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Competing for the future

Bookcover

by Gary Hamel and C.K. Prahalad, Harvard Business School Press, 1994.

A copy of this book can be ordered online via the Ashridge e-bookshop.

Abstract

Companies should be competing for future opportunity share, rather than for current market share, basing their strategies on their core competences or those they could acquire, not on what competitors are currently doing. The book is about how to think as well as to do, competing to redefine the structure and boundaries of industries where they can find a niche.

(Reviewed by Kevin Barham in January 2005)

(These book reviews offer a commentary on some aspects of the contribution the authors are making to management thinking. Neither Ashridge nor the reviewers necessarily agree with the authors’ views and the authors of the books are not responsible for any errors that may have crept in.

We aim to give enough information to enable readers to decide whether a book fits their particular concerns and, if so, to buy it. There is no substitute for reading the whole book and our reviews are no replacement for this. They can give only a broad indication of the value of a book and inevitably miss much of its richness and depth of argument. Nevertheless, we aim to open a window on to some of the benefits awaiting readers of management literature.)

Introduction

Competing for the future is one of the most influential business books of recent times. Although we can see it as a reaction to the short-termism of the early 1990s, many of its messages are still highly valid today.

Published in 1994, it appeared at a time when American industry was emerging from the era of cost-cutting and downsizing which had characterised its response to Japanese supercompetition in the 1980s. American business was ready for a new, positive message and business professors Gary Hamel and C.K. Prahalad provided it. Look beyond your short-term preoccupations, they said, and start thinking long-term again about strategies for regaining the initiative. The successful firms of the future will reshape their industry rather than themselves. By recognising and building on their unique ‘core competencies’, rather than their current product lines, firms can create entirely new competencies and products that will enable them to pre-empt competitors in the global markets of the future. The challenge is to start thinking very differently about strategy and competition. (The notion of core competencies as the gateway to the future has struck such a chord with managers over time that Hamel and Prahalad’s 1990 article on the subject is the Harvard Business Review’s most reprinted article ever.)

Hamel and Prahalad’s partnership is fostered by their shared belief that the ultimate test of business school research is its managerial significance. They were particularly intrigued by how smaller competitors, many from Japan at that time, could beat much larger, richer companies. This seemed to question the prevailing theory about the market power of established firms and the advantages of market share. They suggested that the differences in resource effectiveness could not be accounted for by incremental improvements in operational efficiency nor by institutional factors such as the cost of labour or capital. How were some firms able to constantly invent new ways of accomplishing more with less?

It was clear that the challengers were driven by something more than short-term financial goals. They had, it seemed, a particular point of view about the future typified by amazingly ambitious goals that went far beyond the time horizons of typical strategic plans. Many had succeeded in creating entirely new forms of competitive advantage and in dramatically rewriting the rules of engagement.

The authors concluded that some management teams were simply more ‘foresightful’ than others. They were capable of imagining products, services and entire industries that did not yet exist and of creating them. These managers were less concerned with positioning the firm in existing ‘competitive space’ than in creating fundamentally new competitive space. Other firms - what Hamel and Prahalad call the ‘laggards’ - were more interested in protecting the past than in creating the future. They took the industry structure as given and rarely challenged the prevailing conventions.

Hamel and Prahalad felt that the existing theory provided little insight into how to reshape an industry fundamentally to one’s own benefit. They were writing at a time when strategy was in crisis - firms had disbanded corporate strategy departments, were often more concerned with improving operating efficiency than developing strategy, and were downsizing rather than creating new markets. Hamel and Prahalad’s aim was to enlarge the concept of strategy whereby the goal is to transform industries and not just organisations, where being incrementally better is not enough, and where firms that cannot imagine the future won’t have a future.

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A new view of strategy

At the time that Competing for the future appeared, the authors believed that too many senior managers were occupied with restructuring and re-engineering, neither of which, in their view, was a substitute for imagining and creating the future.

The ‘new’ view of strategy required four things: (1) An understanding of how competition for the future is different; (2) A process for finding and gaining insight into tomorrow’s opportunities; (3) An ability to energise the company from top-to-bottom for a long, tough journey toward the future; and (4) The capacity to outrun competitors and reach the future first without taking undue risks.

To summarise their main ideas, Hamel and Prahalad say the firm must ‘unlearn’ much of its past before it can find the future and must develop great foresight about tomorrow’s markets. Firms need more than an incrementalist, annual planning ‘rain dance’; they need a ‘strategic architecture’ that provides a blueprint for building competencies needed to dominate future markets. This is less about ensuring a tight fit between goals and resources than about creating ‘stretch’ goals that challenge employees to accomplish the seemingly impossible. It is also more than the allocation of scarce resources across projects: strategy is the quest to overcome resource constraints through a creative and unending pursuit of better ‘resource leverage’.

