The reconfiguration process is the secret sauce of remaining relevant in a situation of temporary advantage, because it is through reconfiguration that assets, people, and capabilities make the transition from one advantage to another (table 2-1). Because this is quite different from the thinking in conventional strategy, I thought it would make a suitable point of departure for the rest of the book. Organizations that get this right are shape shifters. You don’t see dramatic downsizings or restructurings, you don’t see people sticking with one role for long periods of time, and you don’t see confusion about the company’s evolutionary path. Instead, there is a consistent reevaluation of current activities with the understanding that some may need to give way to new ones.
TABLE 2-1
The new strategy playbook: reconfiguration
| From | To |
| Extreme downsizing and restructuring | Continuous morphing and changing |
| Bulk of emphasis on arenas in exploitation phase | Equal emphasis on all phases of a competitive life cycle within an arena |
| Stability or dynamism alone | Stability combined with dynamism |
| Narrowly defined jobs and roles | Fluidity in allocation of talent |
| Stable vision, monolithic execution | Stable vision, variety in execution |
A pattern to look for in organizations that have mastered transient-advantage environments is the continual freeing up of resources from old advantages in order to fund the development of new ones. For instance, Infosys moved its talent and people out of a business model that largely leveraged low-cost Indian labor into new business models that included services such as independent software testing and enterprise applications. Alan Mullally, the CEO of Ford Motor Company, announced that, although it would close its iconic Mercury brand (which went from selling 580,000 cars in its peak year, 1978, to just 92,000 in 2009), it would plow the resources freed up into its Lincoln and other brands. Telephone operator Verizon extracted resources from cash-generating but low-growth arenas such as telephone books and landlines to grow businesses based on fiber optic service technology (FIOS) and wireless connectivity.1
A fascinating case of a company that managed to overcome competitive forces that have decimated its entire industry is Milliken & Company, a privately held textile business. I was first introduced to the company by a participant in one of my courses at Columbia. He talked about “Mr. Milliken,” the company’s then-CEO, with a fervor usually reserved for cult figures or rock stars. Upon studying the company, it becomes clear why their leader inspired such enthusiasm. All of Milliken’s traditional competitors have vanished, victims of a surge in global competition that essentially moved the entire business of textile manufacturing to Asia—by 1991, 58 percent of all fabric and apparel sold at retail in the United States was imported.2 Roger Milliken, who originally tried to stem the tide of imports with aggressive public relations and lobbying activities (indeed, he founded the influential “Crafted with Pride in the USA” campaign), eventually decided that the future lay in reconfiguration of the company’s business.3 It had a long history of innovative activities, beginning with the establishment of its first research center in 1958 and the adoption of management practices so innovative that the company routinely won awards for its cutting-edge ideas.
In Milliken, one sees very clearly the pattern of entering new, more promising arenas even as it disengages from older and exhausted ones. Although it eventually did exit most of its traditional textile lines, it did not do so suddenly. As foreign competition launched its assault on American markets in the 1980s and 1990s, Milliken engaged in a steady number of plant closures. Despite its efforts to modernize its plants and make them competitive, one sees a gradual withdrawal from those arenas, with seven plant closings in the 1980s, several more in the 1990s, two in 2003, another in 2008, and the disposal of an automotive body cloth division in 2009. Every effort was made, as best I can tell, to reallocate the workers who suffered as a result. At the same time, Milliken invested in international expansion, new technologies, and new markets, including forays into new arenas to which its capabilities gave access. As a favorable Wall Street Journal article observed in January 2012, “Milliken makes the fabric that reinforces duct tape, the additives that make refrigerator food containers clear and children’s art markers washable, the products that make mattresses fire resistant, countertops antimicrobial, windmills lighter and combat gear protective.”4
FIGURE 2-1
Milliken’s reconfiguration path
Visually, you can think of Milliken’s reconfiguration path along the lines shown in figure 2-1. At the same time, Milliken prided itself on maintaining a legendary corporate culture, heavy on training and internal development, employee engagement, and deep pride in the company’s accomplishments. If Milliken could transform its model from textiles to high-technology, there is hope for other organizations facing decline as well.
