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Competing for the Future

Competing for the Future
by Gary Hamel and With C. K. Prahalad
Price: $16.00
Table of Contents
  Preface to the Paperback Edition
  Preface and Acknowledgments
1. Getting Off the Treadmill
2. How Competition for the Future Is Different
3. Learning to Forget
4. Competing for Industry Foresight
5. Crafting Strategic Architecture
6. Strategy as Stretch
7. Strategy as Leverage
8. Competing to Shape the Future
9. Building Gateways to the Future
10. Embedding the Core Competence Perspective
11. Securing the Future
12. Thinking Differently
Notes
Bibliography
Index
About the Author

Chapter One

Getting Off the Treadmill


The Essence of Business Thinking

ook around your company. Look at the high-profile initiatives that have been launched recently. Look at the issues that are preoccupying senior management. Look at the criteria and benchmarks by which progress is being measured. Look at the track record of new business creation. Look into the faces of your colleagues and consider their dreams and fears. Look toward the future and ponder your company's ability to shape that future and regenerate success again and again in the years and decades to come.

Now ask yourself: Does senior management have a clear and broadly shared understanding of how the industry may be different ten years in the future? Are its "headlights" shining farther out than those of competitors? Is its point of view about the future clearly reflected in the company's short-term priorities? Is its point of view about the future competitively unique?

Ask yourself: How influential is my company in setting the new rules of competition within its industry? Is it regularly defining new ways of doing business, building new capabilities, and setting new standards of customer satisfaction? Is it more a rule-maker than a rule-taker within its industry? Is it more intent on challenging the industry status quo than protecting it?

Ask yourself: Is senior management fully alert to the dangers posed by new, unconventional rivals? Are potential threats to the current business model widely understood? Do senior executives possess a keen sense of urgencyabout the need to reinvent the current business model? Is the task of regenerating core strategies receiving as much top management attention as the task of reengineering core processes?

Ask yourself: Is my company pursuing growth and new business development with as much passion as it is pursuing operational efficiency and downsizing? Do we have as clear a point of view about where the next $10 million, $100 million, or $1 billion of revenue growth will come from as we do about where the next $10 million, $100 million, or $1 billion of cost savings will come from?

Ask yourself: What percentage of our improvement efforts (quality improvement, cycle-time reduction, and improved customer service) focuses on creating advantages new to the industry, and what percentage focuses on merely catching up to our competitors? Are competitors as eager to benchmark us as we are to benchmark them?

Ask yourself: What is driving our improvement and transformation agenda—our own view of future opportunities or the actions of our competitors? Is our transformation agenda mostly offensive or defensive?

Ask yourself: Am I more of a maintenance engineer keeping today's business humming along, or an architect imagining tomorrow's businesses? Do I devote more energy to prolonging the past than I do to creating the future? How often do I lift my gaze out of the rut and consider what's out there on the horizon?

And finally: What is the balance between hope and anxiety in my company; between confidence in our ability to find and exploit opportunities for growth and new business development and concern about our ability to maintain competitiveness in our traditional businesses; between a sense of opportunity and a sense of vulnerability, both corporate and personal?

These are not rhetorical questions. Get a pencil. Rate your company.

How does senior management's point of view
about the future stack up against that of
competitors?

Conventional and Reactive • • • • • Distinctive and Far-sighted

Which issue is absorbing more of
senior management's attention?
Reengineering Core Processes • • • • • Regenerating Core Strategies

Within the industry, do competitors
view our company as more of a rule-taker or a rule-maker?

Mostly a Rule-taker • • • • • Mostly a Rule-maker

What are we better at, improving operational efficiency
or creating fundamentally new businesses?

Operational Efficiency • • • • • New Business Development

What percentage of our advantage-building efforts
focus on catching up with competitors versus
building advantages new to the industry?

Mostly Catching Up to Others • • • • • Mostly New to the Industry

To what extent has our transformation agenda
been set by competitors' actions versus
being set by our own unique vision of the future?

Largely Driven by Competitors • • • • • Largely Driven by Our Vision

To what extent am I, as a senior manager,
a maintenance engineer working on the present
or an architect designing the future?

Mostly an Engineer • • • • • Mostly an Architect

Among employees, what Is the balance
between anxiety and hope?

Mostly Anxiety • • • • • Mostly Hope

If your marks fell somewhere in the middle, or off to the left, your company may be devoting too much energy to preserving the past and not enough to creating the future.

We often ask senior managers three related questions: First, what percentage of your time is spent on external, rather than internal, issues—understanding, for example, the implications of a particular new technology versus debating corporate overhead allocations? Second, of this time spent looking outward, how much of it is spent considering how the world could be different in five or ten years, as opposed to worrying about winning the next big contract or how to respond to a competitor's pricing move? Third, of the time devoted to looking outward and forward, how much of it is spent in consultation with colleagues, where the objective is to build a deeply shared, well-tested view of the future, as opposed to a personal and idiosyncratic view?

