Chat with us, powered by LiveChat JWI575 Adaptability the New Competitive Advantage Discussion | All Paper
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After an initial period of selling, Austin changed the way in which he branded his product. Answer the questions below about innovation and adaptabilityWhat prompted Austin to change the branding for his product? (Tio Gazpacho company)How would you adapt your product or service idea to your customers’ expectations? (I am an intrapreneur implementing a third party management company to manage contingent “temporary” staffing for Avantor (www.settingscienceinmotion.com)Is adaptability as important for an intrapreneur as for an entrepreneur? Explain.
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HBR.ORG
July–August 2011
reprint R1107M
Adaptability:
The New Competitive
Advantage
In a world of constant change, the spoils go to the
nimble. by Martin Reeves and Mike Deimler
This document is authorized for use only by Ryan Bradley in New Bus Ventures and Entrepshp at Strayer University, 2019.
This document is authorized for use only by Ryan Bradley in New Bus Ventures and Entrepshp at Strayer University, 2019.
For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.org
In a world of
constant change,
the spoils go to
the nimble.
Illustration: Brian Stauffer
by Martin Reeves
and Mike Deimler
Adaptability:
The New
Competitive
Advantage
July–August 2011 Harvard Business Review 3
This document is authorized for use only by Ryan Bradley in New Bus Ventures and Entrepshp at Strayer University, 2019.
Adaptability: The new competitive advantage
We live in an era of risk and instability.
Globalization, new technologies, and greater transparency have combined to upend the business environment and give many CEOs a deep sense of unease.
Just look at the numbers. Since 1980 the volatility of
business operating margins, largely static since the
1950s, has more than doubled, as has the size of the
gap between winners (companies with high operating margins) and losers (those with low ones).
Market leadership is even more precarious. The
percentage of companies falling out of the top three
rankings in their industry increased from 2% in 1960
to 14% in 2008. What’s more, market leadership is
proving to be an increasingly dubious prize: The
once strong correlation between profitability and
industry share is now almost nonexistent in some
sectors. According to our calculation, the probability
that the market share leader is also the profitability
leader declined from 34% in 1950 to just 7% in 2007.
And it has become virtually impossible for some ex-
ecutives even to clearly identify in what industry and
with which companies they’re competing.
All this uncertainty poses a tremendous challenge for strategy making. That’s because traditional
approaches to strategy—though often seen as the
answer to change and uncertainty—actually assume
a relatively stable and predictable world.
Think about it. The goal of most strategies is to
build an enduring (and implicitly static) competitive
advantage by establishing clever market positioning
(dominant scale or an attractive niche) or assembling
the right capabilities and competencies for making
or delivering an offering (doing what the company
does well). Companies undertake periodic strategy
reviews and set direction and organizational structure on the basis of an analysis of their industry and
some forecast of how it will evolve.
But given the new level of uncertainty, many
companies are starting to ask:
Jockeying for position:
The media industry at a glance
1950
Slow and steady
1960
This chart shows changes over the
past half century in the number of
players in the U.S. media industry and their revenue rankings in
relation to one another. (Each line
represents a company.) Comcast
and Sirius XM Radio are among
those that have adapted. Playboy
and United Artists Theatre Circuit
are among those that haven’t.
1970
Rapid expansion
1990
1980
McGraw-Hill Companies
Playboy Enterprises
Comcast
A similar pattern can be observed
in many other industries (see hbr.
org/slideshows/turbulence).
News Corporation
4 Harvard Business Review July–August 2011
This document is authorized for use only by Ryan Bradley in New Bus Ventures and Entrepshp at Strayer University, 2019.
For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.org
Idea in Brief
Traditional approaches to strategy
assume a relatively stable world.
They aim to build an enduring
competitive advantage by achieving dominant scale, occupying
an attractive niche, or exploiting
certain capabilities and resources.
• How can we apply frameworks that are based on
scale or position when we can go from market leader
one year to follower the next?
• When it’s unclear where one industry ends and
another begins, how do we even measure position?
• When the environment is so unpredictable, how
can we apply the traditional forecasting and analysis
that are at the heart of strategic planning?
