The end of competitive advantage

But data from the Australian Bureau of Statistics shows us such fast growth innovators are not the norm. Generally the smaller the firm the less they innovate. 

Only 55 per cent of small businesses employing staff of between 5-19 people undertook innovative activity between 2009 and 2010. This figure remains well below the 61 per cent for medium-sized firms and 74 per cent for larger firms (over 200 employees). 

It’s worse for firms with less than five people with just a little over 35 per cent of businesses being innovative. More recent work suggests these numbers have barely changed. 

Now when I sit back and think about this I get really concerned. The pace of change is accelerating. If a company isn’t continually innovating it is going out of business. 

Innovation isn’t really just a one off activity that can be measured once a year by the ABS. In fact you have to think about it constantly. Your vision and strategy now have a shelf life. 

This is the thinking in a book released last year that has been a topic of big discussion around business models. It’s called ‘The End of Competitive Advantage: How to keep your strategy moving as fast as your business’ by Rita Gunther McGrath, who is one of the world’s best thinkers on innovation and strategy. 

This book turns traditional business theory on its head. 

Most business strategy has been based around finding a favourable position in an industry and then exploiting a long term competitive advantage. I have seen it with so many successful businesses in my time at ANZ. They find a niche, write a business plan, articulate the competitive advantage. And then the entrepreneurs work really hard to grow the business, making sure they build up plenty of barriers to entry. And of course when you are successful it gets harder to change because it’s human nature to keep repeating what has worked in the past. 

Under this traditional model innovation is seen as a separate function. You would ask a consultant to run a brainstorm on butcher’s paper. Some ideas might be implemented, most relegated to the bottom draw. 

But all that has to change because in today’s business world competitive advantage is quickly eroded thanks to globalisation and digital disruption.

Instead Professor McGrath talks about ‘transient innovation’: moving from one wave of competitive advantage to the next. To do that you have to think very differently about strategy.

For one, she points out that it was once easy to list on your business plan the companies you see as competition. But boundaries between industries are blurring.

That makes me immediately reflect on my own industry, banking.  Today we don’t just compete against other banks, it may be telecommunication companies, retailers. When companies in one industry are competing with companies from another it creates a new level of complexity for business strategy.

Professor McGrath also makes the point that innovation becomes more imperative so rather than a separate exercise it has to be built into the company routine. That may require a new governance structure and a well thought out plan to get ideas to market.

Now thinking about innovation like that requires a completely different approach to business including different incentives, skill sets and mindsets. And you have to make sure the ideas can be funded to development.

But I love the final point she makes: business owners and executives love to say to staff don’t bring me a problem unless you bring me a solution. Well I know I do! But that can mean you get no surprises until it’s too late.

So the new game plan is to seek out information that challenges assumptions and create an environment where your people can bring you evidence of change without you growling at them for solutions. (Note to self…)

And if it all sounds a bit hard, Professor McGrath says the executives she witnesses who learn to act like this seem to have fun.