Collaborative strategies for getting and staying ahead

Citation

Leavy, B. (2005), "Collaborative strategies for getting and staying ahead", Strategy & Leadership, Vol. 33 No. 6. https://doi.org/10.1108/sl.2005.26133fae.001

Collaborative strategies for getting and staying ahead

Collaborative strategies for getting and staying ahead

The Only Sustainable EdgeJohn Hagel III and John Seely BrownHarvard Business School Press, 2005, 173 pp.

In the late 1980s, Ray Stata, co-founder of Analog Devices, expressed the conviction that “the rate at which individuals and organizations learn may become the only source of sustainable competitive advantage.” Gary Hamel and C.K. Prahalad, in Competing for the Future, went on to portray the new dynamics of competition in the 1990s and beyond as the race to learn and secure competency leadership. The Only Sustainable Edge by John Hagel III and John Seely Brown carries this perspective forward into today’s maelstrom of competition. As the authors see it, competency-based strategy still remains largely enterprise-centric. Looking at the new competitive landscape, they conclude that only by accelerating capability building across both firm and geographical boundaries will firms be able to secure a sustainable edge. The book sets out to explain why and offer strategists practical guidance.

The authors come to their task with well-established reputations in the areas of innovation and the strategic implications of new information technologies. John Hagel III is an independent consultant based in Silicon Valley and a McKinsey consulting alumnus. His most recent book was Out of the Box: Strategies for Achieving Profits Today & Growth Tomorrow Through Web-based Services, while John Seely Brown is the former Chief Scientist and Director of the renowned Xerox Palo Alto Research Center (PARC). He recently co-authored The Social Life of Information (with Paul Duguid).

Among the prime examples that Hagel and Seely Brown draw upon in developing their ideas, are Li & Fung, a new kind of network company, and the outsourcing and hi-tech firms clustered in Bangalore, India, which constitute a new kind of specialized local business ecosystem.

Li & Fung is a century-old company in the apparel business, based in Hong Kong. It currently generates about 5B$ in revenue - over 1M$ per employee – with 30 to 50 percent returns on equity and a sustained record of double-digit growth for over two decades. The secret of its recent success stems from a re-invention of its business model in the mid-1970s to place it at the hub of a business network of more that 8,000 firms across more than 40 countries, allowing it to access and mobilize an extensive array of assets and capabilities.

Over a similar timeframe, Bangalore has emerged as a commercial community with world-class capabilities in software and business process outsourcing services, strong ties with Silicon Valley, a growing influx of Western venture capital, and indigenous world-class players such as Infosys and Wipro Technologies. Understanding the nature and impact of such new business networks and their linkages to such local business ecosystems with unique capabilities are central to the perspective on strategy being offered in the Hagel and Seely Brown book.

Here’s the authors’ thesis in a nutshell. As talent and knowledge become the scarce strategic resources, and innovation the main route to value creation, the relative ability of a firm to accelerate capability building across its business network and convert it into performance improvement on an ongoing basis becomes the key competency for sustaining a competitive edge. This will require managers to focus on three related strategic imperatives: dynamic specialization, connectivity and coordination, and leveraged capability building. Securing an edge in today’s competitive landscape requires the willingness to focus more intensely on areas of world-class capability and use this deepening specialization to drive aggressive growth. With this shift towards greater specialization comes a requirement to partner more extensively for complimentary expertise, “learning how to access and mobilize the resources of other equally specialized companies to add even more value for customers.” Sustaining the edge will require the company and its specialized collaborators to spur each other forward in the dynamic leveraging of their collective capabilities.

Economic arguments in favor of specialization go back to Adam Smith. More recently, companies have been impelled by the logic of core competency to refocus on their core businesses. Hagel and Seely Brown suggest that a further wave of specialization is now gathering pace, reaching into what were once seen as the core operating processes integral to any firm. Why is the time ripe for such a development? Radical reductions in interaction costs from recent advances in IT are a key driver. So also are the tensions inherent within the traditional business model. The traditional model, the authors suggest, is really a combination of three distinct business types, infrastructure management, product innovation and commercialization and customer relationship, each requiring “very different economics, skills, and even cultures to be successful.” The authors conclude that businesses that keep them tightly bundled become “increasingly vulnerable to more focused competitors.” In industry after industry – most notably in financial services, pharmaceuticals and IT – we are already beginning to see the rise of specialist firms along these lines, pooling competencies with complementary specialists to deliver products and services to customers.