2000
Greater Volatility
2009
United Artists
Theatre Circuit
Sirius XM Radio
But globalization, new technologies, and greater transparency
have combined to upend the
business environment. Sustainable competitive advantage no
longer arises from positioning or
resources. Instead, it stems from
the four organizational capabilities
that foster rapid adaptation:
• The ability to read and act on
signals of change
• The ability to experiment rapidly
and frequently—not only with
products and services but also
with business models, processes,
and strategies
• The ability to manage complex
and interconnected systems of
multiple stakeholders
• The ability to motivate employees and partners
• When we’re overwhelmed with changing information, how can our managers pick up the right signals to understand and harness change?
• When change is so rapid, how can a one-year—or,
worse, five-year—planning cycle stay relevant?
The answers these companies are coming up
with point in a consistent direction. Sustainable
competitive advantage no longer arises exclusively
from position, scale, and first-order capabilities in
producing or delivering an offering. All those are
essentially static. So where does it come from? Increasingly, managers are finding that it stems from
the “second-order” organizational capabilities that
foster rapid adaptation. Instead of being really good
at doing some particular thing, companies must be
really good at learning how to do new things.
Those that thrive are quick to read and act on
signals of change. They have worked out how to
experiment rapidly, frequently, and economically—
not only with products and services but also with
business models, processes, and strategies. They
have built up skills in managing complex multistakeholder systems in an increasingly interconnected world. Perhaps most important, they have
learned to unlock their greatest resources—the
people who work for them. In the following pages
we’ll look at how companies at the leading edge
are using these four organizational capabilities to
attain adaptive advantage. We’ll also discuss the
implications of this fundamental strategic shift for
large, established corporations, many of which have
built their operations around scale and efficiency—
sources of advantage that rely on an essentially
stable environment.
The Ability to Read and Act on Signals
Source BCG Analysis
In order to adapt, a company must have its antennae tuned to signals of change from the external environment, decode them, and quickly act to refine
July–August 2011 Harvard Business Review 5
This document is authorized for use only by Ryan Bradley in New Bus Ventures and Entrepshp at Strayer University, 2019.
Adaptability: The new competitive advantage
or reinvent its business model and even reshape the
information landscape of its industry.
Think back to when Stirling Moss was winning
Formula One car races: The car and the driver determined who won. But today the sport is as much
about processing complex signals and making adaptive decisions as about mechanics and driving prowess. Hundreds of sensors are built into the cars; race
teams continuously collect and process data on
several thousand variables—ranging from weather
and road conditions to engine rpm and the angles
of curves—and feed them into dynamic simulation
models that guide the drivers’ split-second decisions.
A telemetric innovation by one team can instantly
raise the bar for all.
In this information-saturated age, when complex,
varying signals may be available simultaneously to
all players, adaptive companies must similarly rely
on sophisticated point-of-sale systems to ensure that
they acquire the right information. And they must
apply advanced data-mining technologies to recognize relevant patterns in it.
For example, a leading media company that
was suffering from a high rate of customer churn
revamped its analytic approach to customer data,
applying “neural network” technologies in order to
understand patterns of customer loss. The company
found hidden relationships among the variables
that were driving churn and launched retention
campaigns targeting at-risk customers. The accuracy rate in predicting churn was an impressive 75%
to 90%—a huge benefit, given that every percentage
point in churn reduction added millions of dollars to
the bottom line.
Companies are also leveraging their signal­reading capabilities to make operational interventions in real time, bypassing slow-moving decision
hierarchies. The UK-based grocery retailer Tesco
continually performs detailed analyses of the purchase patterns of the more than 13 million members
of its loyalty-card program. Its findings enable Tesco
to customize offerings for each store and each customer segment and provide early warning of shifts
in customer behavior. They also supported the development of Tesco’s hugely successful online platform, which has extended the company’s business
model, enabling Tesco to become a store without
walls and to offer a broader range of products and
services, including media and financial services. To
put the icing on the cake, instead of being purely a
cost center, the rich databases and analytical capa6 Harvard Business Review July–August 2011
bilities produce a stream of direct revenue: For a fee,
Tesco allows other enterprises to access its technologies and insights.
