Financial executive as secret agent: welcome to the transient advantage economy.

Author:McGrath, Rita Gunther
Position:Growth
 
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Financial executives can be unwitting accomplices in trapping companies in an aging competitive advantage. The concept of competitive advantage has become rote for many U.S. executives ever since Michael Porter penned his 1985 book, but the core assumptions simply no longer hold. In fact, those working with the old rules of strategy will find that fewer of the tools that are their stock-in-trade are useful when competitive advantages are shorter than ever.

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For example, take the time-honored use of discounted cash flow analysis. This technique assumes firstly that you will continue projects to completion. Next, that cash flows can be predicted. And often, there will be a terminal value left over when the project is over.

Each of these assumptions is highly questionable when advantages are short. You may discontinue many projects before ever launching them in an era of rapid change. Cash flows are highly unpredictable in uncertain markets. And in most cases, "terminal value" is going to be negative, because the project invested in has run its course and instead of the assets having value for another purpose, you are actually going to have to pay to get rid of them. Financial executives can, however, be the catalysts for companies to adapt to this new environment.

Financial executives can assume a major leadership role in the "transient advantage" economy. They can make sure that the tools used to assess projects and analyze the health of businesses are suitable for the level of uncertainty the company is facing. They can mobilize understanding of the core business challenges. They can make sure that decisions are being made for strategic, rather than emotional, reasons. And they can use their skills to explain business decisions to critical external stakeholders.

From 'Sustainable' to 'Transient' Advantage

A bit of scene setting: For many decades, the field of corporate strategy has encouraged executives to pursue sustainable competitive advantage. A sustainable advantage was often described in terms of strong firm-level positions in which entry barriers kept would-be imitators from copying an offering, power over buyers and suppliers was strong, the offering was unique so that no substitutes were effective and rivalry within the industry was relatively muted. These factors were identified in Porter's famous "five forces" model of competitive forces that shape strategy. This framework rested on an assumption of more or less steady-state competition between companies and their rivals, usually defined in terms of other firms within their industry.

Though of course basic industry structures would be shaken up now and again, such destabilizing turns of events were relatively rare. This is the world of strategy we have inherited, and it indeed represents fine thinking and analysis. The dilemma is that the conditions that allow for sustainable advantage are present in fewer and fewer parts of the economy.

In today's environment, the transient advantage economy has instead taken over in many sectors. A transient advantage context appears when a particular profitable business model is deprived of profits or made obsolete by an alternative business model that swipes the existing company's resources.

The destruction of old models can be precipitated by many things, among them technological change, the relaxing of old constraints, social shifts and political changes. We've seen this happen in countless industries already--for instance corner office supply, electronics and toy shops made...

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