Reed Hastings, the CEO of Netflix, has been pilloried in the business press for making a couple of reconfiguration moves that infuriated customers.5 The first was a big price increase in the summer of 2010. The idea was to give Netflix enough cash flow to acquire more content as well as to cover the costs of shipping DVDs in a world going increasingly digital. The resulting furor had many subscribers desert the company. That move was followed by one that caused over half a million to abandon ship—a decision to split the streaming and DVD services into two separate companies. The new, streaming-oriented part of the firm would continue under the Netflix name. The DVD business would be dubbed “Qwickster” and would have its own website, corporate structure, and separate management. That idea made customers so angry that Hastings joked at a weekend off-site meeting that he probably should get a food taster. A speedy retreat ensued, with the idea for the Qwickster service dropped.
Although there is much to be critical about in the way these decisions were handled and communicated, the Netflix story illustrates a fundamental dilemma when competitive advantages shift: What do you do when the early warning signs of an eroding advantage make themselves known? How do you reconfigure the organization to simultaneously disengage from the original advantage while moving resources into the next one?
In the case of Netflix, Hastings is convinced that streaming is going to be the preferred vehicle for users to access content, whatever device they happen to use to do this. The DVD business, by extension, is not going to be the core of Netflix’s future destiny. If you believe this, parting the two areas makes sense. The job of the Netflix leadership would be to manage rapid growth and access to digital content, whereas the job of the Qwickster leadership would be to manage the business for profits for as long as it lasts and squeeze economies out of it. Two contradictory activities. From a company point of view, it makes perfect sense.
Here’s the problem, though. From a customer point of view, the switch was infuriating. Customers were used to populating their “queues” of movies and other content in one place, and were enraged at the idea that they would be required to duplicate that effort if they continued to want access to both formats. Further, the movie choices in the DVD area were vastly richer than those available to stream, creating even more frustration because users would need to check both places to see where they could get what they were looking for. And content providers, wary of Netflix proving disruptive to things such as expensive cable television subscriptions, were not particularly interested in Netflix’s streaming offering being competitive with their networks.
The verdict is still out. To me, although the move to reduce dependence on the DVD business makes sense over the long haul, it was attempted too quickly. Critical though one might be of the DVD-to-streaming transition, Netflix is managing transitions in other realms with more skill. It has, for instance, reduced its dependence on movies to begin to offer television shows and even original programming. We’ll have a look at how Netflix might have managed disengagement from the DVD business more gracefully in the next chapter.
Some firms seem to be able to manage business model transitions with reasonable grace. Recall the growth outliers from the opening chapter, a rare group of ten firms, out of nearly five thousand, that had managed to maintain steady growth rates despite huge upheavals in markets, economies, and industries in the period from 1999 to 2009 (table 2-2). A major conclusion from this study is that this group of firms had identified and implemented ways of combining tremendous internal stability while motivating tremendous external agility, particularly in terms of business models. Let’s consider how they—and other companies with good track records of navigating from advantage to advantage—combine stability with dynamism.
TABLE 2-2
The growth outliers
| Growth outlier | Industry | Headquarters country | Founding year | Market capitalization (USD MM), year ending 2009 | Number of employees (2009) |
| Infosys | IT consulting and other services | India | 1981 | $31,894 | 113,800 |
| Yahoo! Japan | internet software and services | Japan | 1996 | $20,334 | 4,882 |
| HDFC Bank | Diversified banks | India | 1994 | $16,554 | 51,888 |
| ACS (Activedades Construccion y Servicios) | Construction and engineering | Spain | 1983 | $15,525 | 142,176 |
| Cognizant Technology Solutions | IT consulting and other services | United States | 1994 | $13,312 | 78,400 |
| Tsingtao Brewery | Brewers | China | 1903 | $7,214 | 33,839 |
| Indra Sistemas | IT consulting and other services | Spain | 1921 | $3,666 | 26,175 |
| Krka dd Novo Mesto | Pharmaceuticals | Slovenia | 1954 | $3,186 | 7,975 |
| FactSet | Application software | United States | 1978 | $3,009 | 4,116 |
| Atmos Energy Corporation | Gas utilities | United States | 1906 | $2,614 | 4,913 |
Although dynamism and rapid change are all around us, people are not very effective when facing extreme uncertainty—it tends to be paralyzing. The outliers, therefore, have crafted social architectures that bound the amount of uncertainty and change their people have to face. Indeed, in the outlier companies, employees actually spent less time worrying about organizational roles and structures than people in many of the typical organizations I’ve worked with.
