In Competing for the Future, CK Prahalad and Gary Hamel suggested that companies should adapt a strategy concerned with ‘creating stretch goals that challenge employees to accomplish the seemingly impossible’. But hindsight is a harsh taskmaster and most of the companies paraded by P&H for their foresight, have since underperformed.
Competing for the Future by CK Prahalad and Gary Hamel was one of the most influential business books of the 1990s. The thesis was that changes in technology and the growth of international competition would erode boundaries between markets and industries. Companies would prosper only if they were quick to perceive these changes and act accordingly.
The authors argued that “the challenge is to pierce the fog of uncertainty and develop great foresight into the whereabouts of tomorrow’s markets”. They went on to propose “a view of strategy that is less concerned with ensuring a tight fit between goals and resources and is more concerned with creating stretch goals that challenge employees to accomplish the seemingly impossible”.
The claim that the constraints on success are the limits of our imagination lifts our hearts. Chief executives are naturally receptive to the view that great foresight is a prerequisite for success. Not only is this a quality they know they possess, but their companies have displayed just such foresight in raising them to their elevated positions. Those eroding boundaries of markets and industries create a need for alliances and acquisitions. So an army of advisers is waiting to applaud and assist the process of foresight and the achievement of the seemingly impossible.
I recently came across my curmudgeonly 1996 review of the book, which looked at a dozen companies cited as exemplars. I thought it might be interesting to see how these companies had fared in the decade that followed.
Hindsight is a harsh taskmaster. Some of the companies singled out in the business book of the 1980s, In Search of Excellence, such as Wang and Atari, subsequently performed badly. Companies that were excellent in one era might be less so in another. Still, a 2002 Fortune study reviewing the companies Tom Peters and Robert Waterman had picked two decades earlier showed that they had generated shareholder returns in excess of the Standard & Poor’s index. This is not true of the Prahalad and Hamel 12, which yielded 6.2 per cent per year against 9 per cent for the market as a whole.
The four companies praised for “regenerating their strategy” were all subsequently acquired by larger companies in the same industry. AT&T, Compaq, JPMorgan and Banker’s Trust were folded into SBC, Hewlett-Packard, Chase Manhattan and Deutsche Bank respectively.
“Reinvention of their industry” by diversifying companies was later unwound at Merck, which disposed of its distribution business, Medis, in 2003; at British Airways, which abandoned its policy of buying strategic stakes in other airlines; and at Bell Atlantic, now Verizon, which refocused as a telecommunications company rather than an info- communications business. There was a fraud scandal at the US business of ISS, the services company, and the Danish parent, distancing itself, was recently bought out by private equity. Southern Corporation, the funeral company, never really recovered from the scandals that rocked it in 1999.
One Prahalad and Hamel company – CNN – could not be included in the calculations because it is only a small part of Time Warner. This exclusion helps performance because Time Warner’s disastrous AOL acquisition illustrates clearly why the authors’ thesis is mistaken. Seeing the future correctly is hard enough. Finding the right form and timing of strategic moves is much harder. The grand visions, the transformational strategies based on “great foresight”, fail more often than they succeed.
The two companies in the Prahalad and Hamel group – Wal-Mart and Hewlett-Packard – that did outperform the S&P illustrate a more conventional story. HP tried, under Carly Fiorina, to pierce the fog of uncertainty and failed. Its strengths and competitive position are much the same today as a decade ago. And it is hard to understand why Wal-Mart was ever on the list. The folks at Bentonville do not so much “challenge employees to accomplish the seemingly impossible”, as focus on “ensuring a tight fit between goals and resources”. It works pretty well for them and it would probably work pretty well for you.
A full methodology on the performance analysis of the P&H Portfolio in
comparison to the S&P 500 is available.