It’s a Darwinian New World

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Reeves and Deimler¹ portray an unvarnished picture of the business operating environment in their article, “Adaptability: The New Competitive Advantage,” in a recent issue of the Harvard Business Review. Market dominance is increasingly ephemeral, with the percentage of companies falling out of the top three from year to year increasing from 2% in 1960 to 14% in 2008. Market leadership, today, is not often correlated with profitability: The likelihood that market dominance translates into profitability decreased from 37% in 1950 to 7% in 2007.

These two new business truths pose great challenges for those who must set the strategic course for the organization.

Traditional strategic thinking involves building an enduring, or static, competitive advantage by establishing an effective market position. Increasingly, leaders are beginning to question the logic of leading based on something as fleeting as market position, particularly at a time when it is so difficult to determine where one industry ends and another begins.

A growing number of companies are coming to the same conclusion: Success is no longer measured by market position, scale, or the organization’s ability to produce a product (or, in the case of health care, procedures). The greatest measure of success is its ability to adapt—that is, to learn new things. The authors contend that those companies with the ability to thrive in this environment can do four things very well.

First, they are quick to pick up and recognize market signals. Operating in such a fast-changing environment requires an organization to be attuned exquisitely to the external environment and to possess the ability to decode the incoming signals. The authors use Formula One racing as a metaphor, explaining that the era when car and driver determined who won has been supplanted by an era in which information from multiple sensors produces data on thousands of variables processed by race teams, whose input is an important factor in a win.
Adaptive companies use sophisticated data-mining capabilities in order to recognize these patterns in their markets. When considering the new mandate to improve outcomes in health care and the likelihood that providers will assume some level of risk, the ability to collect, process and analyze a multitude of data on a patient population will be fundamental to those endeavors.

The authors cite the example of a leading media company that added neural-network technologies to its analytics to understand customer churn better. The company was able to uncover patterns that enabled it to predict with great accuracy which customers were about to leave and target them with retention programs. Radiology practices could benefit from the ability to recognize and address customer dissatisfaction quickly. Another example cited was Google’s use of analytics to identify the interests of its users so that ads could be better targeted—a strategy that drove revenue, since the company is paid on a per-click basis.

Second, adaptive companies know how to experiment quickly, often, and inexpensively—an excellent alternative to forecasting in market uncertainty. Asking customers for their perceptions is known as a poor predictor of success, the authors write, but experimenting in the real world can be dangerous. Therefore, adaptive companies are finding new ways to experiment, such as in virtual environments. Procter & Gamble, for instance, is creating virtual stores in which to test products. Medical schools have begun hiring actors to stand in for patients, to teach some skills better.

Companies must broaden the scope of their experiments, the authors contend, going beyond their traditional products and services. A case in point is IKEA, which recognized that whenever it opened a store in Russia, property values increased in the area around the store. It began investing in malls and now makes more money in real estate in Russia than with its traditional offerings in furniture. The authors advise that embracing failure for what can be learned is part of the process.

Third, adaptive companies have developed the skills necessary to manage complex systems with multiple stakeholders that are increasingly interconnected. As companies engage in a growing amount of economic activity beyond corporate boundaries, strategy must embrace dynamic business systems.

“Increasingly industry structure is better characterized as competing webs or ecosystems than as a handful of competitors