Rita Gunther McGrath, tells a story about two oil billionaires and the death of Kodak

I went to see Rita Gunther Mcgrath last night in Nottingham. She was addressing a group of Boots executives on the ideas in her book, ‘The end of competitive advantage’. Would I normally spend 5 hours in a car to hang out with a group of pharmacists? To be honest, probably not, but as Rita will be speaking at Business of Software Conference (28-30th October, Boston), I wanted to meet properly before she spoke. I was so glad that I went – I left buzzing with excitement that she will be opening the conference. Not only is she whip smart and utterly charming, she has a way of explaining things that is up there with Geoffrey Moore and Clayton Christensen. A total rockstar.

Rita Gunther McGrath, The end of competitive advantage

I won’t spoil Rita’s Business of Software talk by sharing some of her ideas here – this talk was a talk for an audience of executives in big organisations. I think she is even more excited about what the implications of this framework for entrepreneurial businesses which is what she will focus on in Boston.

So what’s the big idea?

Rita challenges the orthodoxy that the main thrust of strategy for many years has been built on concept of sustainable advantage where you build a business that creates barriers to entry and exit for competitors that allows companies to milk their advantage for huge profits for many years. The world changes and she illustrates the idea with a story.

Billionaires, silver and the death of Kodak

Kodak and Fuji were once very similar – global brands, well run, highly profitable.

In 1973, two oil and gas billionaires, the Hunt brothers, decided to hedge their exposure to the oil industry by buying silver. By 1980, they had so much silver that they controlled the market, a major ingredient in film and prices skyrocketed, quadrupling in price between 1978 and 1980 (fascinating background here). Kodak and Fuji, at the time were the largest consumers of silver and they were both somewhat panicked.

3 months later, the price dropped back to a more normal level and everyone carried on as normal. Everyone except Fuki. The two global photography behemoths took very different paths.

Fuji realised that what could happen once, could happen again and started to investigate the opportunity for photography to be less dependent on chemistry where they couldn’t control the cost of materials.

Kodak did too – they invented the digital camera after all, but were stuck in a film-based paradigm. Early digital images were obviously pretty poor and in 1990, Kodak announced they had a ‘digital solution’.

The solution was: Film – Scanner – Manipulation – Put on CD – Available to play.

Their digital imaging solution was one that started in the place where they had a clear leadership position. While Kodak invented the digital image but they couldn’t move outside paradigm of existing thinking and processes. At first, digital imaging was a far inferior solution, but the world moves on.

Fuji continued to develop digital imaging as a core part of their activity.

  • Fuji has $87 billion in global revenue in 2012.
  • Kodak is more than a little bit broken.

The film-based competitive advantage for both had existed for decades. Competitive advantage does not last.

Competition outside your industry.

Today, the most important competitor you have may not even exist in your industry. Industries face massive competition from different industries. A recent US study on household spending showed recently that spending on electronics in the US is up whilst spending on eating out and apparel is down. Do people want an iPhone or a better car?

Industries are competing with each other for consumer’s cash.

The background behind the book

Her book was based on a series of case studies considering world’s largest companies ($1billion market cap. Total of 5,000 companies). Only 8% of world’s largest companies could sustain 5% growth for 5 years in a row.

Only 10 companies had been able to sustain 10% growth over year.

  • Tsingtao
  • ACS
  • Indra
  • Atmos Energy
  • Infosys
  • Cognizant
  • Yahoo Japan
  • KRKA
  • Factset
  • HDFC Bank

She set her students on looking at what happened to them when they had layoffs. What happened in a downturn. Couldn’t find any evidence of either. There was however, plenty of evidence of ‘ongoing configuration’ in all of those companies.

Rita’s new playbook for strategy.

1 Continuous Reconfiguration

  • Have to be good at executing the traditional stuff but they also have to be in a state of continuous reconfiguration. Be aware of, hypersensitive to, the environment around you.
  • Verizon – often spooked analysts by discarding existing highly profitable business units and focusing on longer term growth areas. Has paid off in long terms as others have stuck with existing businesses that eventually fail.
  • Pallet manufacturer and distributor Brambles found supermarkets has major issue with handling of e.g. soft fruit. Developed packages that are picked and packed into trays directly. Reduces handling significantly and gets product to market faster. Don’t think of themselves as a pallet distributor, see themselves as solving logistic challenges for customers.

2 Healthy disengagement

  • How do you recognise when things need to change before it is too late to do something about it?

3 Deft resource allocation

  • Powerful people control where the resources go in businesses. They tend to be senior within companies and want to support the status quo – Blackberry’s vast spend on relaunch of BB10 for example. The allocation of resources for the future has to be separated from the people who control the existing profitable lines.

4 Innovation Proficiency

  • Innovation today has to happen faster and more routinely than at times in the past. It cannot be episodic.

5 New leadership mindset

  • More open, candid. “Don’t bring me any surprises” “Don’t bring me problems, bring me solutions”. Total BS. Means the executives only hear about the stuff that really matters when it is obvious to everyone. People in the executive suites need to be more willing to embrace uncertainty and surprises.

Leadership really matters

Alan Mulally, CEO of Ford, noticed when he took office that there were no Fords in the Executive parking lot. Saw this was a problem. Had traffic light system to manage management information. Came in sat down with team who presented a sea of green. “How can you be showing me a sea of green when we will lose $6 billion this year?”

“You can’t manage a secret”

When first guy to break cover after a few meetings and showed red on his dashboard, room went quiet expecting an on the spot firing. Mulally clapped. Floodgates opened. Began the turnaround process.

What does this mean for individual careers and talent?

  • From                                                                    To
  • Organisational systems                                  Individuals skills
  • Sable career path                                              Series of gigs
  • Hierarchies and teams                                    Individual superstars
  • Infrequent job hunting                                   Permanent career campaigns
  • Careers managed by organisation             Careers managed by the individual

Is there any good news in all this?

If you are an entrepreneur, YES! Organisations can’t keep you out. Access to assets, not ownership of assets becomes more important.

If you are an employee, yes if you understand the changing rules of the game.