Common to the outlier firms was a public commitment to world-class ambition, coupled with a clear sense of strategic direction in every case. This is reflected in the reviews given to them by analysts and external observers as reference companies. It’s almost tedious to read the descriptions: the phrases “well managed,” “best practices,” and “benchmarks” come up over and over again. Relative to competitors, their leadership appears to have outsize ambition, which sets the bar high. Their leadership also promotes common key themes that are the result of a compelling strategy diagnosis. At Infosys, for instance, the leaders talk about Infosys 1.0 (basically labor arbitrage), Infosys 2.0 (global expansion into services), and now the emergence of Infosys 3.0.
HDFC Bank was founded with the explicit intention of becoming a truly global Indian bank with best-practice standards in all of its operations. As its website proclaims, “HDFC Bank began operations in 1995 with a simple mission: to be a ‘World-class Indian Bank’. We realised that only a single-minded focus on product quality and service excellence would help us get there.” At Infosys, the founding team was determined to create a modern Indian company with transparent and globally acceptable practices (its CEO was recognized in 2009 as one of the fifty most influential management thinkers in the world by Thinkers50, a management award). Cognizant was “born global” as an offshoot of Dun & Bradstreet and built ambitious growth targets into its strategy from the start. Krka is ambitiously expanding far from its Eastern European roots, with investments and partnerships across the globe (including partnerships in China and other countries to support the expansion of its capabilities). Atmos Energy set itself the goal of achieving world-class efficiency in the regulated part of its gas generation business and steady growth in its unregulated units. ACS proudly notes that it is “a world reference in the promotion, development, construction and management of infrastructures and services of all types.”6
Unsurprisingly, references to awards and recognition are to be found liberally festooning the companies’ corporate websites. HDFC Bank features an entire section dedicated to awards. It lists thirty-four awards for 2010 alone. Note the subtle symbolism: nobody in leadership would like to be in charge in a year for which no awards were listed. Infosys regularly places in the top of rankings such as Fortune’s Top 10 companies for leaders. FactSet has been featured in the Fortune 100 list of best companies to work for, BusinessWeek’s ranking of places to start a career, and so on. Indra Sistemas won Computerworld’s best service company award in 2007. It is also acknowledged as one of the world’s “most ethical companies,” an award it won in 2010 after a string of “most sustainable” awards. Krka proudly proclaims that it has won the Golden Otis Award of Trust for its products, an award in which consumers indicate which brands they trust most. The key point here is that the strategies for each of these companies were grounded in a compelling ambition for the firm, an ambition that provides an aiming point for their people.
The finding that stretch ambitions are important to long-term reconfiguration is consistent with what other observers have concluded is essential for preventing companies from becoming complacent and content to pursue yesterday’s advantages. Mikko Kosonen, for instance, a long-time Nokia senior executive during its glory days and now a consultant and professor, argues that stretch, instability, and multidimensionality are crucial to keep a company from getting stuck. As he noted in an interview with me, “Stretch and contradictory goals are important,” as are mechanisms to keep complacency at bay, such as moving people around to facilitate their looking at the business in different ways from different vantage points.
A second source of stability is the investment these firms make in creating a common identity, culture, and commitment to leadership development. They pay considerable attention to values, culture, and alignment. They also invest in training, training, and more training.