This perspective on strategy recognises that firms not only compete within the boundaries of existing industries, they compete to shape the structure of future industries. Competition for ‘core competence’ leadership comes before competition for product leadership; a company is a portfolio of competencies as well as a portfolio of businesses. Product failures are inevitable but provide the opportunity to learn more about future demand. To capitalise on foresight and core competence leadership, a firm must pre-empt competitors in critical global markets.

Getting to the future first is not just about beating competitors bent on reaching the same prize; it is also about having one’s own view of what the prize is. What distinguishes leaders from laggards is the ability to imagine uniquely what the future could be.

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How competition for the future is different

Competition for the future is different from competition for the present. It means competition for opportunity share rather than market share - maximising the share of future opportunities a company could potentially access within a broad opportunity arena. The questions to ask are: Given our current competencies, what share of future opportunities are we likely to capture? What new competencies will we need to build? How can we attract and strengthen the skills that form those competencies? Competence leadership has to be built before the precise form and structure of future markets can be completely seen.

Future opportunities are unlikely to fit neatly within existing SBU (strategic business unit) boundaries; the competencies needed may be spread across a number of business units; and the investment and timeframe needed may be too much for a single business unit to handle. Top managers must view the firm as a portfolio of competencies: Given our particular portfolio of competencies, what opportunities are we uniquely positioned to exploit? How do we orchestrate all the resources of the firm to create the future?

Few companies can create the future single-handed. Many new opportunities require the integration of complex systems rather than innovation around a stand-alone product. Competition is as much a battle between competing and often overlapping coalitions of companies as it is a battle between individual firms.

With product life cycles becoming shorter, speed is of the essence. But the timeframe for exploiting a new opportunity area may be 10-20 years or longer. The battle for the future calls for perseverance and deep commitment. The prospect of making an impact and making a difference in people’s lives will be the driver, rather than the certainty of immediate financial returns. Strategy must be based on more than a hunch, however. The authors suggest a number of questions that help to judge the potential impact of a market-creating innovation in future.

For example: How many people will be affected by this innovation? How valuable will they find this innovation? What is the potential scope for this innovation? The initial financial investment needed may be small but the emotional and intellectual commitment to the future needs to be huge. A firm that cannot commit in this way, even without a financially watertight business case, will end up as a follower rather than a leader.

The two most important ways in which competition for the future is different from competition for the past are that it often takes place in ‘unstructured arenas’ where the rules of competition have yet to be written, and that it is ‘more like a triathlon than a 100-metre sprint’. Being adaptive is not good enough. Nor is a ‘wait-and-see’ attitude; managers still need to make strategic choices. The problem is that the current industry structure and rules of competition are defined by the industry leader. It may be possible to find a profitable niche but there is typically little growth and prosperity to be found in the shadow of the leader. Firms that see strategy as a positioning exercise will end up as laggards. Strategy is as much about competing for tomorrow’s industry structure as it is about competing within today’s industry structure.

Product development and competition between products or services in the marketplace is only the last stage of a much longer race. The race to the future occurs in three overlapping stages:

  • Competition for industry foresight and intellectual leadership: this is competition to gain a deeper understanding than competitors of the trends and discontinuities – technological, demographic, regulatory, or lifestyle – that could be used to transform industry boundaries and create new competitive space. It is competition to be prescient about tomorrow’s opportunities and to imagine a new opportunity area.


  • Competition to foreshorten migration paths: This is a battle to influence the direction of industry development involving a race to accumulate necessary competencies (and overcome technical hurdles), to test and prove out alternative product and service concepts, to attract coalition partners who have critical complementary resources, to construct the necessary delivery infrastructure, and to secure agreement around standards, if necessary. This is competition to shape the emergence of the future industry structure to one’s own advantage.


  • Competition for market position and share: By this stage competition between alternative technological approaches, rival product or service concepts, and competing channel strategies has largely been settled. Unfortunately, say Hamel and Prahalad, this is the stage that most strategy textbooks and strategic planning exercises focus on, to the exclusion of the preceding stages.

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Learning to forget (or, the ‘unlearning organisation’)

To create the future, a company must be able to forget some of its past. Every manager carries around in his or head a set of biases, assumptions and presuppositions about their industry and beliefs, values and norms about the way their firm should behave towards customers, employees and other stakeholders. All these beliefs are the product of a particular industry environment. When that environment changes rapidly and radically, those beliefs may become a threat to survival.