Choosing such a specialized strategy need not restrict a firm’s potential for further growth – at least two of these core activities lend themselves to significant economies of scale and scope in their own rights. Nor does greater specialization unduly narrow the scope for innovation – in fact the reverse may well be true. Greater specialization not only promotes the development of deeper expertise but also lends itself to application to a wider range of market challenges and learning opportunities compared with more integrated versions of the same activity. As examples, contrast the growth and innovation records of a manufacturing services specialist like Sanmina, or a call center specialist like Convergys, with any of their captive equivalents.

In making their case for more collaborative network-based strategies, the authors also make a case for more extensive offshoring, particularly to partners in strategic Asian markets, where the rationale for such a move grows stronger all the time. As indigenous technical skills become more prevalent in such regions (China, for example, now graduates four times more engineers than the USA every year), the advantages of salary arbitrage are greatly amplified as they extend beyond manual labor to technical and managerial talent. Furthermore, many local business ecosystems come to evolve unique capabilities, not available or economically feasible elsewhere (whether it be software expertise in Bangalore, semi-conductor fabrication know-how in Korea, or plasma TV competencies in China). In many cases, such capabilities emerge through efforts to bring new technologies to a critical mass of consumers in such developing markets at price points well below those that prevail in the West. Today, the kinds of innovations currently driving growth in the area of mobile telephony in India and China are quite unique to those markets and the relevant know-how is not directly available to the likes of Nokia or Ericsson. Access to such capabilities will not just be key to full participation in these rapidly developing arenas. For many Western firms they are also likely to become important in maintaining domestic competitiveness down the road, when many of the business solutions developed for Indian and Chinese consumers migrate to more advanced economies as disruptive innovations.

Finally, as noted earlier, the competitive challenge is not just one of shifting to a new type of network-oriented business model to get ahead, it is also finding a new way of working within this collaborative model to stay ahead. This is where the notion of productive friction comes in. For some time now, we have come to appreciate the role that creative abrasion or productive friction can play in the innovation process, when talent from different backgrounds and cultures rub up against each other in the search for solutions to shared problems (see Jerry Hirshberg’s The Creative Priority or Dorothy Leonard’s The Wellsprings of Knowledge).

Business networks of the Li & Fung type are natural wellsprings of this kind of friction. The trick is to be able to harness it effectively and keep it productive. According to Hagel and Seely Brown, the Li & Fung model represents a new form of collaborative network built upon the principles of loose-coupling, modularity and “pull” rather than “push” operating dynamics, that offers a level of flexibility, responsiveness and innovation well beyond that available in the typical extended enterprise to date. The key to making this work is the ability to create the right kind of “performance fabric”, interweaving a business strand aimed at creating and maintaining effective relationships of trust and shared meaning among all of the players with a technology strand drawing on exciting advances in enabling technologies in such areas as service-oriented architectures, social software and wireless connectivity to help a network of this nature function. The creation of such a performance fabric is an emergent multi-phase process, with few short cuts, offering early movers a decided and sustainable advantage. The authors give extensive attention to this key execution challenge.

Overall, The Only Sustainable Edge serves to reinforce the insights to be found in a number of books recently reviewed in these pages on the changing nature of competition. It presents a capability perspective on value innovation that nicely complements the market focus to be found in Blue Ocean Strategy by W. Chan Kim and Renée Mauborgne, while offering specific insights of its own to those on how, where and when new disruptive business models are likely to emerge over the coming decade provided by Clayton Christensen and Michael Raynor in The Innovator’s Solution. Like C.K. Prahalad and Venkat Ramaswamy in The Future of Competition and Marco Iansiti and Roy Levien in The Keystone Advantage, the book examines the growing importance of network-to-network competition (the Li & Fung example figuring prominently in all three) while offering its own particular insights into how to lead strategically within such a new competitive context. So whether considered on its own, or in conjunction with these other recent offerings, The Only Sustainable Edge should prove to be a valuable addition to any strategist’s bookshelf.

Brian LeavyAIB Professor of Strategic Management at Dublin City University Business School and a contributing editor of Strategy & Leadership (brian.leavy@dcu.ie).