A recent MBA thesis examining the culture of HDFC Bank found that its employees generally scored the firm highly on cultural values such as organizational effectiveness, employee engagement, and a supportive culture.7 At FactSet, the culture is promoted on its website as a key draw for potential employees to work with the firm. ACS’s chairman in a recent annual report emphasized “recruiting and retaining the best talent” as one of four “vectors” for the firm’s strategy. Bob Best, the then-CEO of Atmos Energy, decided in 1997 that the creation of culture and shared values was going to be a differentiator for the firm. As he put it, “I do think that creating the right foundation for your culture allows you to make changes as you need to make changes. Culture is the foundation for all success. This has been a very important process to the long-term health and success of our company.”8
Another factor in play in companies that can move from one set of advantages to another is that they consciously set out to educate and up-skill their people. Kris Gopalakrishnan of Infosys explained that the company places a heavy emphasis on training. When I asked him how the company moves people from advantage to advantage, he said, “We hire for learnability—we deliberately select people for their capacity to learn new things.” As he observes, at any given time Infosys has about 80 percent of its people deployed in some way, which is good because that is how it makes money. With the 20 percent of time that is not being used for deployment, employees are expected to take advantage of education and training opportunities so that their skills can be kept upgraded and they can potentially be moved from one kind of advantage to another. Infosys is famous for its Infosys Education Center, a $120 million facility that has the capacity to train 13,500 candidates at a time.
Smart companies recognize that continuous training and development is a mechanism to avoid having to fire people when competitive conditions shift, and they invest in training even as they pursue deployment. Take CLS Communication. This Swiss-based provider of language services was originally a spinoff of the in-house translation services of Swiss Bank Corporation and Zurich Financial Services in 1997. Since then, it has been growing rapidly, even as the underlying technologies for its core businesses of writing, editing, and translation have undergone tremendous shifts. I asked its CEO, Doris Albisser, how she handles the human side of business model and technology shifts. She emphasized continuous training and also moving people around the firm as needs changed. She mentioned training specifically in conjunction with the introduction of a new technology—machine translation coupled with text databases. Although her own people resisted adopting the new approach, they finally achieved a breakthrough when one of the more senior translators actually started training the others.
The point is that when you realize that shifts are inevitable, training people to be able to move from advantage to advantage becomes a cost of doing business. It’s just as important a bill to pay as the one you pay to keep the lights on and the computers running. Investing in people’s capacity to move around removes a tremendous barrier to change and suggests a redirection of emphasis from pure deployment to creating transition capability.
The stability of the outlier firms’ strategy statements through the course of our study period is remarkable. This was a tumultuous time that began with the internet bubble bursting and included the tragedy of 9/11, the global housing and credit bubbles, the introduction of the euro, wars in Iraq and Afghanistan, the explosion of the internet as a vehicle for commerce, and the great recession of 2008. Yet, these firms appear not to have internalized the chaos in their environments. Interviews with their leaders are peppered with references to a few clear and simple strategic priorities, to the importance of building culture and developing talent, and to leveraging a few core capabilities. The CEOs and executive teams create a tremendous force for stability, even in the midst of major change.
At Tsingtao Brewery, for instance, despite the sudden death of its hard-driving CEO in 2001, subsequent leaders committed to following through on his international expansion strategy. The then-CEO of Spain’s ACS at its 1983 founding expressed his commitment to making it Spain’s most profitable public construction company. Today, that strategy continues with the company’s stated objective of being a leader in “both civil and industrial engineering projects.” Atmos Energy is today executing the strategy articulated by its former CEO in 1997, leveraging efficiency in its regulated business and driving growth in its unregulated businesses. FactSet’s strategy statement has not changed at all since its founding, despite massive shifts in underlying technologies and an explosion of information relevant to its key clients.
Senior leadership at the companies was also for the most part stable. For all ten companies we studied, the current most senior executive was promoted from an internal position. There were no white knights and no outside-the-industry saviors. Interestingly, and also consistent with the findings of other researchers over the years, the most senior leaders generally kept a low profile. Although they were respected, acknowledged as having made major contributions, and were somewhat visible in the press, for the most part they were not high-profile public figures. The CEO of ACS is an exception, having showily purchased the Real Madrid soccer team and populated it with extremely expensive international talent. The five I have had the pleasure to meet in person were invariably low-key, courteous, and attentive to the comments of their conversation partners.
