point is that intrying to force many customers to move faster thanthey were prepared to, the company enraged them.

Get systematic about early-stage inno-vation. If advantages eventually disappear, itonly makes sense to have a process for filling

your pipeline with new ones. This in turn means that,rather than being an on-again, off-again mishmashof projects, your innovation process needs to becarefully orchestrated.

Companies that innovate proficiently managethe process in similar ways. They have a governancestructure suitable for innovation: They set aside aseparate budget and staff for innovation and allowsenior leaders to make go or no-go decisions aboutit outside the planning processes for individual busi-nesses. The earmarked innovation budget, whichgets allocated across projects, means that new initia-tives don't have to compete with established busi-nesses for resources. Such companies also have astrong sense of how innovations fit into the largerportfolio, and a line of sight to initiatives in all differ-ent stages. They hunt systematically for opportuni-



Is Your Company Prepared for theTransient-Advantage Economy?To seize transient advantages, companies need a new mode ofoperations. The diagnostic below can help pinpoint areas wherechange is required. Simply position your organization's currentway of wori<ing between the two statements in the assessment.If you score in the lower part of the range in an area, you mightwant to take a hard look at it.

Focused on extendingexisting advantagesBudge ts , p e o p l e , a n d o t h e r resources are la rge ly , » « 4 5 6 7

c o n t r o l l e d by heads o f es tab l i shed bus inesses

W e t e n d t o e x t e n d o u r e s t a b l i s h e d advan tages

if w e c a n 1 2 3 4 5 6 7

We don't have a process for disengagingfrom a business

Disengagements tend to be painful and difficult

We try to avoid failures, even in uncertain

situations

We budget annually or for even longer

Capable of coping withtran?;ient advantageCritical resources are controlled by a séparaigroup that doesn't run businesses

We tend to move out of an establishedadvantage early, with the goal of moving onto something new

1 2 3 4 5 6 7

1

IWe have a systematic way of exiting businesses

We like to stick to plans once they are

formulated

We emphasize optimization in our approach

to asset utilization

Innovation is an on-again, off-again process

It's difficult for us to pull resources from asuccessful business to fund more uncertainopportunities

Our best people spend most of their timesolving problems and handling crises

We try to keep our organizational structurerelatively stable and to fit new ideas into theexisting structure

We tend to emphasize analysis overexperimentation

It isn't easy to be candid with our senior leaders a a 4 s s 7when something goes wrong

1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7

Disengagements are just part of the normalbusiness cycle

We recognize that failures are unavoidable ;try to learn from them

We budget in quick cycles, either quarterlyor on a rolling basis

I

We are comfortable changing our plans asnew information comes in

We emphasize flexibility in our approach to j

asset utilization

Innovation is an ongoing, systematic coreprocess for us J

It's quite normal for us to pull resources from "a successful business to fund more uncertainopportunities J

IOur best people spend most of their time

working on new opportunities for our

organization

We reorganize when new opportunities requirea different structure

We tend to emphasize experimentation

over analysis

We find it very easy to be candid with senior]leaders when something goes wrong

"IsniorS


SPOTLIGHT ON STRATEGY FOR TURBULENT TIMES HBR.ORG

Speed is paramount. Fast and roughly rightdecision making must replace deliberationsthat are precise but slow.

ties, usually searching beyond the boundaries of thefirm and its R&D department and figuring out whatcustomers are trying to accomplish and how the firmcan help them do it.

8Experiment, iterate, learn. As I've said formany years, a big mistake companies makeall the time is planning new ventures with

the same approaches they use for more-establishedbusinesses. Instead, they need to focus on experi-mentation and learning, and be prepared to make ashift or change emphasis as new discoveries happen.The discovery phase is followed by business modeldefinition and incubation, in which a project takesthe shape of an actual business and may begin pilottests or serving customers. Only once the initiativeis relatively stable and healthy is it ramped up. Alltoo often, in their haste to get commercial traction,companies rush through this phase; as a result what-ever product they introduce has critical flaws. They

"oh, so you're homing from work today."


also spend way too much money before testing thecritical assumptions that will spell success or failure.

Leadership as OrchestrationNo leader could cognitively handle the complexityof scores of individual arenas, all at slightly differentstages of development. What great leaders do is fig-ure out some key directional guidelines, put in placegood processes for core activities such as innovation,and use their influence over a few crucial inflectionpoints to direct the flow of activities in the organi-zation. This requires a new kind of leader—onewho initiates conversations that question, ratherthan reinforce, the status quo. A strong leader seekscontrasting opinions and honest disagreement. Di-versity increasingly becomes a tool for picking upsignals that things may be changing. Broader con-stituencies may well become involved in the strategyprocess.

Finally, transient-advantage leaders recognizethe need for speed. Fast and roughly right decisionmaking will replace deliberations that are precisebut slow. In a world where advantages last for fiveminutes, you can bhnk and miss the window ofopportunity.

ONE THING ABOUT STRATEGY HASN'T CHANGED: I t Sti l l

requires making tough choices about what to doand, even more important, what not to do. Eventhough you are orchestrating scores of arenas, youcan do only so many things. So defining where youwant to compete, how you intend to win, and howyou are going to move from advantage to advantageis critical. While we might be tempted to throw upour hands and say that strategy is no longer useful,I think the opposite conclusion is called for. It's moreimportant than ever. It just isn't about the status quoany longer. Ü H BR Reprint R1306C

R Q Rita Günther McGrath, a professor at ColumbiaM « Business School, researches strategy in uncertain andvolatile environments. She is the author of the book The Endof Competitive Advantage (Harvard Business Review Press,June 2013), from which this article is adapted.

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