The answers we get typically conform to what we call the "40/30/20 rule." In our experience, about 40% of senior executive time is spent looking outward, and of this time, about 30% is spent peering three, four, five, or more years into the future. And of the time spent looking forward, no more than 20% is spent attempting to build a collective view of the future (the other 80% is spent looking at the future of the manager's particular business). Thus, on average, senior management is devoting less than 3% (40% x 30% x 20% = 2.4%) of its energy to building a corporate perspective on the future. In some companies the figure is less than 1%. As a benchmark, our experience suggests that to develop a prescient and distinctive point of view about the future, a senior management team must be willing to spend about 20 to 50% of its time, over a period of several months. It must then be willing to continually revisit that point of view, elaborating and adjusting it as the future unfolds.

It takes substantial and sustained intellectual energy to develop high-quality, robust answers to questions such as what new core competencies will we need to build, what new product concepts should we pioneer, what new alliances will we need to form, what nascent development programs should we protect, and what long-term regulatory initiatives should we pursue. We believe such questions have received far too little attention in many companies.

They have received too little attention not because senior managers are lazy; most are working harder than ever. Stress, burnout, and perpetual jet lag are less occasional occupational hazards than a way of life for most executives today. It is not even the sheer, bloody, time-consuming difficulty of answering these questions that scares top teams off. These questions go unanswered because to address them senior managers must first admit, to themselves and to their employees, that they are less than fully in control of their company's future. They must admit that what they know today—the knowledge and experience that justify their position in the corporate pecking order—may be irrelevant or wrong-headed for the future. These questions go unanswered because they are, in a sense, a direct challenge to the assumption that top management really is in control, really does have better headlights than anyone else in the corporation, and already has a clear and compelling view of corporate direction. So the urgent drives out the important; the future goes largely unexplored; and the capacity to act, rather than the capacity to think and imagine, becomes the sole measure of leadership.

If it's not the future, just what is occupying senior management's attention? In two words—restructuring and reengineering. Whereas downsizing and core process redesign are legitimate and important tasks, they have more to do with shoring up today's businesses than creating tomorrow's industries. Neither is a substitute for imagining and creating the future. Neither will ensure continued success if a company fails to regenerate its core strategies. Any company that succeeds at restructuring and reengineering, but fails to create the markets of the future, will find itself on a treadmill, trying to keep one step ahead of the steadily declining margins and profits of yesterday's businesses.

Beyond Restructuring

The painful upheavals in so many companies in recent years reflect the failure of one-time industry leaders to keep up with the accelerating pace of industry change. For decades the changes that confronted Sears, General Motors, IBM, Westinghouse, Volkswagen, and other incumbents were, if not exactly glacial in speed, at least more or less linear extrapolations of the past. Sears could count on the fact that successive generations of rural Americans would find its catalog the most convenient way to outfit their homes and themselves; GM could be sure that as incomes rose, young consumers, like their parents before them, would trade up from Chevys to Oldsmobiles and from Buicks to Cadillacs; IBM could expect revenues to rise forever upward as big companies added more "mips" to their central data-processing departments and as proprietary operating systems protected IBM's accounts from competitor encroachment. The watchword for top management in these companies was "steady as she goes." Companies were run by managers, not leaders; by maintenance engineers, not by architects.

Yet few companies that began the 1980s as industry leaders ended the decade with their leadership intact and undiminished. IBM, Philips, Dayton-Hudson, TWA, Texas Instruments, Xerox, Boeing, Daimler-Benz, Salomon Brothers, Citicorp, Bank of America, Sears, Digital Equipment Corp. (DEC), Westinghouse, DuPont, Pan Am, and many others saw their success eroded or destroyed by the tides of technological, demographic, and regulatory change and order-of-magnitude productivity and quality gains made by nontraditional competitors. Buffeted by these forces, few firms seemed to be in control of their own destiny. The foundations of past success were shaken and fractured when, in all too many cases, the industrial terrain changed shape faster than top management could refashion its basic beliefs and assumptions about which markets to serve, which technologies to master, which customers to serve, and how to get the best out of employees.

These and many other companies found themselves confronted with sizable "organizational transformation" problems. Of course, any company that is more of a bystander than a driver on the road to the future will find its structure, values, and skills becoming progressively less attuned to an ever-changing industry reality. Such a discrepancy between the pace of change in the industry environment and the pace of change in the internal environment spawns the daunting task of organizational transformation. The organizational transformation agenda typically includes downsizing, overhead reduction, employee empowerment, process redesign, and portfolio rationalization. As important as these initiatives are, their accomplishment cannot restore a company to industry leadership, nor ensure that it intercepts the future.