The deeply encoded lessons of the past that are passed from one generation of managers to another pose two dangers for any organisation. First, individuals may, over time, forget why they believe what they believe. Second, managers may come to believe that what they don’t know is not worth knowing. The challenge is to identify, and then transcend, the boundaries of our knowledge.

A laggard is a company where senior management has failed to write off its depreciating intellectual capital fast enough, and has under-invested in creating new intellectual capital. Senior managers believe they know more about how the industry works than they actually do and what they do know is out of date. Current success confirms the firm’s strategy and encourages managers to believe that doing more of the same thing is the surest way to prolong success.

Corporate leaders must be very careful about what and how much of their beliefs and perspectives are institutionalised. There is often a thin line between the admirable desire to institutionalise learning and best practice and the need to prevent managerial frames from becoming too rigid. Enlarging managerial frames depends, above all, on curiosity and humility.

As well as creating a ‘learning organisation’, we have to create an ‘unlearning organisation’. We are all familiar with the ‘learning curve’, but we also need to consider the ‘forgetting curve’ – the rate at which a company can unlearn those habits that hinder future success. A company must work as hard to forget as it does to learn. Successful industry challengers should also understand that their continued success is no more ensured than that of the incumbents they have displaced. To be a challenger once, it is enough to challenge the orthodoxies of the incumbents; to be a challenger twice, the firm must challenge its own orthodoxies.

What prevents companies from creating the future is not so much an installed base of capital equipment or products, it is an installed base of thinking. Creating the future does not require a company to abandon all of the past. The critical question is: What part of our past can we use as a ‘pivot’ to get to the future, and what part represents excess baggage? To find the limits of the firm’s current ‘profit engine’ we need to ask questions about the following areas:

  • Concept of served market: What customers and needs aren’t we serving?
  • Revenue and margin structure: Could profits be extracted at a different point in the value chain?
  • Configuration of skills and assets: Might customers’ needs be better served by an alternative configuration?
  • Flexibility and adaptiveness: What is our vulnerability to the new rules of the game?

To escape the gravitational pull of the past, managers must be convinced that future success is not inevitable. The trick is to create a sense of urgency while a company is still at the peak of its success. Managers and employees must be brought face to face with the inevitability of corporate decline and must understand at what point, and under what conditions, the present economic engine runs out of steam.

If top management cannot clearly articulate the five or six fundamental industry trends that threaten its continued success, it is not in control of the firm’s destiny. Any firm that wants to avoid a genuine profit crisis must create a quasi-crisis years in advance. The goal is not to create anxiety among employees (which can be immobilising) but to produce a sense of urgency. Senior management must create an intellectually compelling and emotionally enticing view of the future, an ‘alluring vista’ of opportunities to come (an ‘opportunity horizon’) that presents a compelling alternative to just reliving yesterday’s successes.

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Competing for industry foresight

The goal of competition for industry foresight is to build the best possible ‘assumption base’ about the future and thereby develop the prescience needed to shape industry evolution proactively. It is competition to establish one’s company as the intellectual leader in terms of influence over the direction and shape of industry transformation. Industry foresight helps managers answer three critical questions:

  • What types of customer benefit should we seek to provide in five, 10 or 15 years?
  • What new competencies will we need to build or acquire to offer those benefits?
  • How will we need to reconfigure the customer interface over the next several years?

Industry foresight is based on deep insight into the trends in technology, demographics, regulation, and lifestyles that can be harnessed to rewrite industry rules and create new competitive space. Senior executives are not the only ones with industry foresight – it is their primary role to capture and exploit the foresight that exists throughout the organisation.

Any top team that has not made a substantial investment in creating industry foresight will find itself at the mercy of more farsighted competitors. To get to the future first, top management must either see opportunities not seen by other top teams or must be able to exploit opportunities, by virtue of pre-emptive and consistent capability-building, that other firms can’t exploit. It requires more than good scenario planning or technology forecasting. These typically start with what is and then project forward to what might happen. Industry foresight starts with what could be and then works back to what must happen for that future to come about.

Foresight must be informed by deep insight into trends in lifestyles, technology, demographics, and geopolitics, but it rests as much on imagination as prediction. It grows out of a ‘childlike innocence’ about what could be and should be, out of a deep and boundless curiosity on the part of senior executives, and out of a willingness to speculate about issues where one is not yet an expert.

Managers tend to look at the future through the narrow aperture of existing served markets. A company must be capable of enlarging its opportunity horizon. This requires top management to conceive of the company as a portfolio of core competencies rather than a portfolio of individual business units. The latter are typically defined in terms of a specific product-market focus whereas core competencies connote a broad class of customer benefits.

