Will the dominant firms of the next century be the ones that show foresight and react quickly? Many of the best companies work simply by doing traditional business very, very well.
“Competing for the Future”, by Gary Hamel and CK Prahalad, has deservedly been one of the best selling business books of the last two years. They argue that changes in technology, and the growth of international competition, mean that the traditional boundaries between markets and industries are eroding. The firms that survive into the next century will be those that first perceive these changes, and act accordingly.
It is easy to understand why this thesis is seductive. The claim that the only constraints on our success are the limits of our imagination, although generally false, has lifted hearts for millennia. Grand visions take precedence over the pedantry of the numbers men. Since the argument makes acquisitions and alliances central items on every company’s agenda, an army of advisers is waiting to applaud and assist.
So SmithKline Beecham are redefining pharmaceuticals as the health care business. Scottish Power know that the future lies with multi-utilities. All manner of media companies are exploring their versions of convergence. “The challenge is to pierce the fog of uncertainty and develop great foresight into the whereabouts of tomorrow’s markets”. Every business needs to contemplate different customers, different markets, different products, different technologies The specific assertion of Hamel and Prahalad (HP) is that future business success will largely be based on early identification of the changes in the boundaries of markets and industries. “Some management teams were simply more “foresightful” than others. Some were capable of imagining products, services, and entire industries that did not yet exist and then giving them birth”.
But there are good reasons for scepticism about the degree to which such foresightfulness is the basis of competitive advantage. AT&T correctly predicted the convergence of computing and communications, but was mistaken in believing that this should be the basis of its business organisation. Xerox demonstrated foresight in recognising that the personal computer and the fax machine would be important new products in the 1980’s but failed to make money out of either innovation. The oil companies who diversified into coal and minerals in the 1970’s under the influence of an earlier version of the thesis – Levitt’s “marketing myopia” preceded HP’s “product myopia” by around 20 years – lived to regret their purchases.
So what evidence do HP present for their claims? As is often the case with business fashions, the main evidence for the potency of the drug is the number and prestige of the other patients who are taking it. HP identify eight companies which have prospered by “reinventing their industry”. Merck have integrated forward into managed health care. British Airways seek to become the world’s first truly global airline. Bell Atlantic have a vision of an integrated info communications company.
But it may be premature to claim success for these “reinventions”. Bell Atlantic’s diversification into info communications has now been sidelined in favour of just becoming a bigger phone company by merger with Nynex. British Airways, nursing heavy losses on its investment in US Air and Qantas, now seeks to double its bets through an alliance with American Airlines. And the benefits of Merck’s costly purchase of Medco are still to be demonstrated.
Then there are two firms, ISS and Service Corporation, who have pioneered international acquisitions in industries – contract cleaning and funerals – where the benefits of global organisation are not, at first glance, obvious. They are not more obvious at second or third glance: and it now appears that the financial record of ISS owes less to its reinvention of its business than to the reinvention of its accounts. One might conjecture that the originality of these firms’ strategies may not be the result of their extraordinary foresight, perhaps the business idea is not a good one.
The three other inclusions on HP’s list do not seem to have much to do with their argument. Wal-mart and Hewlett Packard are undeniably successful companies, but their success seems to be based on doing, very well, very similar things to their competitors. And CNN is a fine example of inspired identification of a market opportunity, superbly executed. Yet what industry did CNN reinvent?
It is easier to find examples of firms whose attempts to redefine their industry were costly failures than ones which used it to establish sustainable competitive advantage. Citibank’s repeatedly unsuccessful strategy of establishing Pan-European retail banking: the attempt through the Alleghis Corporation to integrate United Airlines into a “total travel experience”: Saatchi and Saatchi’s creation of a global advertising business.
And we should not be surprised by this. Anticipating the evolution of markets and industries is hard, and even if a firm picks the direction correctly the timing is a matter of fine judgement. Citibank and Saatchi were wrong in the 1980’s, but one day they will probably be right. The advantages of being first are rarely so decisive that they clearly outweigh the risks of being wrong, or simply premature. It is not the people which pioneered jet aircraft or pocket calculators, superstores or personal computers, video recorders or junk bond financing, package holidays or fax machines, who are market leaders today. Genuine foresight was rapidly overtaken by other companies. Boeing and Casio, Sainsbury and IBM, Matsushita and Salomon, Thomson and Canon had real competitive advantages based on what is the only sustainable source of competitive advantage – a distinctive capability unmatched and unmatchable by rivals.
The problem – as so often in the frenzied world of business publishing – is that entirely sensible, if limited, advice is turned into misleading prescription by crass hyperbole. Every company should be alive to changes in the nature of its markets, the needs of its customers, and the opportunities which are presented by new technology. But overestimation of the impact of these changes on competitive positions, and an exaggerated view of the imminence of radical change in industry structure has already led far too many firms into ill considered acquisitions. The direct and indirect costs of acquisitions are high and mistakes are seldom easily or cheaply reversible. Do not be too ready to accept that “new competitive realities have ruptured industry boundaries, overthrown much of standard management practice, and rendered conventional models of strategy and growth obsolete”. They have not.