It is also noteworthy that the relationships among the outlier firms and their clients and ecosystem partners tend to be extremely stable as well. FactSet boasts that its client retention rate has been 95 percent over the past ten years, and on its website notes that it has a 90 percent employee retention rate. Analysts observe that both Infosys and Cognizant have strong client retention (with Cognizant boasting of a 90 percent client satisfaction rate on a recent survey, and Infosys reporting retention of 95 percent in a recent interview with us). Indra Sistemas observes in its annual report that “Indra considers its suppliers and knowledge institutions to be partners in value creation and allies in innovation and that is a major responsibility.” This factor works together with our observation that wrenching change seldom characterizes strategic shifts at the outlier companies—the fact that they can change in an evolutionary manner as their customers change aligns the interests of clients and service firms rather than pitting them against one another.
Other companies, too, have learned the value of preserving relationships. Interestingly, they take the issue of what happens to the people who were engaged in an eroding advantage extremely seriously and consciously manage the process. Nancy McKinstry, the CEO of publisher Wolters Kluwer, had to confront this problem often as the company made a difficult transition from largely print outputs to a digital world. She emphasized redeployment from one market to another and retraining as key to preserving flexibility while keeping people.
Of course, it isn’t always possible to redeploy or retrain people, and sometimes a parting of the ways is necessary. What exemplary companies seem to do is to manage these separations in such a way that those who have moved on maintain good relationships with the firm, even after they have been fired or laid off. Cambridge consultancy Sagentia is practically a pure-play transient-advantage firm because it has built fluidity, change, and business model transition into its culture. Even it occasionally needs to make people redundant, however. I asked one of its senior leaders about this, and he said that the company goes out of its way to make sure that such staffing decisions are perceived as fair and transparent. And what happened to the people? “Some of them set up their own consultancy,” he said. “Some got senior roles in the companies we used to do consulting for … The important thing is that the people come to a good landing. I personally keep in touch with them.”
So even in firms that embrace change and appear to manage it well, there are elements of tremendous stability in their businesses. How, then, do they preserve the dynamism that highly competitive markets require? To answer this question, one needs to look also at what does change. In other words, where do we see these firms behaving in a dynamic and agile way?
In contrast to the internal systems and structures that created stability over time in vision, strategy, culture, and leadership, I found equally well-developed and sophisticated approaches in these firms to fostering strategic agility—in other words, to sparking change routinely and consistently. The first such approach was a bit of a surprise—namely, that these firms, over the entire study period, had no dramatic downsizings, restructurings, or sell-offs.
When I first started the outliers study, I expected to find that firms that were able to survive in spite of ephemeral advantages would have great processes for downsizing, restructuring, and otherwise getting out of declining areas in a big way. So I spent an entire summer torturing my student researchers to find instances of how these firms exited segments, canceled projects, or otherwise got out of business areas. The increasingly frustrated students searched in vain.
Instead, it seems that the outlier firms, relative to competitors, embed change in their normal routines. They reallocate resources flexibly and on an ongoing basis, rather than going through sudden divestitures or restructurings. Despite our best efforts, we found almost no instances of a sudden, wrenching exit. What we found instead was a tendency to redeploy resources and shift emphasis. We also noted that the firms seemed to accept industry evolution (especially regarding technologies) and embrace the changes in order to enter newer markets instead of cutting costs and divesting, just as we saw with Milliken. They use industry change as an opportunity to exit old businesses and enter new, higher-growth segments.
Alison Norman, one of my research assistants, observed that exit information for these firms was “elusive” and that the five companies she researched seemed to have a knack for integrating their old technologies into new waves, accepting the evolution of their industries but taking them into new markets rather than divesting completely. Xi Zhang, another researcher, came to the same conclusion, namely, that “instead of divestiture and disposal, they choose to upgrade in order to move up the value chain. Rapid upgrading is a common feature among all three companies [Infosys, HDFC, and FactSet] that I have researched.”