When a competitiveness problem (stagnant growth, declining margins, and falling market share) finally becomes inescapable, most executives pick up the knife and begin the brutal work of restructuring. The goal is to carve away layers of corporate fat, jettison underperforming businesses, and raise asset productivity. Executives who don't have the stomach for emergency room surgery, like John Akers at IBM or Robert Stempel at GM, soon find themselves out of a job.

Masquerading under names like refocusing, delayering, decluttering, and right-sizing (one is tempted to ask why the "right" size is always smaller), restructuring always has the same result: fewer employees. In 1993, large U.S. firms announced nearly 600,000 layoffs—25% more than had been announced in a similar period in 1992 and nearly 10% above the levels of 1991, which was technically the bottom of the recession in the United States. While European companies had long tried to put off their own day of reckoning, bloated payrolls and out-of-control employment costs had, by the early 1990s, made downsizing as inevitable in Europe as it was in the United States. Some European companies such as Volkswagen, eager to preserve industrial peace, sought to maintain employment levels by reducing the number of hours worked by each employee. The depressing assumption seemed to be that because there was no hope of raising output, the only solution was to share fewer jobs among more people.

Despite the excuses about global competition and the job-destroying impact of productivity-enhancing technology, the fact was that most of the employment contraction in large U.S. companies was caused not by distant foreign competitors intent on "stealing U.S. jobs," but by U.S. senior managers who had fallen asleep at the switch. For the most part, the companies that have been most aggressive in reducing headcount won't make it on to anyone's "most admired" list (see Table 1-1). These companies tend to be a rogue's gallery of undermanaged or wrongly managed companies.

Although some responsibility for Europe's pitiful record of job creation could be laid at the feet of politicians and their overgenerous social spending (between 1965 and 1989 European industry created approximately 10 million new jobs while U.S. industry created close to 50 million new jobs), much of the problem was, again, management-made. The guilty included self-protective executives in Europe's sclerotic telecommunications companies determined to prevent European companies from enjoying the fruits of the information revolution, timid managers in European car companies who preferred protectionism at home to the challenge of learning to compete head on with U.S. and Japanese automakers outside of Europe, and subsidy-hungry managers in many of Europe's high-technology companies who, having accepted billions of ecus from Europe's long-suffering taxpayers, nevertheless failed to create world-beating new businesses.

With no or slow growth, these companies soon found it impossible to support their burgeoning employment rosters, traditional R&D budgets, and significant investment programs. The problems of low growth were often compounded by inattentiveness to ballooning overheads (IBM's problem), diversification into unrelated businesses (such as Xerox's foray into financial services), and the paralysis imposed by unfailingly conservative corporate staff. It is not surprising that shareholders are giving moribund companies new marching orders: Make this company "lean and mean"; "make the assets sweat"; "get back to basics." Return on capital employed, shareholder value, and revenue per employee became the primary arbiters of top management performance. Although perhaps inescapable and in many cases commendable, the resulting restructuring has destroyed lives, homes, and communities—to what end? For efficiency and productivity. Although arguing with these objectives is impossible, their single-minded—and sometimes simple-minded—pursuit has often done as much harm as good. Let us explain.

Imagine a chief executive who, fully aware that if he or she doesn't make effective use of corporate resources someone else will be given the chance, launches a tough program to improve return on investment. Now, ROI (or RONA, or ROCE, and so forth) has two components: a numerator—net income—and a denominator—investment, net assets, or capital employed. (In a service industry, a more appropriate denominator may be headcount.) Managers throughout our not-so-hypothetical firm also know that raising net income is likely to be a harder slog than cutting assets and headcount. To grow the numerator, top management must have a point of view about where the new opportunities lie, must be able to anticipate changing customer needs, must have invested preemptively in building new competencies, and so on. So under intense pressure for a quick ROI improvement, executives reach for the lever that will bring the quickest, surest improvement in ROI—the denominator. To cut the denominator, top management doesn't need much more than a red pencil. Thus the obsession with denominators.

In fact, the United States and Britain have produced an entire generation of denominator managers. They can downsize, declutter, delayer, and divest better than any managers in the world. Even before the current wave of downsizing, U.S. and British companies had, on average, the highest asset productivity ratios of any companies in the world. Denominator management is an accountant's shortcut to asset productivity.

Don't misunderstand. We have nothing against efficiency and productivity. We believe, and will argue strongly, that a company must not only get to the future first, it must get there for less. Yet there is more than one route to productivity improvement. Just as any firm that cuts the denominator and holds up revenue will reap productivity gains, so too will any company that succeeds in growing its revenue stream atop a slower growing or constant capital and employment base. Although the first approach may sometimes be necessary, we believe that the second approach is usually more desirable.

