Competing for the Future

Chapter One

Getting Off the Treadmill

The Essence of Business Thinking

Beyond Reengineering

Recognizing that restructuring is ultimately a dead end, smart companies have moved on to reengineer their processes. Reengineering aims to root out needless work and get every process in the company pointed in the direction of customer satisfaction, reduced cycle time, and total quality. Once again, the stopwatches are out: How do we do things faster and with less waste? The difference between this twenty-first century Taylorism and the original is that now companies are asking employees, rather than the "experts," to redesign processes and work flows. Interestingly, though the ostensible goal of reengineering is to focus each and every process on customer satisfaction, it is almost always the promise of reduced costs, rather than heightened customer satisfaction, that convinces a top team to sign up for a major reengineering project. In fact, many companies have taken reengineering charges against earnings in the same way they took restructuring charges in earlier years. Few companies seem to have asked themselves what is the opportunity cost of the hundreds of millions—or even billions—of dollars that have been written off for reengineering and restructuring. What if all that cash and all that "redundant" brain power had been applied to creating tomorrow's markets? Far from being a tribute to senior management's steely resolve or far-sightedness, a large restructuring and reengineering charge is simply the penalty that a company must pay for not having anticipated the future.

There is a difference, though, between restructuring and reengineering. Reengineering offers at least the hope, if not always the reality, of getting better as well as getting smaller. Any company that is more successful at restructuring than reengineering will find itself getting smaller faster than it is getting better. Several of the largest U.S. companies have recently found themselves in this unenviable position. Although restructuring is never more than a necessary thing, reengineering can be a good thing. Yet there is a dilemma. Let us explain. The Machine That Changed the World, an exhaustive and insightful study of the changing economics of car design and production, was published in 1990. "Lean manufacturing," the authors' term for the extraordinarily efficient manufacturing system pioneered by Toyota, is a central theme of the book. Yet as one reads the book, one is compelled to ask: When did Toyota begin its pursuit of lean manufacturing? Answer: more than 40 years ago. And another question comes: Why did it take U.S. automakers 40 years to decode the principles of lean manufacturing? Answer: because those principles challenged every assumption and bias of U.S. auto executives.

Detroit is today catching up on quality and cost with its Japanese competitors. (Of course, Detroit was helped by a yen that appreciated by 20% against the dollar between 1991 and 1993 and a new U.S. president who, at the beginning of his term, threatened Japanese car producers with a massive antidumping suit. Not surprisingly, Japanese automakers raised their prices and surrendered market share.) Supplier networks have been reconstituted, product development processes redesigned, and manufacturing process reengineered. Yet the cheerful headlines heralding Detroit's comeback miss the deeper story. Sure, Detroit is catching up on cost and quality, but what was lost in terms of employment and global market share? The answer: hundreds of thousands of jobs, about 25 percentage points of market share in the United States, and any near-term hope of U.S. automakers' beating Japanese rivals in the booming markets of Asia.

The point is that in many companies, process reengineering and advantage-building efforts are more about catching up than getting out in front. A few years ago one of us sat in on a leading strategy consulting firm's exposition of its methodology for helping clients do things faster. "Competing on time" was, in the opinion of the presenters, the next big competitive advantage. Although no one argued with this premise or the proposed methodology, the consultants were reminded that in the 1970s they had identified global scale and experience effects as key advantages to be pursued and, indeed, many automakers, chemical companies, semiconductor producers, and others had been persuaded to make preemptive investments in large-scale plants, each hoping to secure the required minimum share of world capacity. The result, in several industries, was severe overcapacity and vicious price cutting. Later, in the 1980s, they had urged their clients to pursue quality, which was certainly a laudable goal. Now they were recommending speed as the tonic for uncompetitiveness. In each case, it was pointed out, the consultants had come up with the right answer, but in each case the answer had come about ten years too late. They were helping their clients catch up rather than take the lead.

So while U.S. car companies could celebrate the fact that they were pulling even with their Japanese rivals on cost and quality, Japanese producers were setting new competitive hurdles—breathtaking engine performance, razor-edge handling, luxury, new design aesthetics, and product development aimed at lifestyle niches. It remained to be seen whether Detroit would be the pacesetter in the next round of competition—to produce vehicles as exciting as they were fuel efficient and reliable—or whether they would once again rest on their overused laurels.

In a recent survey, nearly 80% of U.S. managers polled believed that quality would be a fundamental source of competitive advantage in the year 2000. Yet, barely half of Japanese managers predicted quality to be a source of advantage in the year 2000, though 82% believed it was currently an important advantage. Rated first as a source of competitive advantage in the year 2000 by Japanese managers was a capacity to create fundamentally new products and businesses. Does this mean that Japanese managers are going to turn their backs on quality? Of course not. It merely indicates that by the year 2000 quality will no longer be a competitive differentiator; it will simply be the price of market entry. These Japanese managers realize that tomorrow's competitive advantages must necessarily be different from today's.

