Author: Rita McGrath

I’ve been researching what allows companies to be successful even when their competitive advantages are short-lived — a phenomenon I call transient advantage. The Regus Group, Ltd., a company that provides many services but is best-known for its offices-for-rent business, is one of many I’ve been studying whose leaders seem comfortable that their current competitive advantages won’t last, and don’t waste too much time clinging on to them once competitors have caught up or the moment has passed.Their success is a great example of how companies can quickly get out of an uncompetitive business, and decisively spot, capture and exploit new opportunities, even as the next one unfolds. What’s their secret? How do they manage from one wave of transient advantage to another?

Regus was founded in 1989, one of a string of businesses started by Mark Dixon, a colorful serial entrepreneur from the UK. His entrepreneurial beginnings weren’t auspicious — a food delivery operation called “Dial-a-Snack” he started upon leaving school failed (as he later said to a reporter, “customers loved it but nobody told me that you had to make a margin”) — leading him to undertake a nomadic life supporting himself with odd jobs such as bartending and selling encyclopedias. He eventually scraped together enough money to buy a “burger van” and spent some years selling hot dogs. Spotting an opportunity in the difficulty he had getting a supply of good buns, he started The Bread Roll Company with £10,000 in savings, eventually selling the business in 1988 for £800,000. He next started what he would call a “flat rental” firm in Brussels. While he was there, inspiration struck at a small cafe. All around him were businesspeople awkwardly taking notes and trying to work amidst shoppers, students and housewives, because they were not near their offices. At that time, if you were working and on the road, the local coffee shop was about your only option for a meeting. The idea for a business centre (as they say) that could be rented on an as-needed basis was born.

The people at Regus, like their founder, recognize that any given competitive advantage is temporary. This wisdom was painfully gained — with the dot.com crash, the US part of the business went into Chapter 11 as the entrepreneurs who rented their facilities themselves went under. Coming out of that experience, Dixon led the company through a reinvention of its business model through new kinds of partnerships with building owners, new product offers such as a members’ club, “Businessworld,” and international expansion to new geographic markets. Today, Regus is present in 95 countries with facilities in 550 cities. It’s listed on the London Stock Exchange and is a constituent of the FTSE 250. It offers a vast number of services, from disaster recovery to “virtual” offices. It moves into and out of geographies and businesses with rhythmic regularity.

One way Regus has addressed the phenomenon of transient advantage is that when scoping out new business opportunities, they assume — even before entering — that any competitive advantage gained there will eventually end. As Rudy Lobo, their Chief Operating Officer explains, at the very moment the company goes after an opportunity, it simultaneously considers what it will take to exit it. Facing short-lived advantages is a way of life. Before they even commit to a property, according to Lobo, they ask “what happens if this doesn’t work?” They then work on that “religiously” (as he says) to take as much risk as possible out of any projects before making a commitment to them. It’s a principle I’ve been teaching for years — if you can de-risk a project, you can move much more aggressively, even if there is some chance of failure.

Regus’ has also exploited the phenomenon of transient advantage in another, even more clever, way — they’ve linked their own success to the increasing prevalence of transient advantages of their customers. By using Regus’ services, companies can keep their costs variable. This frees them up from being saddled with assets that may become obsolete. In addition, Regus can help its clients ramp up quickly should an opportunity prove more attractive than initially thought. It can help small companies seem like big ones; and can help big ones explore new territories and operate as a “virtual” back office for companies on the move. Companies like Regus have much to teach us about how to operate with the logic of transient advantage underpinning a strategy.

One of the dilemmas of firms in rapidly transforming environments is that their ownership structure may get in the way of making tough decisions. Investors in publicly traded companies are understood to desire stable, predictable earnings and growth. But such expectations are unrealistic in many industries. As noted management expert Geoffrey Moore told me with respect to high-velocity competition, “I’m not sure you ever want to be in the public markets.” The problems with public markets and quarter-by-quarter thinking are many, but for companies in fast-changing environments the biggest issue is that public markets are not patient — miss a quarter and the punishment can be severe.