Conceiving of the company as a portfolio of competencies opens up a whole new range of potential opportunities. Some of those opportunities may lie in the ‘white spaces’ that exist between or around existing product-based business definitions. Future opportunities are unlikely to correspond to today’s business definitions. The risk is that business unit managers may mistake the edge of their particular product-market for the outer limits of the opportunity horizon. Companies need processes, such as cross-company teams, for exploring white space opportunities.

Just as it is necessary for firms to change their thinking from business units to underlying core competencies, it is necessary to move away from traditional product and service definitions and focus on the underlying functionalities or benefits delivered to customers. (If blackboard manufacturers had done this, say the authors, they would have conceived the electronic whiteboard.)

Top management should also challenge price-performance assumptions: ‘What would happen to the size and shape of our markets if we could offer more or less the same functionality at 50% or even 90% off current levels?’ The idea is to create a specific price goal and work backward from that to reinvent the product.

Gaining enough insight into potential discontinuities to be able to decide what to do about them demands a significant expenditure of intellectual energy by senior management. Half-day or day-long planning reviews are inadequate. To really understand the future and to have the courage to commit, top management needs to spend weeks and months on the task, not hours and days.

Senior management must be willing to move beyond the issues on which it can claim expert status. It must admit that what it knows most about is the past and be willing to participate in debates about the future as equals not as omnipotent judges. It must be willing to listen to ‘unconventional’ or less experienced voices in the company and those that raise questions for which there is no ready answer.

The future is to be found in the intersection of changes in technology, lifestyles, regulation, demographics and geopolitics. Seeing the future first requires not only a wide-angle lens, it requires a multiplicity of lenses. Any group charged with finding the future needs an eclectic mix of individual perspectives. Companies who possess extraordinary foresight typically have rich cross-currents of interfunctional and international dialogue and debate. They identify the conventions underlying an industry and use them as weapons against the orthodox incumbents.

It is no longer enough to be customer-led. Companies that create the future do more than satisfy customers, they constantly amaze them. Garnering ideas about new product possibilities has to go beyond traditional modes of market research to answer two critical questions: What range of benefits will customers value in tomorrow’s products, and how might we, through innovation, pre-empt competitors in delivering those benefits to the marketplace?

To help firms identify unexploited opportunities, the authors present a two-by-two matrix. One axis shows needs - those that customers are capable of articulating and those they can’t yet articulate. The other shows types of customer - those that the company currently serves and those that it doesn’t.

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Crafting strategic architecture

The future must not only be imagined; it must be built - hence the term ‘strategic architecture’. An architect must be capable of dreaming of things not yet created and must also be capable of producing a blueprint for turning the dream into reality.

Just as every company has information, social, and financial architectures, so every company needs a strategic architecture. To build a strategic architecture, top management must have a view on which new benefits or functionalities will be offered customers over the next decade or so, on what new core competencies will be needed to create those benefits, and on how the customer interface will have to change to allow customers access to those benefits most effectively.

Strategic architecture is a high-level blueprint that identifies ‘what we must be doing right now’ to intercept the future and is the essential link between today and tomorrow, between short term and long term. It shows the organisation what competencies it must begin building right now, what new customer groups it must begin to understand right now, what new channels it should be exploring right now, and what new development priorities it should be pursuing to intercept the future. The question it addresses is not what we must do to maximise our share in an existing product market, but what we must do today, in terms of competence acquisition, to prepare ourselves to capture a significant share of the future revenues in an emerging opportunity arena.

The ultimate test of strategic architecture is to ask a random sample of 25 senior managers ‘How will the future of your industry be different?’ and then compare the answers. The view of the future that emerges should be judged by its foresight, breadth of conception, competitive uniqueness, the consensus around it, and its ‘actionability’ in the short term.

Getting to the future is a process of ‘successive approximation’. There are dangers of both underspecifying the future and being pre-empted by more clear-sighted competitors, and of overspecifying the future – a company that fails to recognise the limits to what can actually be known about the future is likely to race off in the wrong direction. Foresight and investment must stay in step. As additional insight into the best route to the opportunity is gained, investment commitments are escalated.

Why do so many great companies fail? Inability to escape the past comes from:

  • An unparalleled track record of success.
  • No gap between expectations and performance.
  • Contentment with current performance.
  • An accumulation of abundant resources.
  • A view that resources will win out.
  • Seeing resources as a substitute for creativity.

An inability to create the future derives from:

  • Optimised business systems.
  • Deeply etched ‘recipes’.
  • Vulnerability to new rules.
  • Success confirms strategy.
  • Momentum is mistaken for leadership.
  • ‘Failure’ to reinvent leadership.