Cognizant, during the period of our study, made nine strategic acquisitions but had no divestitures. The company itself was a spinoff from Dun & Bradstreet and began by offering straightforward technology services. Over the years it has moved into more professional consulting services and differentiated itself by a strong industry focus and co-location of its teams with its clients. As the company has evolved, it has shifted technology and people from low-growth businesses (such as plain-vanilla business process outsourcing) to more people-intensive, high-touch businesses, such as selling complete and complex software solutions. The company is pursuing a strategy that CEO Francisco D’Souza terms an evolution from labor arbitrage to intellectual arbitrage, and appears to be doing so without the wholesale downsizing that competitors such as Satyam Computer Services have experienced.
The interesting thing about how these companies exited areas is that they followed a far more evolutionary path than their competitors appeared to. Sanjay Purohit, the head of strategy for Infosys, explained it to me this way: “When we decide to get out of something, we slow down on allocating resources to those things. They find their way to insignificance in a period of time … You don’t need to chop it off, you need to let it live its life … It’s easy for us to repurpose the leadership and the talent, to look at some other area. We are a company that never fires its people. We transition the customers out of it, and people take other responsibilities.” I thought that was a brilliantly succinct description of how a firm that is comfortable with transient advantage thinks.
One of the more subtle implications of this transformation-without-wrenching-change approach is that the firms manage major resource allocations centrally. This matters, because in many companies resources are trapped and, in the words of a friend of mine who is a chief strategy officer at a major multinational, “held hostage” at the divisional or business unit level. When a business is under pressure, or an opportunity falls between units, a company can be unable to respond effectively because incumbent executives regard the change as a threat. In the case of the outliers, decision making with respect to major strategic challenges appears to have been centrally coordinated, with considerable latitude for action at the business unit level. Budgeting also happens far more in real time than in many organizations.
At Infosys, for instance, budgets are adjusted on a rolling four-quarter basis. And, says Sanjay with a wicked grin, “I could rebudget the firm every seven days if I had to. I don’t because it would drive people crazy, but we could.” Infosys prides itself on being able to reallocate resources “at a very fast pace.” Sanjay’s function, which is corporate planning, does the recasting and reallocating. In a very transparent way, Infosys makes it obvious to everyone when a business doesn’t need as many resources. Indeed, a business unit head might actually call Sanjay and ask to give some resources back because its business won’t support that size this quarter. Can you imagine that conversation in a typical hierarchical company? High-quality data systems and absolute transparency help with the process. Sanjay tells me that there is no concept of hidden data in the company—everything is as transparent to the business units as it is to corporate, and there is only one version of the truth. “Our chairman has a great phrase for this,” he says. “In God we trust, everybody else brings data.”
I was struck by this—imagine a business unit leader in a typical company coming to the head of strategy and asking for resources to be taken away. It certainly doesn’t happen in those cases in which people and assets under management are the measure of corporate importance.
Just as in budgeting, a factor that appears to support the shape-shifting approach to change is that our outlier firms make considerable investments in flexibility. So rather than heavy annual budgeting processes and efficiency-oriented values, the outlier firms invest in increasing their flexibility, even if this might lead to a small degree of suboptimization. Krka, for instance, has among its five core values “speed and flexibility” (the others are partnership and trust, creativity and efficiency). It goes so far as to create an annual award in which the employees who best exemplify these attributes are rewarded.
At the outlier companies, adjustments to strategy and changes in resource allocation were not annual exercises. They were far more likely to be quarterly. This applies to promotions and personnel evaluations as well. At Yahoo! Japan, for instance, Makiko Hamabe, the head of investor relations, described a quarterly target and evaluation system, combined with a 360-degree evaluation that would determine whether a person would be promoted or not.
The interesting aspect of the way these companies work is that the accelerated pace of their operations allows them to be extremely responsive to changes in the environment, catching the need to make changes and adapt earlier than companies with a more rigid, annual process. They also appear to have dealt with a major barrier to effective change, which is the fear and sense of career risk that often leads managers to cling to eroding businesses long after they should have moved on.