Take Motorola, for instance. Its RAZR thin phone was a huge success in the mid-2000’s, and the market raved. The next few product launches were not nearly as successful and Ed Zander, a CEO who came in during the successful period, was unable to come up with any more hits. The pressure on the company by the investing community (among others) was so severe that it eventually split into two, Motorola Mobility and Motorola Solutions in January of 2011.

One interesting consequence of the indigestion experienced by the public markets over the volatility of strategy in rapidly changing businesses is that we are beginning to see evidence of a sort of division of labor, as it were, between different kinds of investors at different stages of a firm’s lifecycle.

In the early stages, incubation and launch, historically venture capitalists and angels (in addition to the “friends, families and fools” beloved of the entrepreneurship literature) have provided seed funds for organizations to develop an idea. The venture capital industry has now become fairly large and robust. Moreover, firms are often investing in venture capital-type organizations with the hope of striking it lucky with a new technology or offer. We are also increasingly seeing large firms partnering with small ones to provide the resources essential to launch and ramp up. Such a pattern is well established in the pharmaceutical industry as large established firms partner with smaller biotech firms. Such investors are not too concerned with stable earnings. Rather, they invest with an options-oriented motivation, looking for a large payout at some uncertain point in the future.

As a company matures and enters a period of exploiting a competitive advantage, it makes sense for the firm to be publicly traded if it requires the capital. The danger, of course, is that the pressure placed upon management by the drumbeat of investors looking for steady gains can lead to an unwillingness to make the tough calls required to disengage from businesses with declining value. Remember the pillorying Ivan Seidenberg got from the public markets when he moved Verizon out of cash-generating but slow-growing businesses like phone books?

It is far more likely that the hard work of restructuring will be the task of private equity firms, leveraged buyout firms or hedge funds, all of whom have a financial motivation to make whatever disengagement decisions are necessary to profit from the eventual re-sale of a healthier company. Of course, all is not joy and sunshine in this world as sometimes over-leveraged companies fail to create or sustain the capabilities they need to be successful, but in theory it makes sense for a single investor with a reasonably long-term perspective to take on the difficult work of restructuring. Even better would be for management to have done that work without needing a savior to come and do it, but, as we have seen over and over again, being a publicly listed company can make a firm prone to short-termism, which can put off the tough decisions — until it’s too late.

Take the case of Dell, whose attempts to go private have been hotly contested by its investors. As some observers have noted, Michael Dell believes that the massive changes required in the company to bring it back to health and growth would be poorly received by investors. He plans to make significant R&D investments, hire lots of sales people to approach enterprise customers, expand in emerging markets and develop entirely new product categories. As Dell’s public statements have pronounced, these changes will reduce near-term profitability, raise operating and capital expenditures and involve a lot of risk.

So we are left with a quandary. As the pace of competition intensifies, it is going to be harder and harder for companies like Dell to keep a leadership position. And yet, the hunger of public markets for stability and steady profits can prevent leaders from making the very changes that would ensure a firm’s long-term viability. So, how does this get resolved? Do we depend on private equity to help companies clean up obsolete activities? Do we hope that analysts will learn to use different metrics to judge management teams — metrics that realize that with fast-moving markets and short-lived competitive advantages a different set of criteria should be used to gauge performance?

Broadcasters have had it tough in business model terms. The rise of cable and the proliferation of content have shaken off their grip on consumers’ attention and schedules. The vastly expanding worlds of alternatives for entertainment and education have put them in a position of struggling to hang on to audiences. And all this has basically ended the dominance of “appointment TV,” when you would know that a certain show was on at a certain time and clear your calendar to watch it. With the exception of “big event TV,” which includes programs such as the Super Bowl or the American Idol finals, viewers can increasingly customize what they are watching to their own interests and on their own schedules. The future of broadcast is indeed unclear.