Every firm must proceed to the future with all due haste. But the way to measure speed in the journey to the future is not how fast one is committing financial resources, but how fast one is gaining insight into the precise route that will get one to the future first. A disciplined approach to developing industry foresight can take a company only so far. It can set a basic direction and point out significant milestones. But to find the exact path to the future, a company must learn as it goes – through small market incursions, carefully-targeted acquisitions, alliances, etc. Every management team should ask: ‘How do we learn about the future faster than competitors, while making fewer and smaller irrevocable commitments?’

You don’t have to be a big risk-taker to get to the future first. The goal is not to encourage enormous risk-taking, but to work to ‘derisk’ one’s ambitions. Though the ‘when’ and the ‘how’ may be substantially indeterminable, the ‘what’ should be clearly specified. Whereas a strategic architecture identifies broad competencies to be built – the potential highways to the future - the relative merits of specific routes emerge only as you move forward. You hedge your bets on how to get to the future, not the attractiveness of the destination. Having exhausted what can be deduced analytically about the future, a firm must learn by doing – creating alliances with leading-edge customers, performing prototype market testing, undertaking joint development with potential competitors, studying competing technologies, etc. As you move forward and acquire additional insights, the best approaches become clearer and the bets less equivocal.

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Strategy as stretch

Strategic architecture is the map for the journey, but the fuel is provided by the emotional and intellectual energy of employees. ‘Strategic intent’ is an animating or energising dream. Strategic architecture is the brain; strategic intent is the heart. The latter implies a significant stretch for the organisation. Current capabilities and resources are manifestly insufficient for the task. Whereas the traditional view of strategy focuses on the ‘fit’ between existing resources and emerging opportunities, strategic intent creates, by design, a substantial ‘misfit’ between resources and aspirations. It implies a particular point of view about the long-term market or competitive position that a firm hopes to build over the coming decade or so. Hence, it conveys a ‘sense of direction’.

A strategic intent is differentiated; it implies a competitively unique point of view about the future, and holds out to employees the promise of exploring new competitive territory. So it also conveys a ‘sense of discovery’. Strategic intent has an emotional edge to it; it is a goal that commands the respect and allegiance of employees and that they perceive as inherently worthwhile. Hence, it implies a ‘sense of destiny’.

Turning strategic intent into reality requires that every employee understands the exact way in which his or her contribution is crucial to the achievement of strategic intent. The first task in personalising strategic intent is to set clear corporate challenges that focus everyone’s attention on the next key advantage or capability to be built. Top management’s job is to focus the organisation’s attention on the next challenge, and the next after that. Corporate challenges are thus the operational means of staging the acquisition of new competitive advantages. They identify the focal point for capability building in the near to medium term. They are the means for allocating the emotional and intellectual energy that flows from enthusiasm for the firm’s strategic intent.

Every employee must have a scorecard that directly relates their job to the challenge being pursued in a particular time frame (e.g. a quality benchmark, an indicator of timeliness, or a productivity number). Too few firms have such performance measures that link individual achievement to the firm’s overall strategic intent. Corporate challenges will engender more frustration than fresh thinking if employees don’t have the right to challenge corporate orthodoxies. Corporate challenges focus the entire organisation on the same capability-building task. Each level and function must understand the totality of the challenge, the interdependence of different roles, and the dimensions of their own responsibility.

Employees are not likely to rise to a particular challenge if they don’t believe that they will benefit proportionately from the firm’s success. An atmosphere of ‘shared pain; shared gain’ must prevail. Employees must also be given the tools they need to contribute to advantage-building efforts. To sum up, corporate challenges are the stepping stones between the firm’s present position and its strategic intent. Each challenge dares employees to do more than they thought possible. The process of managing corporate challenges has the following elements:

  • Setting the challenge in the context of the strategic intent.
  • Describing the nature and magnitude of the challenge with honesty and humility.
  • Specifying precisely the particular improvement to be sought in a given time frame.
  • Establishing measurements to link every employee’s contribution to the overall challenge; and granting employees the freedom to contribute in ways that range far beyond the boundaries of their roles or organisational level.

A view of strategy as stretch helps bridge the gap between those who see strategy as a grand plan thought up by great minds and those who see strategy as a pattern in a stream of incremental decisions.

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Strategy as leverage

Ultimately, one must find a way to close the gap between resources and aspirations that strategic intent opens up. The way to do this is by leveraging resources. The goal is to challenge managers to become more ingenious both in multiplying the impact of the firm’s resource base and enlarging it.