All too often in companies intent on exploitation, innovation is an afterthought. In the outlier companies, rather than innovation being an episodic, on-again, off-again endeavor, innovation is continuous, mainstream, and part of everyone’s job. Innovation and the opportunity recognition process appear unendingly on the companies’ websites, feature in their recruitment materials, and are reinforced by investment. All of the firms proudly list how much they are investing in new activities such as R&D or international expansion. It is also worth noting that these companies have processes for managing the entire innovation pipeline that cut across business units.
At Yahoo! Japan, for example, Hamabe explained that the company is pursuing four growth strategies: first, what it calls “Yahoo! everywhere,” which is to facilitate access to the site from any kind of device; next, user-oriented social media, which means adding information from users to other data that can be found on the Yahoo! Japan site to make it more valuable; third, personalized local information that focuses on developing offerings for specific individuals based on their interests and needs; and finally, open network partnerships, which seek to offer businesses solutions to problems such as accepting online payments. Within each of these areas, managers are regularly given opportunities to identify where they think the next set of promising opportunities will be, coupled with a process of dedicating resources to the opportunities that appear most compelling. At the same time, the company’s leaders continually monitor the usage of key services and their impact on relations with key partners to determine when a service should no longer be offered.
At Infosys, every unit is tasked by the senior executive team every year with articulating two big things they are going to do that will dramatically and in real time move their business forward—and to go public with that declaration. It is continuously thinking of new things as part of everybody’s “day job.” FactSet prides itself on “thirty years of innovations” and goes so far as to declare its ability to innovate a critical competitive factor in its 2008 10-K filing with the government.9 Tsingtao Brewery is recognized among Chinese companies for its continuous innovations. As one former CEO said in announcing a change of direction toward greater integration, “We must not try to become large in order to become powerful. We must become powerful in order to become large.” A recent focus of its innovative efforts has been a thrust in the direction of environmentally responsible brewing. As a local journal reports, “Years of hard work paid off. Tsingtao Beer has topped its rivals on the list of ‘China Green Companies Top 100’ at the Annual Summit of China Green Companies 2010, held in Chengdu, Sichuan Province this April.”10
I showed an early version of this chapter to my coauthor and colleague Ian MacMillan, and he observed that the options-oriented approach we’ve been studying for some time seems to fit very well with how these firms think about opportunities. As he put it, “It’s like building a firm that grazes on options—always testing, then engaging and entering, then disengaging from exhausted areas well before disengagement becomes costly.” What the new strategy playbook seeks to embed is a mind-set and set of management processes that cultivate this pattern.
Relative to competing firms, the firms in our sample appeared to share an options-oriented pattern to exploring new opportunities. The essence of this approach is that they make small initial investments to explore opportunities, following up later with more substantial investments as the opportunity warrants. They are also willing to abandon a particular initiative if it doesn’t appear to be developing effectively. Overall, the firms tended to move earlier than competitors into spaces that appeared attractive, even if their ultimate market size was not clear. Further, the firms seemed to be more active overall in pursuing a constant stream of new initiatives.
HDFC Bank’s history of entering into various new growth markets is illustrative. In 1998, it joined the Cirrus alliance so that Mastercard holders worldwide could use the bank’s ATM network. It then became the first bank in India to launch an international debit card in association with Visa in 2001. This was followed by innovations in credit card utilization such as credit cards specifically for farmers and later a 2007 agreement with Tata Pipes to offer credit facilities for farmers. In contrast, ICICI Bank, a key competitor, only began exploring internationally linked debit cards in 2000. HDFC Bank followed a similar pattern of moving early and building from initial success in many other new markets, including linking to worldwide ATM networks, providing telebanking services, mobile banking, consumer loans (such as financing for car radios), e-commerce, wholesale banking, online accounting services, and foreign exchange services. Indeed, the only market in which a competitor seems to have beaten HDFC to capitalizing on a growth market was in the Indian rural market, in which the State Bank of India already had a well-established position. HDFC’s response was characteristic: the firm linked up with the Postal Department to extend its reach and offered innovative products such as market linkage programs for self-help groups (self-help groups are composed typically of women who each contribute a small amount of money on a regular basis until there is enough to make a loan, which can go to members or to other investments). In addition, the firm prides itself on its emphasis on experimentation and continuous innovation.
