Business Standard

Book Extract: Seize the moment

In times of change companies need to reconfigure existing structures to allocate resources to new opportunities. That can mean wresting control from powerful people, says a new book

Rita Gunther Mcgrath 

A core implication of transient advantage is that what is good for a particular business may not be good for the as a whole. In a traditional company, people who had lots of assets and staff reporting to them were the important people in the company. This idea was reinforced by systems such as the Hay Group's point allocation, in which more pay and power were assumed to go to those managers with bigger operations. Indeed, just recently I was chatting with the head of talent development for a major publishing firm, who believes that this way of rating people is their single biggest obstacle to becoming a more nimble competitor. The bigger-is-better mind-set is deadly in an environment in which advantages come and go. If people feel their authority, power base, and other rewards will be diminished if they move assets or people out of an existing advantage, they will fight tooth and nail to preserve the status quo.

Sony provides a clear cautionary tale. It yielded dominance in portable music to Apple. It ceded leadership in entire display technologies, such as plasma and LED, to other firms. It has no presence in many of today's most exciting technologies, such as touchscreen computing devices. As an insider told me, "Sony was trapped by its own competitive advantages. They wanted to protect their technologies. When customers would ask [former CEO] why the company didn't make plasma or high definition televisions, he would say to them that Trinitron is superior technology." Superior, no matter what the customers said they wanted. Indeed, as far back as 2003, observers were already pointing out the dangers of the "civil war" inside Sony as no one mediated the difference in objectives between the content divisions and the hardware divisions of the company.

Instead of allowing resources to be allocated at the level of individual businesses, a critical condition for competing in transient-advantage situations is to have a governance process for controlling resources that is not under the control of business unit leaders. Recall Sanjay Purohit at Infosys being asked to take resources back that were underemployed - remarkable! Wresting control from powerful people is not always easy, but it is absolutely essential if one is to avoid the organization's interests being subsumed by what is good for an individual leader. In moving Wolters Kluwer from existing business models to digital ones, Nancy McKinstry used control over the capital allocation process as one of her key levers. Indeed, when I asked her what advice she would give to other CEOs faced with such a massive transformation in their business, she said, "My advice to other CEOs is to focus on capital allocation."

Long-term competitive advantage is becoming rare: Rita Gunther Mcgrath
In fast-moving industries, winner in one round of competition is unlikely to be the winner in the next, Rita Gunther Mcgrath tells Ankita Rai

You have turned conventional wisdom on its head by saying there is no such thing as  sustainable competitive advantage. Please explain.
There are still places where companies can preserve a competitive advantage for a long time, it is getting rare. Even industries that were structurally very attractive because they had high entry barriers are finding things are changing for them. For instance,energy distribution sector was perceived very stable. But today we have ‘green’ forces and new battery technologies, which are emerging as a threat to their business model. Also, in fast-moving industries like telecom, winner in one round of competition is unlikely to be the winner in the next.

In the book you have written about ‘the resources as hostage problem’ and described how people fight tooth and nail to preserve the status quo. What strategy should companies adopt to allocate resources?
You need people with a different vantage point than those who are totally within one business. They should have responsibility for monitoring the portfolio and the health of individual businesses within it to determine where resources should go. Sometimes this is the office of the CEO, sometimes the strategy office, but it is important to have a person whose career does not depend on a given business.

You write that ‘disengagement is the new strategy playbook’. When should companies look for early warnings of decline and make an exit decision?
This is part of the process of doing resource allocation in a very systematic way. Early warnings of decline are often all around us. For example, instances like customers are defecting, or saying that cheaper alternatives are good enough, or that there’s a shrinking pool of resources, are signs of decline.

If competitive advantage is dead why should companies innovate?
I think of innovation more broadly than just technology-based product innovation — it can be innovation in customer experience, processes etc. When justifying the cost of innovation, the best argument is that investments in innovation have option value — they open opportunities for a firm that it would not have if the company didn’t make the investment.

Run non-negotiable legacy assets for efficiency
Just as you need to reconfigure existing structures to go after new opportunities, so too you need to deal with the assets tied up with those existing structures. In many cases, they are still important to your organization, but they are no longer growth opportunities. The watchword here is to extract as many resources as you can from running these activities, because they no longer represent opportunity. Further, they can become obstacles to creating a deft because they tend to preserve processes that were designed to support a now-commoditizing business. Deconstructing reward systems, processes, legacy programs, structures, networks, and other elements used to deliver to an old advantage is not going to happen by accident and calls for real leadership. At IBM, for instance, stopping projects such as OS2 and exiting the PC business were both moves that freed up resources, time, and attention to be able to focus on opportunities. The eroding differentiation of legacy assets can sneak up on you if you aren't strategically alert. In past work, I've commented on the fact that what was once exciting and sexy about a product, service, or other offering that companies provide eventually becomes a commoditized nonnegotiable attribute. That means that customers expect something similar from all providers. The dilemma is that these things are often highly expensive table stakes. Not offering them to customers enrages them, but offering them, even offering them exceptionally well, does nothing for you competitively. Network reliability in your cable service, clean beds in hotel rooms, car ignitions that routinely start, restaurants that deliver what you ordered, accurate bills - all these things are hard to do. Because you have to do them but they don't add to margin or gain you market share, the mantra for delivering them has to be to focus on cost savings.

The slide from exciting to nonnegotiable means you need to change how you run the assets that deliver expensive nonnegotiable attributes.

This may be the time to bring in a rock-ribbed exploitation expert to wring every last bit of productivity out of existing assets. This is what happened at Apple when Steve Jobs returned to run the company in 1997 and astonished everybody by moving quickly to instill world-class operating capabilities in the areas of manufacturing, finance, and back office functions.

Reprinted by permission of Harvard Business Review Press. Copyright 2013. All rights reserved.

AUTHOR: Rita Gunther McGrath
PUBLISHER: Harvard Business Review Press
Price: Rs 1,250