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Published: February 17, 2014
 / Spring 2014 / Issue 74

 
 

Rita Gunther McGrath on the End of Competitive Advantage

The Columbia Business School professor says the era of sustainable competitive advantage is being replaced by an age of flexibility. Are you ready?

Rita Gunther McGrath thinks it’s time for most companies to give up their quest to attain strategy’s holy grail: sustainable competitive advantage. Neither theory nor practice of strategy has kept pace with the realities of today’s relatively boundaryless and barrier-free markets, says the associate professor at the Columbia University Graduate School of Business. As a result, the traditional approach of building a business around a competitive advantage and then hunkering down to defend it and milk it for profits no longer makes sense.

This is the core argument in McGrath’s most recent book, The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business (Harvard Business Review Press, 2013), in which she steps squarely into the ring of corporate strategy for the first time. McGrath started out in government 30 years ago, after earning a B.A. in political science from Barnard College and an M.A. in public administration from Columbia’s School of International and Public Affairs. “I took a job with the City of New York that eventually involved automating the City’s purchasing system, which had been manual up to that point,” says McGrath. “That got me interested in large-scale organizational change.”

This Year’s Top Three Strategic Challenges

Rita Gunther McGrath outlines the hot-button issues that companies are facing in 2014.

In 1989, McGrath returned to school, first pursuing her Ph.D. in the Wharton School’s innovative social systems sciences department, which was founded by management iconoclast Russell Ackoff, and then joining Ian C. MacMillan at Wharton’s Sol C. Snider Entrepreneurial Research Center. It was the beginning of an extended collaboration between the two that continued long after McGrath joined the faculty at Columbia’s Graduate School of Business in 1993. McGrath and MacMillan wrote three books together: The Entrepreneurial Mindset: Strategies for Continuously Creating Opportunity in an Age of Uncertainty (Harvard Business School Press, 2000), MarketBusters: 40 Strategic Moves That Drive Exceptional Business Growth (Harvard Business School Press, 2005), and Discovery-Driven Growth: A Breakthrough Process to Reduce Risk and Seize Opportunity (Harvard Business Press, 2009).

Those books’ themes—entrepreneurship, innovation, and growth in fast-moving, uncertain markets—are also woven into The End of Competitive Advantage. “All these pieces of research that I’ve done over the years came together,” says McGrath. “Innovation used to be over there, and strategy was over here, but now they are inseparable. The idea of learning from failure, the notion of studying business portfolios, and the concept of building new capabilities are all linked when you consider the new competitive environment and how companies need to change in order to succeed within it.”

To buttress the core argument in The End of Competitive Advantage, McGrath identified every publicly traded company with a market capitalization of US$1 billion or more—there were 4,793—and eliminated any company that had been unable to grow its net income by at least 5 percent annually from 2000 to 2009 (about 1 percent more than the growth of global GDP during that time). That left just 10 companies, some well known, others less familiar: Atmos Energy, Cog-nizant Technology Solutions, and FactSet in the U.S.; HDFC Bank and Infosys in India; ACS and Indra Sistemas in Spain; Krka in Slovenia; Tsingtao Brewery in China; and Yahoo Japan.

McGrath then compared each company to its top three competitors. The major conclusion: The growth outliers were “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.” They are successful, McGrath wrote, because they are “exploiting temporary competitive advantages, not sustainable ones.”

McGrath spoke recently with strategy+business and described the ramifications of transient competitive advantage on corporate strategy and organizational structure.

 
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