The recent National Association of Broadcaster’s annual meeting made at least that much clear. I typically don’t go to this meeting, but was asked to speak this year and decided to stick around afterwards to learn more about the strategies broadcasters are using to remain viable in the face of technological progress and competitive pressures. (Also among the highlights was hearing Dorie Clark talk about her new book on personal branding. Key takeaway: We all need to build a brand!) My key impressions from the conference are, that relative to the folks from the broadband/wireless world where I have a good deal of experience helping executive teams develop new strategies and business models, the broadcasters are a much more fragmented lot, and that the pressures of unbundling (the separate pricing of goods and services as opposed to purchasing them in a package) could conceivably wreak havoc on their business models.

The basic problem is that the constraints which broadcasters have historically used to protect their profits have now been relaxed — or have even disappeared. Indeed, the New York Times recently noted that the profit model for broadcasters is under assault, citing “cracks in the citadel of TV profits.” The issue is that when you sell things in bundles you can charge for a whole bunch of things nobody really wants — customers will pay for the entire bundle in order to get the one or two things they actually want. This worked for years in cable television — give customers hundreds of channels they won’t watch but will pay for anyway in order to obtain ESPN or HBO. It worked in music — make customers purchase an entire album when all they actually want is the hit song. It works in other industries as well, such as education. Think of it — we get charged for a degree, when perhaps all we want is a course or two.

This is exactly what’s happening in the broadcast industry right now. Upstart Aereo has a potentially devastating business model where, using teeny antennas, they snatch “free” content that broadcasters send over the airwaves, then charge customers subscription fees to have that content directed to their own TV sets. While the channels are a lot more limited, the fees are much less than a cable subscription. The broadcasters, obviously, have cried foul, arguing that they pay to create the high-quality content that is re-broadcast and should be compensated for it. Aereo’s argument, which the courts have so far supported, is that those signals are free for the taking and that all they are doing is offering a sort of souped up set of rabbit ears to their customers. To understand just how disruptive this is, consider one of the more dramatic moments of the conference when News Corp.’s president, Chase Carey, very calmly said that if the networks lose the right to charge re-transmission fees, they would consider abandoning the business model of sending content over the airwaves and instead adopt a pay-only model.

Once the bundled model begins to erode, consumers flee it to go to a model where they are buying only what they want. That’s what happened in music, fundamentally transforming the nature of the business. Increasingly, that’s what’s happening with movies, as video on demand and streaming fundamentally shift power to consumers. So, will broadcasters be able to throw up the barricades and keep the bundled model going strong? My guess is not. It will be interesting to watch and see what happens.

Ron Johnson’s office seat has barely cooled off following his departure as business observers everywhere dissect what went so dreadfully wrong at J.C. Penney. The former Apple executive was too Silicon Valley for the Plano, Texas, retailer. He was arrogant. He didn’t test his ideas, maintaining the Apple mantra that customers don’t know what they want until you show it to them. He approved marketing campaigns that told loyal Penney’s shoppers that “you deserve to look better,” basically telling them that they looked less than glamorous wearing the brand they had trusted and been comfortable with for years. He hoarded information so that individual store merchandisers didn’t know how various lines were performing. He mocked J.C. Penney’s ways of doing things. He abandoned the discounting customers had come to expect from retailers. And he, and most of the team he recruited, were commuter leaders, jetting back to California after cramming in marathon work sessions at headquarters.

These factors certainly couldn’t have helped. I think, however, there’s one major reason behind J.C. Penney’s sudden swoon that not enough commentators are picking up on. There’s one big reason JCP would never be “Bloomingdale’s for the mass market,” as Johnson wanted it to be, and that’s because the mass market is gone. Because the middle class is gone, or at least rapidly going.

This reflects a troubling development in our economy, what some have termed the “hourglass economy.” This means that companies can reach both high-end and low-end consumers, but there’s no longer a broad middle to appeal to.

For years, a fundamental problem that Penney’s has grappled with is that their historical base of middle-income households is shrinking. If you compare charts showing how various slices of our economy are doing, you’d see growth at the bottom and growth at the top of the income spectrum, and shrinkage in the middle. Penney’s is not going to be able to overcome a demographic reality that is causing its historical customer base to go away. Indeed, economic forces are leading many employers of what would at one point have been middle-class jobs to push the economic risks to their employees, further limiting their disposable spending capacity.

