Wednesday, November 13, 2013

How doing what you’re best at, might be the end of you.

“Most companies don’t pass the coherence test because they pay too much attention to external positioning and not enough to internal capabilities”
One of the first sentences in the HBR paper “The coherence premium” talks about how building your core competency is as important or possibly more important than positioning yourself in the market. It goes ahead to say that your company must be focussed intensely on its core competencies – figuring out the three-to-six competencies that they excel in, develop them coherently, and cut off other competencies that do not add to the coherence. This, according to me, conflicts slightly with our reading in week 1 where the company’s strategic style could be decided based on the environment. With that reading of “Your strategy needs a strategy” we learned that for example if an organization is in an industry that is unpredictable, then it is better off having adaptive strategies to keep up with the market changes. But how does this affect the core competencies as mentioned in “The coherence premium”? When an industry changes, an organization is faced with two options to stay relevant in that industry: to build the competencies in-house, or to acquire an organization that has these competencies. And either of these options seems to make the company incoherent, and thus the new question then would be about figuring out how they can adapt to the changing market and yet pass the “coherence test”?

A classic example of a company building up on its core competency only to realize that the industry moved in a different direction - is Chrysler. Chrysler in the 1980s built their competencies in inventing the minivan [1]. This was their core competency and they excelled at it. At that point in time Chrysler would have passed the coherence test. But the industry for cars changed as the gas prices spiked. The industry moved more towards hybrids, SUVs and more recently the trend of environment-friendly cars. If Chrysler had focused only on their internal competencies, and worked only on developing them further, then they would’ve been trapped (a “competency trap” as Jeffrey Pfeffer from CNN calls it). Therefore trying to create value by only focusing on what they were good at, could have been their end.
Chrysler's core competency in the 1980s - MiniVan

However, when the industry changed, Chrysler knew that they had to adapt, despite having huge investments in their minivan-tailored factories. That was when Chrysler merged with Benz to get the competencies they needed to survive in the changing industry. This merger could have been viewed as incoherent, but it was necessary for them to do so and get out of the “competency trap”.

In recent times there are plenty of examples where companies are moving out of their core competencies in order to be innovative. Nike, essentially a shoe company, has products such as the FuelBand which has vastly different competencies needed when compared to shoe manufacturing. When asked about this transition from shoes to software, the CEO of Nike says "In the world we live in today, you have to adapt and change. One of my fears is being this big, slow, constipated, bureaucratic company that's happy with its success. That will wind up being your death in the end." [2]. This again leads to the fact that while focussing on their core competency of manufacturing great shoes worked for Nike all these years, they choose to adapt in a changing industry to be relevant to their customers, even if this means having to tread untested waters in areas they don’t have competencies in.

One way to visualize the balance between keeping your core competency while still adapting to the changing market, is to look at Apple. It is very clear to see that Apple builds new competencies to keep up with the industry (while they change the industry simultaneously). But the new competencies they build while adapting to the changes, always leverages their existing core competency. The coherent core competency of Apple could be their design skills, which is seen in every new product they release. For instance, when Apple decided to adapt their strategies to an industry that was trending towards mobile technologies, they built their competencies to manufacture iPhones. But this drew upon their core design competencies.  Therefore we can say that Apple has a balance between growing by adapting to changing industries while also growing their competencies in a coherent fashion.

While Apple seems to be one example I could think of that has it all figured out, what about other organizations that change their strategies as per the industry? Or what about companies like blackberry that are really good at what they do, and focus only on their core competency without paying much attention to the industry trends? And more so, what about organizations that have always grown by acquisitions outside of their core competency - I’m thinking of the Big 4 which have always acquired and is moving from audit to consulting – How do they manage to remain coherent while growing across competencies in the changing industry they operate in? 

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