Through the years, I have been intrigued by the number of once powerful companies that are no longer around. Darwinian principles seem to apply in business as much as in biology. When technology and market environments go through major changes, as is certainly the case today, previously successful business strategies will no longer work, no matter how much you try to fix them. Companies that are unable or unwilling to adapt to the changes in such a Darwinian climate will become marginalized or extinct.
It is not hard to understand how I come to this somewhat fatalistic view of business. In the IT industry, I have seen many once leading companies disappear altogether or become shadows of their former selves. IBM's near-death experience in the 1990s was very painful for me personally and for all us in the company. Even though IBM managed to survive, as well as to regain a position of leadership in the IT industry, the experience has definitely left its imprint and colors my views of the world.
More recently, Citi, which I joined as strategic advisor in March of 2008, has gone through its own near-death experience as a result of the financial crisis of the past few years. As we know, quite a number of once mighty financial institutions did not survive the crisis.
Why is it that some firms are able to go through ups and downs, yet survive and thrive? What accounts for their long term, enduring success? Are there any principles or patterns that can help guide companies through these highly uncertain times and allow them to not only survive but emerge stronger than before?
Cusumano is a professor in MIT’s Sloan School of Management, with a joint appointment in the Engineering Systems Division. He has devoted around thirty years to the study of many of the world’s most successful companies, some of them from the inside as an advisor. The results of his research have been published in over seventy articles and nine books.
In Staying Power, he has distilled all that research into a handful of big ideas or principles that, in his experience, have enabled many of the companies he studied to not only survive the tumultuous business environment of the past few decades, but achieve superior performance. These principles are based on a detail analysis of how the better performing companies put these ideas into practice time after time. In addition, Cusumano has selected only those principles that have also been subjected to rigorous empirical and theoretical scrutiny by academic researchers in a variety of disciplines.
“Whilst some firms do outperform their peers for years and decades, this is a rare accomplishment,” he writes in the book’s introduction. “Staying power is particularly difficult when managers confront disruptive change in technology and customers’ needs - factors largely outside their control, except for how they may respond. Permanent competitive advantage probably does not even exist - that is, across generations of technologies and customers. Firms that continue to do well usually need to continue reinventing themselves.”
“The greatest threat to managers, then, may well be inside the firm. Years of success have the potential to breed complacency or arrogance. Both can plant the seeds of decline and make it more difficult to foresee and respond to change. In fact, steady growth and profitability are likely to encourage firms to become more bureaucratic and less attentive to detail and innovation as they transition to managing a large number of people, more complex products and services, and a bigger scale of operations. And the more competent managers become at doing certain things well, the more difficult it is for them to think outside the box or recognize when they are losing their edge. This admittedly difficult challenge - to identify fundamental principles of management that may help managers create competitive advantage and staying power for the firm - is the primary purpose of this book.”
Professor Cusumano offers six such enduring principles for managing strategy and innovation:
- Platforms, not just Products
- Services, not just Products (or platforms)
- Capabilities, not just Strategy
- Pull, don’t just Push
- Scope, not just Scale
- Flexibility, not just Efficiency
The book devotes a chapter to each of the six principles. The last four, - capabilities, pull, scope and flexibility, - have long been studied in management practice and research. They are all related to agility, that is, a company’s ability to quickly adapt to unpredictable change in technology, markets or competitive conditions. I will not further discuss them in this blog.
But, the first two principles, - platforms and services, - are relatively new. They represent broader ways of thinking about strategy, innovation and business models, especially for products and services companies delivering fairly standardized offerings. They depend heavily on information technologies, and are key drivers of innovation in all companies looking to leverage IT for competitive advantage, which increasingly encompasses just about all companies and industries around the world.
At the beginning of each chapter, Cusumano succinctly summarizes his advice to managers for the particular principle covered in the chapter. Here is his advice, first on platforms, then on services.
“Managers (at least in industries affected by digital technologies as well as network effects more broadly) should move beyond conventional thinking about strategy and capabilities to compete on the basis of platforms, or complements to another firm’s platform. A platform or complement strategy differs from a product strategy in that it requires an external ecosystem to generate complementary product or service innovations and build positive feedback between the complements and the platform. The effect is much greater potential for innovation and growth than a single product-oriented firm can generate alone.”
“Managers (at least in product firms or service firms that offer standardized or automated services treated as products) should use service innovations to sell, enhance, and even de-commoditize products or standardized services. Services can also be new sources of revenues and profits, such as an ongoing maintenance or subscription stream. The goals of most firms should be to find the right balance between product and service revenue, and then to servitize products to create new value-added opportunities and pricing models as well as productize services to deliver them more efficiently and flexibly, such as by using information technology and service automation.”
Cusumano writes that while each principle represents a big, enduring idea, in the end, they are relatively high-level abstractions and should be taken as guidelines, not prescriptions. “Managers must still figure out how to apply these concepts and lessons from the different cases to their particular situations.” Context is all important. What works for one company may not work for another with a very different organizational culture. Different industries vary widely. So do the business environment in different countries around the world.
Management is a highly complex discipline. It is very difficult to capture what works well for all companies in one industry, let alone for business in general. There are so many variable to contend with. But, the six principles articulated by Michael Cusumano in Staying Power feel absolutely right to me. They capture the essence of what every manager should know, internalize and then figure out how to apply as appropriate. Staying Power well deserves to have been recognized as one of the best books on strategy in 2011.