A reporter, examining HDFC’s long run of success, observed that CEO Puri is “a cautious banker” who enters new areas deliberately, through a process of learning, adapting, proving viability, and then expanding into category after category. As Puri says, “Personal loans, gold loans, microfinance, two-wheelers, crop loans—it’s been the same, deliberate process.”11
In contrast to their competitors, the outlier firms also appeared to have fewer big, high-risk all-or-nothing bets, which is also consistent with an options orientation. In comparing Indra Sistemas with competitor BAE Systems, for instance, although both firms made acquisitions and had disposals during the study period, those of BAE tended to be larger—most of Indra’s acquisitions were under $100 million, whereas most of BAE’s were well over that amount, with one enormous $4.5 billion acquisition (of Armor Holdings in 2007). Kris Gopalakrishnan, the former CEO of Infosys, told me that the company would never engage in a merger worth more than 10 percent of its revenues, in order to limit the downside cultural and business risks.
Finally, the companies had diverse, but related, portfolios. Each of the companies appeared to maintain enough diversity in its portfolio that it could simultaneously invest in the renewal of its core businesses while exploring new alternatives. Their consistent performance is partly a reflection of the fact that when one segment goes into decline, others can be leveraged. Indra Sistemas, for example, was able to leverage diversification moves from its defense businesses into computer systems designs with the acquisitions of BDE and into banking by buying Diagrama FIP. Through subsequent acquisitions, it was able to build and maintain a formidable solutions portfolio without being overly dependent on one business model or end market. Even in the case of the two single-product companies, Tsingtao Brewery and Yahoo! Japan, diversity in terms of geographic reach (Tsingtao) and diversity of services offered and segments served (Yahoo! Japan) appeared to honor this principle.
I undertook the outliers study with the hope of gaining some insight into how firms can persist, grow, and even thrive when specific competitive advantages are transient. A major conclusion I have come to from this research is that these companies navigate seemingly incompatible demands deftly.
On the one hand, they exhibit tremendous stability. Their values, cultural norms, core strategies, capabilities, customer relationships, and leadership are remarkably consistent over time. Although they do change and adapt, the changes are evolutionary, and the adaptations rapid and generally modest. They put serious investment into “soft” factors such as training and reinforcing their corporate values, which are backed up by meaningful symbolic actions on the part of their leaders.
Against this platform of stability, however, is a tremendous amount of experimentation and innovation. The firms are developing and deploying new technologies, moving into new markets, exploring new business models, and even opening up new industries. They take on acquisitions and aggressively seek to obtain external inputs from people and organizations not at all like their own. They rapidly adjust and readjust resources and are comfortable with moving executives and staff from one role to another.
Rather than being contradictory, as an initial look might suggest, the twin abilities to maintain coherence and alignment while at the same time innovating and challenging the status quo are deeply interdependent. A stable organizational environment with transparent values is conducive to employees’ feeling confident that they can take the risks that experimentation requires. Norms of high performance and “reference company” ambitions prevent stability from degrading into complacency. Strong values enforced symbolically help maintain reasonable ethical standards. Continual small changes refresh the organization and keep it from becoming stale, while at the same time avoiding the “big bang” risks of massive restructuring. Continuity of management allows for the formation of informal internal networks, which research has long shown are associated with successful innovation. Consistent corporate rhythms and internal practices free up time and energy for doing new things that would otherwise be spent sorting out how old ones should be happening.
The leadership and management challenge is thus maintaining an organizational system that can maintain the complementarity between the forces for innovation and those for stability. Too heavy a shift in the direction of innovation, and corporate coherence and the benefits of integration break down. Too heavy a shift in the direction of stability, and innovation and change can suffer. In either case, what made the difference in our study was not the “hard” analytical issues such as capital structure, cost of capital, prices of assets, or market capitalization.
This chapter on reconfiguration provides a fairly high-level look at what it takes to thrive when competitive advantages come and go. In the chapters that follow we will dig more deeply into core processes. Next, we’ll take a look at how healthy disengagement from a declining line of business actually works.