The Disruptive Impact of Globalization and Technology
Take a look at the changes happening within essentially any industry today, and it’s obvious how quickly the pace of change is accelerating. New innovations and new products are being brought to market with such increasing frequency that the acceleration of change can seem a bit daunting.
We hardly need any evidence of our rapidly changing world. After all, we’re inundated daily with ads for new products and media stories of the next big thing. But to gain a little perspective on the increase in innovation and change, think back just two or three decades about a couple of everyday examples with which we’re all familiar—groceries and automobiles.
Cleaning Up in Aisle Six
Everyone has some firsthand market and product experience. My parents had a small grocery and meat store, and as someone who stocked the shelves year after year, I can tell you that there were relatively few new product introductions. The big news was the cola wars and the Pepsi Challenge of Pepsi vs. Coke, which was a genius move by a brilliant marketer and business leader—John Sculley. But the ingredients were unchanged. As far as innovative new products, there was not a lot happening.
Today it’s a different story. It seems there is a constant influx of new grocery products fighting for attention. And often there are entirely new categories emerging and changing the product landscape. Take energy drinks as one example. To get an idea as to the rate of growth, Red Bull was created in Austria in 1987 and launched in the US in 1997. The energy drink category grew to approximately $43 billion worldwide in 2016.42 Wikipedia lists 60 different energy drink brands (Red Bull, Rockstar, Monster, and 5-hour Energy are the popular ones), and there’s probably several more launching by the time I finish this sentence.
Zero to Sixty in 60 kWh
Another example of an industry undergoing rapid change is the automotive industry. Before the influx of Japanese automobiles, the cars coming out of Detroit, Michigan, really didn’t change that much from year to year. There just wasn’t an environment of fierce competition to drive consistent and significant innovation.
But consider what began with the introduction of Japanese automobiles into the US, and what continues today within the automotive industry. Cars are continually being released with significant mechanical and electrical advances. Even a partial listing of automotive features being added now or in the near future reads like a dream list from Popular Mechanics: rear-mounted radar, night vision with pedestrian detection, automatic high beam control (unlike old controls that switched from high to low beam, this technology actually gradually increases or decreases the light pattern), parental control (to limit speed), GPS vehicle tracking (watch your car live on the internet), built-in cameras, internet for passengers, etc.
And that doesn’t even mention self-parking, self-driving, hybrid, or fully electric cars like Tesla Motors—which promise major changes beyond the innovative automobile itself—including fueling stations, recycling batteries, cleaner emissions, etc.
Two things are clear to me, more innovation is occurring faster than ever before, and the global business world has undergone profound changes. But what are the reasons behind these fundamental shifts?
Global Business Strategist Richard D’Aveni
To further understand what is driving all this innovation and change within the world of business, I had the privilege of speaking with Richard D’Aveni of the Tuck School of Business at Dartmouth. D’Aveni is one of the world’s preeminent strategists who has worked for three decades with multinational corporations and major governments throughout the world to assist with their strategies.43
As evident from his several books on the topic and his enthusiasm, Professor D’Aveni is passionate about understanding the seismic changes happening and in communicating new strategies for success. He explains the corporate strategies, that companies used for decades, have been under attack as a result of globalization and technology. According to D’Aveni, the old corporate strategic theories, along with the old business models are falling apart. The resulting impact on businesses has ranged from creating a challenging business environment (automobiles, consumer electronics) all the way to creating major industry upheavals (music, newspapers).
Traditional Business Strategies
Historically, the first rule of business strategy that corporations used was to find and leverage a sustainable competitive advantage. Perhaps the company had access to a geographically concentrated pool of factory workers or engineers. Or it had the critical mass to have its own fleet of vehicles for product distribution, had a secret manufacturing technique, or was geographically situated in a location that had a unique advantage. Such sustainable competitive advantages were often the reason a customer would pick a company over its competitor.
But in today’s global business environment, and with technology that connects everyone at the speed of light, many competitive advantages have greatly diminished or even been eliminated. Access to engineers and scientists is now readily available anywhere there is internet, UPS will handle distribution and logistics for a multitude of small- and medium-size businesses, world-class cloud software is affordable and readily available to even a one-person company, and a small business can reach customers around the world for next to nothing.
Another primary business strategy used during the 20th century was for companies to use their strengths against a competitor’s weakness. Typically, this strategy was ascertained by the business development and marketing folks completing a SWOT analysis—where the company would describe its strengths, weaknesses, opportunities, and threats. Then the managers, with their SWOT analysis in hand, would begin planning and executing how best to deploy their strengths against a competitor’s weaknesses.