An abundance of resources, though useful, does nothing to enhance the wisdom of strategic decisions. The ability to make multiple bets and to sustain multiple failures is too often a substitute for creative strategic thinking. In the absence of an aspiration that outstrips a firm’s resources and a capacity for resource leverage, abundance is no more than a licence for carelessness in strategic decision-making.

Viewing strategy as stretch leads to a view of competition as encirclement of competitors. It involves a propensity to accelerate the product development cycle, tightly-knit cross-functional teams, a focus on core competencies, close links with suppliers, and programmes of employee involvement.

Stretch gives birth to the motive for resource leverage. But much nurturing is required to transform it into a full-grown capability for resource leverage. The authors put forward some basic premises:

  • The firm can be conceived of as a portfolio of resources (technical, financial, human, etc.)
  • Resource constraints are not necessarily an impediment to the achievement of global leadership.
  • Great differences exist between firms in the market and the competitive impact they are capable of generating with a given amount of resources.
  • Leverage-based efficiency gains come primarily from raising the numerator in productivity ratios (revenue and net profits) rather than from reducing the denominator (investment and headcount). Resource cutting is not an essentially creative activity; resource leverage is.
  • The resource allocation task of top management has received too much attention when compared to the task of resource leverage. Sooner or later, in every industry the battle evolves around the capacity to leverage resources rather than the capacity to outspend rivals. (The authors propose a crude measure of a firm’s capacity to leverage resources - the ratio of its relative market share gain [or loss] to its relative share of investment or resources.)
  • The capacity for resource leverage is the ultimate selection mechanism, sorting out the victors from the victims in battles for industry leadership. It is not enough to get to the future first; one must also get there for less.

Resource leverage can be achieved in five fundamental ways:

Concentrating resources on key strategic goals: This means protecting against divergence of goals by ensuring efforts over a long period of time converge on the same goal through a process of ‘cumulativeness’; protecting against the dilution of resources at a point in time by focusing on key goals – no one group of employees can attend to more than two key operational improvement goals at a time. Resources are leveraged when they are targeted in the areas that make the most difference to customers.

More efficiently accumulating resources: A firm is a reservoir of experiences and knowledge about customers, competitors, etc. Some firms are better at mining experience from their ‘experience stockpiles’ than others (they are capable of extracting greater learning from each additional experience than others). It means having employees who are well schooled in problem-solving, having a forum where employees can identify common problems and search together for higher-order solutions, being willing to fix things before they are broken, and continuously benchmarking against the world’s best practice. It only happens when management declares open season on precedent and orthodoxy. Borrowing the resources of another firm – through alliances, joint ventures, licensing, the use of subcontractors, welding tight links with suppliers – is another way to leverage resources.

Complementing resources of one type with those of another to create higher-order value: Blending different types of resources in ways that multiply the value of each – this calls for technological integration, functional integration and new product imagination, ingenuity in dreaming up new permutations of existing skills (such as the Sony Walkman). The firm must also be balanced, like a stool, on three strong legs – a strong product development capability; a capacity to produce its products at world-class levels of cost and quality; and a sufficiently widespread distribution, marketing and service infrastructure – i.e. a capacity to invent, make and deliver.

Conserving resources wherever possible: The more often a particular skill or competence is reused (‘recycling’), the greater the resource leverage. This calls for agreement by senior managers across the firm on key development priorities. Otherwise, divisional managers may be more likely to hoard resources than loan them to sister businesses. Unit managers must realise they are stewards rather than ‘owners’ of key human and other resources. It is also necessary to protect one’s resources by not exposing them to unnecessary risks in frontal confrontations with competitors such as attacking them in their home markets or matching a larger competitor strength for strength.

Rapidly recovering resources by minimising the time between expenditure and payback: A rapid recovery process acts as a resource multiplier. A firm that can do anything twice as fast as competitors with a similar resource commitment enjoys a twofold leverage advantage.

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Competing to shape the future

A finely crafted strategic architecture is worth little without an ability to turn intellectual leadership into market leadership. Companies that fail to get to the future first may end up dependent on those that do. But in many companies there is an implicit assumption that it is better to be a quick follower than a pioneer. The belief is that the pioneer role is inherently risky and the pioneer will inevitably stumble creating an opportunity for an alert follower to snatch away the prize of the new market; in other words, it is better to let the other person make the mistakes.

Being first, however, is only a risk if the pioneering firm permits its financial commitment to race ahead of its precise understanding of the precise nature of the emerging opportunity. The objective is to learn as quickly and as inexpensively as possible about the future opportunity by involving key customers early on in the development phase, regularly testing emerging product concepts and prototypes with employees and/or with customers in small-scale market experiments, by sharing investment risk with alliance partners, or by using a partner to gain insights into a new and unfamiliar class of customers or technologies.

