When the foundations of business strategy are turned upside down, what are the implications for inclusive business?
A professor at Columbia Business School writes a book that turns conventional notions of business strategy upside down. The book does not mention inclusive business, but the relevance is clear. Inclusive businesses are part of the new generation of businesses, but have more to learn.
Professor Rita McGrath proposes key characteristics of firms that can compete in today’s fluid fast-paced markets: some characteristics are already common in inclusive business, while others are useful food for thought as inclusive businesses mature.
The core premise of ‘The End of Competitive Advantage’ is that conventional business strategy seeks to achieve sustainable competitive advantage, but that is out-dated. It was based on the assumption that the world of 5 years hence is to some extent comprehensible today. These days competitive advantage is quickly eroded away. Protecting it is not the solution. In the face of rapidly changing and challenging markets, successful firms are those that seek out ‘transient competitive advantage’: they constantly innovate into new business and withdraw from established business ahead of time.
This core argument is convincingly illustrated with several examples. The way that Fuji moved on from twentieth century photography is contrasted with Eastman Kodak, which was a market leader but went bust. More recently, the example of RIM’s market leader, the blackberry, also shows how even the most established market leaders hit the limits of competitive advantage.
A fundamental principle of this new approach is that business strategy and innovation are no longer separate. In the past, strategy positioned the firm in a well-defined industry to exploit comparative advantage, while innovation was about creating new businesses. In McGrath’s new approach, strategy, innovation and organisational change all work together. This immediately made me think of the inclusive businesses that lie within an established company, whether domestic or multinational. Their inclusive business models have required not one but many doses and processes of innovation (a major theme of the recent 4Ps of Inclusive Business report.) When we dig into why they are spending so long innovating, it tends to be for long-term strategic reasons, creating new markets and new sources of competitive advantage. They are innovating for strategic reasons. So at first sight, these inclusive businesses are great examples of what McGrath calls for.
There are other important characteristics expounded by McGrath, that I also see as common within many inclusive businesses:
• Long-term vision. McGrath studies ten ‘outlier firms’ - the only ten out of every publicly traded company with over $1bn capitalisation, on any exchange, to have achieved net income growth of at least 5% per year for a solid decade, 2000-2009. One main conclusion is that this group ‘was pursuing strategies with a long-term perspective on where they wanted to go, but also with the recognition that whatever they were doing today wasn’t going to drive their future growth. That seems to echo much of the thinking of inclusive business leaders.
• Leadership: Leaders of the outliers tend to have ‘outsize ambition’ as well as compelling strategy diagnosis.
• Access not ownership: In pursuit of transient advantage, access to assets not ownership of assets is what matters. This tallies with what we see in inclusive business, where companies go into unlikely partnerships to access networks, skills and other assets that they do not own.
• A wider understanding of the competition: in today’s markets, competition is no longer from firms within the same industry offering close substitutes, but from arenas that link customers and solutions, which often cut across traditional sectors. Successful businesses know this. This immediately reminded me of a conversation in Ghana last week with a seed company. Other seed companies are direct competitors, but they are also collaborators in developing the sector. As the CEO commented, their main competition is farmers’ own seed kept from last harvest, not the bags sold by other seed suppliers. In India, Hindustan Unilever is equally aware of the real competition to its household water filters targeted at the Base of the Pyramid. Such customers don’t face a wide choice of affordable filters. They face competing options for this year’s big investment, whether in agricultural equipment, solar lanterns, or clean water. Inclusive businesses need to be highly attuned to competition, both within their own sectors and from beyond them, judging the competition from the users’ point of view.
So many inclusive businesses are already illustrating some of what is needed. But complacency has no place here. McGrath makes a host of recommendations that seem highly relevant to inclusive business, and a few of them rather challenging.
Exploiting new opportunities means disengaging from established ones. The four key phases in the new approach to securing transient competitive advantage are: launch, ramp up, exploit, reconfigure and disengage. The implication is that any firm, however much it is a market leader, should not only be continually looking for the next opportunity (as inclusive businesses are), but should also be continually disengaging from current products, even where they are still strengths , ‘Even as the existing advantages are generating good results, leaders need to be pulling assets and resources out of them to create resource space for the next advantage, just as Fuji did with its film-based photography business.’ Continuous reconfiguration of people and assets is described as the 'secret sauce' which enables a company to make the transition from one advantage to another.
The book makes good use of examples from the ten outliers to illustrate how this works. Infosys, for example, reorganises the company every three years or so, to unleash growth.
Disengagement should not be confused with business failure. Indeed it should take place when the business is still viable, not failing. Healthy disengagement responds to the very earliest of warning signs. Not many inclusive businesses have reached the stage where complacency is the biggest threat, but in not many years to come, this may be a valuable lesson. In the BIF portfolio, many businesses were seeking ‘first mover advantage’ by innovating new products, services and sourcing with the poor. Assuming they achieve that goal, what will happen when others catch-up?
Innovation as a well-managed process. The second big challenge is on innovation, surely an easy win for inclusive business, which after all involves so much innovation. McGrath points out that ‘Innovation needs to be a continuous, core, well-managed process rather than the episodic and tentative process it is in many companies.’ This means a defined process for managing innovation, and career paths for innovators. There is much here that IBs could learn from, as they seem to have ended up innovating more than expected, but not always planning to cultivate innovation long term.
Stability and agility. One of the major and most intriguing conclusions is that the successful outlier businesses have found ways of combining tremendous internal stability with tremendous external agility, particularly in terms of business models. Every successful inclusive business model requires agility, but they may struggle to combine this with stability. The lessons are that this stems from strong leadership plus a common identity, strong culture, and commitment to staff development. The outliers seem to navigate seemingly incompatible demands deftly. On the one hand they show tremendous stability, in their norms, strategies and customer relationships. On the other, they are agile, constantly changing. This capacity to maintain coherence while innovating and challenging the status quo is at the heart of business success. That is no doubt true for many businesses the world over; it is probably particularly true for inclusive businesses given the fluid and increasingly competitive markets in which they operate.
The End of Competitive Advantage. How to Keep Your Strategy Moving ... is published by Harvard Business Review Press. Rita Gunther McGrath, 2013.
If you want to get quickly to what the approach means for your business in one page, I’d recommend the Preface and the table on page 25, which serves as a 14-point checklist of features of a firm designed to cope with transient advantage.