That doesn’t mean JCP is doomed. In 2004, former CEO Alan Questrom was applauded for turning around the store which had hit on hard times. He was replaced by the soon-to-once-again-take-the-reins Myron Ullman, who managed to continue the store’s evolution, introducing more hip brands and giving shoppers a reason to turn up. Among his more interesting initiatives was to leverage capabilities that Penney’s had long developed as a catalog company into the emerging world of Internet retail. Indeed, in 2009, reporters at Businessweek admiringly observed that J.C. Penney “gets” the net, holding its own even against competitors such as Kohl’s and Target. He was widely regarded to have led a successful strategy by the time Penney’s board, seeking something new, turned to Johnson.

But Kohl’s and Target, like Walmart, appeal to the growing segment of consumers at the lower end of America’s economic spectrum. If JCP continues to focus on the shrinking middle class, it’s only reasonable to assume their sales will also continue to shrink. I think Penney’s management needs to once again get back into the heads of its core consumers. They need to understand those consumers’ entire sets of experiences and make doing business with Penney’s better again. But they also need to decide where they are going to find growth again. In an hourglass economy, it’s unlikely to be their traditional middle-income consumer. Who could they appeal to and how? I’d consider things like making life easier for super-stressed moms. Perhaps considering the whole household in their approach (the company is big in household goods) — maybe even offering services that would help newly formed households get set up. Skinny jeans and Euro-fashions don’t strike me as the route to the future.

I recently wrote a blog post about the forces of competition and market change that are affecting the legal profession, causing many firms to now take the once unthinkable step of letting even senior partners go if they can’t produce sufficient revenues to contribute to the firm’s bottom lines (as reported in the Wall Street Journal).

Ironically, there was another article in that same issue of the Journal that hit a little closer to home — about the diminishing returns to the investment in an MBA degree. Entitled “For Newly Minted M.B.A.s, a Smaller Paycheck Awaits,” the article describes a phenomenon that I’ve been predicting for some time, which is that as the number of MBA degrees granted grows, the degree itself becomes commoditized and loses its differentiation.

Grow it has — the Journal reported that the US awarded 126,214 masters of business administration in the 2010-2011 school year, 74% more than ten years prior. The same pattern seems to apply as with law schools — since professional degree programs are highly attractive (and profitable) for universities, more and more schools entered the market, producing more and more graduates. Today, just as it isn’t clear whether there is sufficient demand for all those young lawyers, it’s not clear that there is sufficient demand for all those MBAs. Moreover, employers who used to be willing to pay a price premium for a degree candidate are seeking instead those with relevant working experience.

Related trends are the rise in high-quality international MBA programs (compounded with immigration policies that make it very difficult for students to study in the U.S.); competition from one-year, more focused courses (such as one-year degrees in finance, which are increasingly popular); and the ability to obtain somewhat substitutable credentials of other kinds.

What can we predict? That just as with law schools, business schools without some strong form of differentiation or demonstrable value-added will find it increasingly difficult to stay in the business. Just as astonished senior partners in law firms learned that when the economics don’t work neither does lifetime employment, so too will astonished tenured professors. If your school goes out of business, tenure doesn’t mean much. In the short-term, admissions offices, scared about their ratings dropping, will increasingly focus on how “employable” a candidate will be after graduation, rather than the more traditional emphasis on academic accomplishments and future potential. And, as major absorbers of MBAs, such as financial institutions, cut back or are regulated to shrink, the lust-inspiring starting salaries and sign-on bonuses of yore are likely to be more rare.

In the longer run, my hope is that these competitive pressures and shifts will lead to some interesting new models for business schools. One I am following with particular focus is how schools are changing to create value for executives throughout their careers, rather than just at the ages of about 26-28. Executive education, to me, is at the forefront of innovation in how the study of business and the practice of business can be mutually informed. I think that is a positive trend that is likely to accelerate.