A preference for following typically rests on an erroneous premise that the follower has in place the skills and competencies necessary for a quick follow-up. As it often takes 10 years to build a world-class competence, this is unlikely unless the follower has previously committed to the new opportunity and been diligently building up its own competencies. It is difficult to overtake a pioneer who has not over-committed financially, who has built up the requisite core competencies, and who continues to pursue opportunities for low-cost, low-risk market learning. Simply sitting back and betting the company’s future on the possibility that the pioneer will trip up is irresponsible.

To get to the future first, a company must find the shortest ‘migration path’ between today and tomorrow. Dreams don’t come true overnight. The goal is to minimise both the time and the investment required to turn foresight into genuine market opportunity. Competition in the first stage of competing for the future is competition to conceive of an alternative industry structure or new opportunity arena and the goal is to out-think and out-imagine competitors. The second phase involves actively shaping the emergence of that future industry structure to one’s own advantage and the goal here is to out-flank and out-distance competitors. Like competition for intellectual leadership, competition to shape migration paths is ‘premarket’ or ‘extramarket competition’ in that there is little or no direct, product-to-product rivalry between firms.

The goal for any company intent on capturing a significant share of future profits in a new opportunity arena is to maximise its share of influence over the direction of industry development. A company’s share of future profits is determined by four factors:

  1. Creating and managing coalitions: its capacity to build and manage coalitions to access and harmonise complementary resources residing in other firms.
  2. Investing in core competencies: its success in building core competencies central to the provision of customer value in the new opportunity arena.
  3. Learning and experimentation in the market: its ability to accumulate market learning rapidly (racing to find where the ‘mother-lode’ of demand is in an emerging market).
  4. Building global brand and distribution: its global ‘share of mind’ (worldwide brand presence) and distribution capacity; this will enable it to pre-empt competitors when the new market takes off.

In some industries, the ability to set standards and influence regulation might constitute a fifth determinant.

If a company is particularly adept in one or more of these arenas of premarket competition, it may gain for itself a share of influence disproportionate to its size. The goal for any firm in managing migration paths is to maximise the ratio of influence over size, to punch more than its weight and cast a shadow bigger than its actual size. Lack of a common standard can dramatically slow the arrival of the future. Firms cannot capture economies of scale because they must design different products for different standards. Competing standards confuse customers who may defer buying until a clear winner emerges. So most companies will be eager for standards to emerge as early as possible to accelerate development and reduce the risk of committing resources to a technology or approach that ultimately fails to become the dominant standard. Each, of course, would like to see its particular technology or approach emerge as the standard because whose standard ultimately wins out often largely determines who makes money from the future and who does not.

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Building gateways to the future

A key challenge in competing for the future is to build pre-emptively the competencies that provide gateways to tomorrow’s opportunities, as well as to find novel applications of current core competencies. Any company that wants to capture a disproportionate share of profits from tomorrow’s markets must build the competencies that will make a disproportionate contribution to future customer value. Because building world-class leadership in an important core competence area may take 5-10 years or more, a company must possess a point of view today about what core competencies to build for the future. Few companies understand how to leverage existing core competencies beyond the boundaries of existing business units to create new competitive space. Fewer still have a clear well-articulated agenda for building entirely new core competencies. Any company that lacks such a point of view is likely to be pre-empted in the markets of the future.

Leadership in a core competence represents a potential that is released when imaginative new ways of exploiting that competence are envisioned. The most valuable competencies are those that represent a gateway to a wide variety of potential product markets. For example, Hewlett-Packard’s competencies in measurement, computing and communications gave it the option of participating in a broad array of markets that require excellence in those skill areas. Sony’s skills in miniaturisation has given it access to a broad range of personal audio products. 3M’s core competencies in adhesives and advanced materials have led to thousands of products.

Hamel and Prahalad define a core competence as a bundle of skills and technologies that enables a company to provide a particular benefit to customers. (At Sony, for example, that benefit is ‘pocketability’ and the core competence is miniaturisation. At Federal Express, the benefit is on-time delivery, and the core competence is logistics management.)

The commitment a firm makes to building a new core competence is a commitment to creating or further perfecting a class of customer benefits, not commitment to a specific product-market opportunity. Because competence-building represents more cumulative learning than great leaps of inventiveness, it is difficult to compress the time it takes – it will be very difficult to catch up with other firms once they have a head start in a particular core competence.