Google is another example. It uses algorithms to
update the position of an ad on the basis of the ad’s
relevance to an individual search or website as well
as the advertiser’s bids on key words. The more relevant an ad, the higher the click-through rate—and
because advertisers pay per click, this means more
revenue for Google. By linking its advertising data directly to its operations, Google can respond to changing ad conditions on a split-second basis, without the
intervention of human decision makers.
The Ability to Experiment
That which cannot be deduced or forecast can often
be discovered through experimentation. Of course,
all companies use some form of experimentation
to develop and test new products and services. Yet
the traditional approaches can be costly and time­consuming, and may saddle the organization with
an unreasonable burden of complexity. Furthermore,
research based on consumers’ perceptions is often a
remarkably poor predictor of success. The real world
is an expensive medium for experimentation, and
failed market-facing tests and pilots may jeopardize
a company’s brand and reputation.
To overcome these barriers, a growing number
of adaptive competitors are using an array of new
approaches and technologies, especially in virtual
environments, to generate, test, and replicate a
larger number of innovative ideas faster, at lower
cost, and with less risk than their rivals can. Procter
& Gamble is a case in point. Through its Connect +
Develop model, it leverages InnoCentive and other
open-innovation networks to solve technical design
problems. It uses a walk-in, 3-D virtual store to run
experiments that are quicker and cheaper than traditional market tests. And by employing Vocalpoint
and other online user communities, it can introduce
and test products with friendly audiences before a
full launch. In 2008 alone, 10 highly skilled employees were able to generate some 10,000 design simulations, enabling the completion in hours of mock-ups
that might once have taken weeks. More than 80%
of P&G’s new-business initiatives now make use of
its growing virtual toolbox.
In addition to changing the way in which they
conduct experiments, companies need to broaden
the scope of their experimentation. Traditionally, the
focus has been on a company’s offerings—essentially
This document is authorized for use only by Ryan Bradley in New Bus Ventures and Entrepshp at Strayer University, 2019.
For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.org
was negligible—“almost a rounding error,” says Rick
Jensen, the vice president of product management
for Intuit’s consumer tax division. But the marketing team documented what it had learned from the
failure and won an award from company chairman
Scott Cook, who said, “It is only a failure if we fail to
get the learning.”
The Ability to Manage
Complex Multicompany Systems
new products and services. But in an increasingly
turbulent environment, business models, strategies,
and routines can also become obsolete quickly and
unpredictably. Adaptive companies therefore use
experimentation far more broadly than their rivals
do. We’ve seen that Tesco illustrates the power of
experimenting with business models as well as with
product range.
Ikea, like Tesco, leverages existing assets and capabilities to experiment with business models. After
the company entered Russia, managers noticed that
whenever it opened a store, the value of nearby real
estate increased dramatically. So Ikea decided to explore two business models simultaneously: retailing
through its stores and capturing the appreciation
in real estate values through mall development. It
now makes more profit in Russia from developing
and operating malls than from its traditional retail
business.
Finally, experimentation necessarily produces
failure. Adaptive companies are very tolerant of
failure, even to the point of celebrating it. For example, the software company Intuit, which has been
extremely successful at using adaptive approaches
to grow new businesses, launched a marketing
campaign in 2005 to reach young tax filers through
a website called rockyourrefund.com. The site offered discounts at Expedia and Best Buy and the opportunity to get tax refunds in the form of prepaid
gift cards. The campaign was a flop, and practically
no one used the site. The amount of money involved
In one year
10 highly skilled
P&G employees
generated some
10,000 design
simulations,
enabling the
completion in
hours of mockups that might
once have
taken weeks.
Signal detection and experimentation require a
company to think beyond its own boundaries and
perhaps to work more closely and smartly with customers and suppliers. This flies somewhat in the face
of the unspoken assumption that the unit of analysis
for strategy is a single company or business unit.