But D’Aveni points out that many new disruptive technologies and business models now force firms to build their weaknesses and to overwhelm the strengths of rivals. The old SWOT rule of leveraging your core competence is now a way to milk your firm’s current assets. Instead, firms should be preparing for the future by turning weaknesses into new competitive advantages that shift the rules of the game.
Managers have been taught the above strategies for decades, and those strategies are still being taught today in many institutions. According to D’Aveni, who has researched and written about this topic in several books, continuing with these primary strategies has been a mistake for which businesses pay dearly.
Traditional Strategies No Longer Work
Professor D’Aveni explains in his books, classroom, and consulting engagements with companies, that those long-held traditional strategies were premised on a slower change of pace and lower levels of disruption. While they were viable strategies decades ago, he has shown how globalization and technology (and to an extent regulation) have long negated those practices. He wrote about this new environment in his book Hypercompetition: Managing the Dynamics of Strategic Maneuvering, and coined the term. These concepts of temporary competitive advantage and hypercompetition were first written by D’Aveni in 1994, and since that time, there have been many imitators, followers, and adopters of his ideas.
What D’Aveni explains is that the old rules are being destroyed as a result of a global shift in business competition caused by globalization and technology. This fundamental shift, results in a world where finding a “sustainable competitive advantage” is no longer viable. Where using your strengths against a competitor’s weakness will eventually lead to failure. As an explanation, Professor D’Aveni describes a general history arc of the automotive industry over the past 100 years, which he adds is similar to many other industries during the same period.
A Brief History of How We Got Where We Are
When the automobile industry began, there were tremendous innovations related to engine performance, braking, and suspension systems. There were also major innovations concerning manufacturing and production assembly. Henry Ford, founder of the Ford Motor Company, was a champion of the assembly li
ne. Eventually, as the industry matured and a few key competitors emerged, the industry evolved into a small oligopoly, and the innovations lessened. The model was not to drive the other competitor out of business, but more or less to divide the market.
The market changed to one where there was “planned obsolescence” of the products. Many executives considered this a great management practice. It allowed car companies to overcharge and make good profit, while producing mediocre products. D’Aveni describes the result as one where the manufacturers treated the customers and suppliers poorly, while treating the competition well. He points out that this is something that seems backward today.
But the unwritten rules were within the US, and foreign competitors had different rules of competition. Previously, the automotive industry could discredit a cutthroat attitude. But Japan entered the market and it didn’t care about US rules. The Japanese vehicles were of high quality, reliable, and affordable. Over the ensuing years, Detroit and the US auto industry was decimated.
As further evidence of the changing world and strategies, D’Aveni mentioned a couple of hugely popular business books: Built to Last: Successful Habits of Visionary Companies, by Jim Collins and Jerry Porras; and In Search of Excellence: Lessons from America’s Best-Run Companies, by Thomas Peters and Robert Waterman. According to D’Aveni, these books profiled companies that were at the top of their industries for over 50 years. However, today only about one third of the companies have continued to earn money for shareholders at about their same historic rates. D’Aveni mentions that “Historical performance didn’t predict the future.” And that’s the point D’Aveni has been trying to make for decades. “The old rules don’t apply. The old rules have contributed to creating the weakest economy in decades.”
The New Hypercompetitive World: Good News and Bad News
The historic strategies of the 20th century were about the ability to sustain leadership position by putting up barriers to entry and competing systematically with the competition. This was done in hundreds of industry sectors and by thousands of companies and was primarily accomplished by these methods.
Finding a sustainable competitive advantage, such as superior resources.
Conducting a SWOT analysis and using your strengths where the competitors were weak. (This is also typically used historically as a military strategy.)
But, technology and globalization have leveled the playing field and allowed new players to come into virtually every market, creating a world of hypercompetition where the old strategies are no longer effective.
The good news is that on the whole people benefit. The bad news is that competition is escalating. Competition is becoming increasingly fierce. There has been major disruption in numerous industries, and some industries have experienced such upheaval that they have had to deploy completely new business models.
So, exactly why don’t the old strategies work any longer? In a word, because of hypercompetition, as Richard D’Aveni explains by use of an analogy.
Sustainable Competitive Advantage Is No Longer a Viable Strategy
As a simple means of describing to a large group of business executives why and how business strategy needs to evolve as a result of the new hypercompetitive world, Richard D’Aveni uses a simple thought experiment involving a tennis match.
He describes a hypothetical scenario in which two competing tennis players are equally matched. For the sake of example, he wants you to assume they’re of identical skills and fitness levels; and that they both have strong forearms (same competitive advantage) and similarly weaker backhands. They’re perfectly matched competitors, and, being equal, would each win an equal number of games.
