Perpetual pilots are the new goal for strategy

FT

July 1, 2013 4:09 pm

By Andrew Hill

Corporate cavemen trigger the smugness alarm with statements such as ‘I don’t want surprises’

Industries are in flux. Google’s driverless cars are waiting at the intersection of internal combustion and search engines. Payment companies such as M-Pesa, Stripe and PayPal are testing the locks on banks’ safe deposit boxes. Samsung, Appleand Google’s Android have put BlackBerry and Nokia on hold. If you are the chief executive of a carmaker, financial institution or mobile phone maker and you are not yet worrying about the blurred edges of what was once a clearly demarcated border between sectors, you are lost.

Yet corporate cavemen still trigger the smugness alarm with statements such as “I don’t want any surprises” or “don’t bring me a problem unless you’ve got a solution”.

Rita Gunther McGrath, of Columbia Business School, says such comments are characteristic of leaders who think they have found a “competitive advantage” – the holy grail of strategists since Michael Porter defined it in 1985, in his book of the same name.

You question the solidity of Prof Porter’s work at your peril. When I asked him in 2011 whether the greatest economic and financial crisis in 75 years had shaken his theories, he was adamant they were “more and more and more fundamentally important and visible”. But Prof McGrath’s new book – provocatively entitled The End of Competitive Advantage – is a battering ram aimed straight at the door of Prof Porter’s Harvard-based Institute for Strategy and Competitiveness.

As she told me last week, chief executives who cling to the illusion of competitive advantage are “resisting the reality” of 21st-century corporate existence: fluctuating competition (and competitors), short-lived opportunities, constant challenge.

The danger with tearing down the Porter pillars is that companies will be left sitting in the rubble, without landmarks to help them find a new path. But Prof McGrath offers a guide through the volatility that includes a policy of constant, systematic early-stage innovation

Peter Sands, Standard Chartered’s chief executive, summed up the approach well in the FT yesterday, when he outlined the threat to risk-averse, regulation-bound banks from nimbler competitors and a solution that involves “generating more ideas, implementing them more swiftly, [and] being quicker to discard the ones that do not work”.

For many large companies that still think of innovation as a series of large projects based on expensive research and development, this goes against the grain.

But the traditional and modern approaches are not mutually exclusive. In fact, a combination is essential. Jaideep Prabhu of Cambridge’s Judge Business School points to Bangladesh-based Brac, the world’s largest development organisation and a pioneer in the fight against poverty. Its success is founded, he says, on scrupulous accounting, paranoia about fraud and a culture of “thinking hard about testing programmes [in the field] and then evaluating them”. By contrast, a structured R&D process used on its own can produce “something that is technically beautiful, but useless in the market”.

Some areas are off-limits for experimentation. I don’t want nuclear power plants to indulge in rapid prototyping and I would adopt the brace position if the captain announced he was planning to try out some new ideas in-flight.

But most other organisations have already entered the era of the perpetual pilot project, what Prof Prabhu calls “permanent beta”. An attitude of experimentation should liberate companies such as banks or phone service providers to try out Brac-style innovations in the user experience, which can be tested and evaluated cheaply and efficiently. As Prof McGrath says, product features can be copied easily but service advances are harder to replicate.

Prof Porter has added to his portfolio and reputation since the 1980s, exploring useful concepts such as “shared value”. His twin pillars of competitive strategy and competitive advantage are also still valid for more stable industries, such as mining, food retail or aircraft manufacture. I don’t expect him ever to admit the validity of his original theories has diminished, but he ought to be satisfied with their durability. The competitive advantage of “competitive advantage” kept rival theories at bay for nearly 30 years. By the standards of the latest corporate innovations, that’s an exceptionally good run.

andrew.hill@ft.com