With an increasing amount of economic activity
occurring beyond corporate boundaries—through
outsourcing, offshoring, value nets, value ecosystems, peer production, and the like—we need to
think about strategies not only for individual companies but also for dynamic business systems. Increasingly, industry structure is better characterized
as competing webs or ecosystems of codependent
companies than as a handful of competitors producing similar goods and services and working on
a stable, distant, and transactional basis with their
suppliers and customers.
In such an environment advantage will flow to
those companies that can create effective strategies
at the network or system level. Adaptive companies
are therefore learning how to push activities outside
the company without benefiting competitors and
how to design and evolve strategies for networks
without necessarily being able to rely on strong control mechanisms.
Typically, adaptive companies manage their ecosystems by using common standards to foster interaction with minimal barriers. They generate trust
among participants—for example, by enabling people to interact frequently and by providing transparency and rating systems that serve as “reputational
currency.” Toyota’s automotive supply pyramids,
with their kanban and kaizen feedback mechanisms,
are early examples of adaptive systems. EBay’s complex network of sellers and buyers is another; the
company relies on seller ratings and online payment
systems to support the online marketplace.
If the experience curve and the scale curve were
the key indicators of success, Nokia would still be
leading the smartphone market; it had the advantage
July–August 2011 Harvard Business Review 7
This document is authorized for use only by Ryan Bradley in New Bus Ventures and Entrepshp at Strayer University, 2019.
Adaptability: The new competitive advantage
of being an early mover and the market share leader
with a strong cost position. But Nokia was attacked
by an entirely different kind of competitor: Apple’s
adaptive system of suppliers, telecom partnerships,
and numerous independent application developers,
created to support the iPhone. Google’s Android operating system, too, capitalized on a broad array of
hardware partners and application developers. The
ability to bring together the assets and capabilities
of so many entities allowed these smartphone entrants to leapfrog the experience curve and become
new market leaders in record time. As Stephen Elop,
Nokia’s CEO, wrote in a memo to his staff, “Our competitors aren’t taking our market share with devices;
they are taking our market share with an entire ecosystem.” Through broader signal detection, parallel
innovation, superior flexibility, and rapid mobilization, multicompany systems can enhance the adaptiveness of individual companies.
The Ability to Mobilize
Adaptation is necessarily local in nature—somebody
experiments first at a particular place and time. It
is also necessarily global in nature, because if the
experiment succeeds, it will be communicated, selected, amplified, and refined. Organizations therefore need to create environments that encourage
the knowledge flow, diversity, autonomy, risk taking,
sharing, and flexibility on which adaptation thrives.
Contrary to classical strategic thinking, strategy follows organization in adaptive companies.
A flexible structure and the dispersal of decision
rights are powerful levers for increasing adaptability.
Typically, adaptive companies have replaced permanent silos and functions with modular units that
freely communicate and recombine according to the
situation at hand. To reinforce this framework, it is
helpful to have weak or competing power structures
and a culture of constructive conflict and dissent.
Cisco is one company that has made this transformation. Early on, it relied on a hierarchical, customercentric organization to become a leader in the market
for network switches and routers. More recently the
CEO, John Chambers, has created a novel management structure of cross-functional councils and
boards to facilitate moves into developing countries
and 30 adjacent and diverse markets (ranging from
health care to sports) with greater agility than would
previously have been possible.
As they create more-fluid structures, adaptive
companies drive decision making down to the front
8 Harvard Business Review July–August 2011
lines, allowing the people most likely to detect
changes in the environment to respond quickly and
proactively. For example, at Whole Foods the basic
organizational unit is the team, and each store has
about eight teams. Team leaders—not national buyers—decide what to stock. Teams have veto power
over new hires. They are encouraged to buy from
local growers that meet the company’s quality and
sustainability standards. And they are rewarded for
their performance with bonuses based on store profitability over the previous four weeks.
Creating decentralized, fluid, and even competing organizational structures destroys the big advantage of a rigid hierarchy, which is that everyone
knows precisely what he or she should be doing. An
adaptive organization can’t expect to succeed unless it provides people with some substitute for that
certainty. What’s needed is some simple, generative rules to facilitate int …
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