We come across far too many companies where top management's advantage-building agenda is still dominated by quality, time-to-market, and customer responsiveness. Although no one questions that such advantages are prerequisites for survival, to be still working on the advantages of the 1980s in the 1990s is hardly a testimony to management foresight. Though managers often try to make a virtue out of imitation, dressing it up in the fashionable colors of "adaptiveness," what they are adapting to all too often are the preemptive strategies of more imaginative competitors.

Regenerating Strategy

Again, let us be clear. Catching up is necessary, but it's not going to turn an also-ran into a leader. Divisions of IBM, GM, and DEC have all won the Baldrige for quality—an award for better, not different. Becoming smaller and better are not enough. Think again about the laggards of the late 1980s and early 1990s: Sears, TWA, Westinghouse, Sanyo, Upjohn. Could Sears retake the high ground by getting even better at "bait-and-switch," convincing even more customers that they really wanted a $600 washing machine when they had come in for a $300 model? Would it have helped Sears to become an even more efficient and customer-focused catalog retailer (instead of killing off its encyclopedic catalog)? What if IBM created a lightning-fast mainframe development process, and won even more loyalty with central data-processing managers? What if American and United perfected the art of running a hub-and-spokes airline system—would this help them woo well-heeled international business passengers away from British Airways and Singapore? Our point is simple: It is not enough for a company to get smaller and better and faster, as important as these tasks may be; a company must also be capable of fundamentally reconceiving itself, of regenerating its core strategies, and of reinventing its industry. In short, a company must also be capable of getting different (see Figure 1-1).

Just as some companies have gotten smaller faster than they've gotten better, others have gotten better without becoming much different. Consider Xerox. During the 1970s and 1980s Xerox surrendered a substantial amount of market share to Japanese competitors such as Canon and Sharp. Recognizing that it was on a slippery slide to oblivion, Xerox benchmarked its competitors and fundamentally reengineered its processes. By the early 1990s Xerox had become a textbook example of how to reduce costs, improve quality, and satisfy customers. But in all the talk of the new "American Samurai," two issues were overlooked. First, although Xerox succeeded in halting the erosion of its market share, it failed to recapture much share from its Japanese competitors. Canon still produces more copiers than any company in the world. Second, despite a pioneering role in laser printing, networking, icon-based computing, and the laptop computer, Xerox has failed to create any substantial new businesses outside its copier core. Although Xerox may have invented the office as we know it, it profited very little from its inventiveness. In fact, Xerox has probably left more money on the table, in the form of underexploited innovation, than any company in history. Why all this underexploited innovation? Because to create new businesses, Xerox would have had to regenerate its core strategy and reinvent its very concept of self: its channels, manufacturing processes, customers, criteria for promoting managers, metrics for measuring success, and so on. A company surrenders today's businesses when it gets smaller faster than it gets better. A company surrenders tomorrow's businesses when it gets better without getting different.

It is entirely possible for a company to downsize and reengineer without ever confronting the need to regenerate its core strategy, without ever being forced to rethink the boundaries of its industry, without ever having to imagine what customers might want in ten years' time, and without ever having to fundamentally redefine its "served market." Yet without such a fundamental reassessment, a company will be overtaken on the road to the future. Defending today's leadership is no substitute for creating tomorrow's leadership.

We meet many managers who describe their companies as "market leaders." (With enough creativity in delimiting market boundaries, almost any company can claim to be a market leader.) But market leadership today certainly doesn't equal market leadership tomorrow. Think about two sets of questions:

Today

Which customers are you serving today?

Through what channels do you reach customers today?

Who are your competitors today?

What is the basis for your competitive advantage today?

Where do your margins come from today?

What skills or capabilities make you unique today?

In what end product markets do you participate today?

5 to 10 Years in the Future

Which customers will you be serving in the future?

Through what channels will you reach customers in the future? Who will be your competitors in the future?

What will be the basis for your competitive advantage in the future?

Where will your margins come from in the future?

What skills or capabilities will make you unique in the future?

In what end product markets will you participate in the future?

If senior executives don't have reasonably detailed answers to the "future" set of questions, and if the answers they do have are not substantially different from the "today" answers, there is little chance their companies will remain market leaders. Whatever market a company might dominate today, it is likely to change substantially over the next ten years. There's no such thing as "sustaining" leadership; it must be reinvented again and again.

Back

© Gary Hamel, C. K. Prahalad

Email this article | Respond to this article