In a world where competitors are capable of achieving 5, 10, or 15% real growth in revenues, aggressive denominator reduction, under a flat revenue stream, is simply a way to sell market share profitably. Marketing strategists term this a "harvest strategy" and consider it a no-brainer. Take a national example. Between 1969 and 1991, Britain's manufacturing output (the numerator) went up by a scant 10% in real terms. Yet over this same period, the number of people employed in British manufacturing (the denominator) declined by 37%. The result was that during the early and mid 1980s—the Thatcher years—U.K. manufacturing productivity increased faster than any other major industrialized country except Japan. Though Britain's financial press and Conservative ministers trumpeted this "success," it was, of course, bittersweet. While new legislation limited the power of trade unions, and the relaxation of statutory impediments to workforce reduction allowed management to excise inefficient and outmoded work practices, there was not a corresponding increase in the ability of British firms to create new markets at home and abroad. In fact, with scarcely any net gain in real manufacturing output over the period, British companies were, in effect, surrendering global market share. One half expected to arrive at Heathrow one morning, pick up the Financial Times, and find that Britain had finally matched Japanese manufacturing productivity—and that the last remaining person at work in U.K. manufacturing was the most productive son-of-a-gun on the planet.

The social costs of restructuring are high. And although an individual firm may be able to avoid some of these costs, society cannot. In Britain, the service sector could not absorb all the displaced workers and underwent its own vicious downsizing in the recession beginning in 1989. Of course, much of the cutting in British companies and around the world was necessary, even if first-line workers often bore more than their fair share of the pain. Unproductive layers of management had to be excised, dumb acquisitions unwound, and inflexible work practices abandoned. Yet few companies seemed to ask themselves: How will we know when we're done restructuring? Where is the dividing line between cutting fat and cutting muscle?

One of the inevitable results of downsizing is plummeting employee morale. Employees have a hard time squaring all the talk about the importance of human capital with seemingly indiscriminate cutting. They are too often confronted with a lose-lose proposition: "If you don't become more efficient, you'll lose your job. By the way, if you do become more efficient, you'll lose your job." What employees hear is that they're the firm's most valuable assets; what they know is that they're the most expendable assets.

Many middle managers and first-line employees must feel like the laborers who built the pharaohs' tombs. Every pharaoh hoped to build for himself a tomb of such intricate and deceitful design that no marauder would ever be able to enter it and purloin the pharaoh's wealth. Think of the laborers as middle managers in the midst of corporate restructuring. All the workers knew that when the tomb was finished they would be put to death—this was how the pharaoh destroyed any memory of how to find the wealth. Imagine what would happen when the pharaoh showed up on a work site and inquired of a supervisor, "How's it going, are you about done yet?" "Not yet boss, it'll be a few more years, I'm afraid." No wonder tombs were seldom finished within the pharaoh's lifetime! And no wonder so few first-level and mid-level employees bring their full emotional and intellectual energies to the task of restructuring.

Restructuring seldom results in fundamental improvement in the business. At best it buys time. One study of 16 large U.S. companies with at least three years of restructuring experience found that although restructuring usually did improve a firm's share price, the improvement was almost always temporary. Three years into restructuring, the share prices of the companies surveyed were, on average, lagging even farther behind index growth rates than they had been when the restructuring began. The study concluded that a savvy investor should look at a restructuring announcement as a signal to sell rather than buy. Downsizing belatedly attempts to correct the mistakes of the past; it is not about creating the markets of the future. The simple point is that getting smaller is not enough. Downsizing, the equivalent of corporate anorexia, can make a company thinner; it doesn't necessarily make it healthier.

Any company that is better at denominator management than numerator management—any company that doesn't have a track record of ambitious, profitable, organic growth—shouldn't expect Wall Street to cut it much slack. What Wall Street says to such companies is, "Go ahead, squeeze the lemon, get the inefficiencies out, but give us the juice (i.e., the dividends). We'll take that juice and give it to companies that are better at making lemonade." The financial community knows that a management team that is good at denominator reduction may not be good at numerator growth. Look at how IBM's share price tanked when the company finally cut its dividend. Investors obviously didn't believe that IBM was likely to redeploy the cash saved in a way that would ultimately produce more shareholder wealth.

Though many factors influence dividend payout ratios (the proportion of earnings paid out to shareholders), and although ratios among companies in the developed world may be slowly converging after having diverged since the mid-1970s, it is not totally by accident that the world's best denominator managers—U.S. and British managers—pay back more of their firm's earnings to shareholders than do Japanese and German managers. Again and again Wall Street has shown itself quite content to watch a firm profitably restructure itself out of business, when top management seems incapable of profitably creating the future.



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© Gary Hamel, C. K. Prahalad

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