Traditional Strategy
The only difference D’Aveni inserts into the above scenario, is that competitor “A” was taught the basic strategy of using a strength against an opponent’s weakness—as per traditional business SWOT analysis. So, putting that strategy into practice, player A would use her forearm to hit the ball to player B’s backhand whenever possible. Using that strategy, we could correctly assume that player A would win the first game in this matchup. Furthermore, player A would probably win the next several matches using the same strategy.
But, D’Aveni explains that because we’re now competing in a hypercompetitive world with new rules, competitive landscape, and a greater number of “games played”—that consistently applying the old business strategy no longer works—at least not for long.
As an example of how the world has changed, he mentions Sony and Panasonic. “In the consumer electronics industry, product lifecycles used to be five years, now new products are introduced in five months. And while in the 1980s each company had a few thousand products, today they have between 60,000 and 70,000 products.” So concerning the analogy of the tennis match, one game, or even a dozen games, doesn’t reflect the real world today. A more apt analogy would be competing hundreds of times, perhaps on different courses with evolving rules.
Going back to the tennis scenario, after 100 games … player A has likely still won more games. But at this point, player B’s backhand has gotten much better due to all the usage. In fact, D’Aveni argues that player B has likely by now probably developed her backhand into a second competitive advantage—in that her backhand is now better than player A’s backhand. And that, he points out, is one of the problems in today’s world when companies focus primarily on “leveraging their core competency.” It’s a formula for victory in the short term, but in this new world, it will likely lead to defeat in the long term. Focusing on using strengths often defocuses companies from developing their weaknesses. Yet old business habits are hard to break, and D’Aveni’s lament is that business theory has become religion in the face of new world facts. “People are taking old rules and continuing to apply them without adaptation to a new world,” D’Aveni says.
More Competition Requires New Strategy
Returning to his thought experiment, D’Aveni asks the business execs, “Now, if you were player B, after the first 100 matches what would you do during the next 100 games?” He gets good participation from the group, “Mix it up,” “Run player A around,” and “Continually change the pace.” The professor smiles and nods his head positively. D’Aveni explains, “Exactly! If you were player B, rather than simply use your competitive advantages against the competition, which would be using your forehand and now your backhand to hit to player A’s backhand, you’d change things up and be unpredictable.”
This is the point D’Aveni has wanted to make, and indeed has been espousing for decades. He makes a point that historically, business strategy was to be clear and permanent, but in today’s dynamic and ever-evolving world, it should be flexible.
Increased Competition Requires a Multitude of Varying Strategies
D’Aveni explains this scenario is what has similarly happened within numerous industries over the past 30 years in the United States. He asks the audience of senior business executives for their general thoughts on the discussion and the hypothetical tennis match. Their responses include the following ideas.
The rules of competition have changed significantly over the past few decades.
Rote focus on the traditional strategy of “using your strength against an opponent’s weakness” will eventually lead to trouble.
Through repeated usage, player B’s weakness becomes a strength. Player B now has essentially two competitive advantages.
Player A should have developed her weakness, rather than solely focus on using her strength against player B’s weakness.
In an environment of rapid change, a better long-term strategy would be to play unpredictably and “mix things up.”
Timing and speed of maneuvering become increasingly important.
Once unpredictability and constant change is happening, the fierceness of competition goes way up.
Unpredictability and constant change equate to competing and winning with temporary advantages.
The old busi
ness strategies involving finding a competitive advantage and attacking your opponent’s weakness with your strengths are no longer effective in today’s world. Rather, competing strategically by establishing dynamic temporary competitive advantages is increasingly required to establish and maintain business success.
In with the New, Out with the Old
The business world used to be different. Business strategy in the 20th century focused on the rules codified by Harvard Business School professor Michael Porter: slow-down the competition by finding a sustainable competitive advantage, establish oligopolies by creating barriers to entry, reduce rivalry through avoiding price competition, and attacking a competitor’s weaknesses. Then use this noncompetitive environment to maximize margins by taking advantage of consumers through higher prices and lower quality. One other important rule codified by Porter was that firms should only offer higher quality for a higher price, or low quality for a low price, because this prevents margins from eroding.
Business schools in the 20th century taught generations of managers that this was considered fair competition, ignoring the detrimental effects of noncompetitive oligopolies and planned obsolescence. This was the thinking, Richard D’Aveni explains, which led the US automotive companies to essentially offer higher-priced, low-quality cars, and to open the doors for Japanese competitors to take market share by offering high quality and low prices at the same time. The major manufacturers made money, and lots of it, by acting as an oligopoly with power over customers and suppliers.
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