The unit of analysis for competitive strategy has usually been a particular product or service. But competition for competence is not product versus product, or even business versus business. Competition for competence has to be conceived of as intercorporate competition because core competencies are not product-specific. They contribute to a range of products or services and transcend any particular product or service. They are also longer-lasting than any individual product or service.

Because a core competence contributes to the competitiveness of a range of products or services, winning or losing the battle for competence leadership can have a profound impact on a company’s growth and potential for product differentiation, a much greater impact than the success or failure of a single product. Because the investment, risk-taking, and time frame required to achieve core competence leadership often exceeds the resources of a single business unit, some competencies will need corporate support. Senior management cannot leave it up to individual business units, each of which is primarily interested in protecting its position within a pre-existing product or service market, to identify and sustain investment in core competencies that will secure the firm’s position in the markets of the future. Most importantly, only by building and nurturing core competencies can top management ensure the continuance of the enterprise.

A core competence is unlikely to reside in its entirety in a single individual or team. You should aim to define between 5 and 15 core competencies for your firm. To manage a firm’s stock of core competencies, top management must be able to disaggregate core competencies into their components, all the way down to the level of specific individuals with specific talents.

Competition between firms is as much a race for competence mastery as it is for market position and power. Senior management can’t pay equal attention to every potentially important capability in a particular business, but there must be some sense of what activities really contribute to long-term corporate prosperity. The goal is to focus senior management’s attention on those competencies that lie at the centre rather than the periphery of long-term competitive success. To be considered a ‘core’ competence, a skill must meet three tests:

Customer value: A core competence must make a disproportionate contribution to customer-perceived value. Core competencies are the skills that enable a firm to deliver a fundamental customer benefit. This does not mean that a core competence will be visible to, or easily understood, by the customer. What is visible to the customer is the benefit of the underlying competence. Customers are the ultimate judge of whether something is or is not a core competence.

Competitor differentiation: To qualify as a core competence, a capability must also be competitively unique. There is a difference between the ‘necessary’ or minimum set of competencies that all firms must possess to compete in an industry and ‘differentiating’ competencies that set a particular firm apart. Benchmarking against competitors helps guard against a tendency to overstate the uniqueness of one’s own capabilities.

Extendability: Managers must work very hard to abstract away from the particular product configuration in which the core competence is currently embedded, and imagine how the competence might be applied in new product arenas. A competence is truly core when it forms the basis for entry into new product markets so managers must escape a product-centric view of the firm’s capabilities.

It is important to distinguish between core competencies and other forms of competitive advantage because it is too easy for a firm to rest easy on an asset or infrastructure-based advantage and under-invest in building unique advantages.

The authors distinguish between the endowments (brands, assets, patents, installed base, distribution infrastructure, etc) that have been inherited from the past and the competencies that will be required to profit from the future. To get an accurate reading of a company’s capabilities, subtract from its profits the percentage of the profits that derive from its historical endowments. The remaining profitability is a measure of a company’s ability to manage and exploit its unique capabilities.

Competition for competence takes place at four levels, the last of which - competition to maximise end product share or competition for brand share - receives 99% of the attention in most companies and strategy textbooks. Most of the battle, however, takes place in the three preceding stages:

  • Competition to develop and acquire constituent skills and technologies – this takes place in the markets for technology, talent, alliance partners, and intellectual property rights. Resource leverage here comes from an ability to access and absorb skills and technology from outside.


  • Competition to synthesise core competencies – the ability to harmonise a wide variety of disparate skills and technologies is critical.


  • Competition to maximise core product share – a core product is typically an intermediate product somewhere between the core competence and the end-product. Leverage comes from ‘borrowing’ the distribution channels and brands of downstream partners. The goal may be to build a monopoly in some particular competence area.

To sum up, the authors say that corporate strategy must be more than an amalgamation of individual business unit strategies. Because core competencies are the highest-level, longest-lasting units for strategy-making, they must be the central subject of corporate strategy. Top management must have a view on which new competencies to build and must know whether current competencies are slowly eroding or are being strengthened. It must also be acutely aware of the competence-building efforts of competitors and must recognise that the company’s ‘competence competitors’ may not be identical to current end-product competitors.

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Embedding the core competence perspective

For such a core competence perspective to take root in a company, the entire management team must fully understand and participate in five key competence management tasks:

1. Identifying existing core competencies: Several teams, each containing a broad cross-section of employees, should work on this to ensure a diversity of views. The teams should also identify and agree on the elements that contribute to each core competence. Senior management must be full participants in the process which will involve many meetings, heated debate and frequent disagreements but also unexpected insights and a sense of excitement about potential new opportunities.

2. Establishing a core competence acquisition agenda: A competence-product matrix is useful for setting specific competence acquisition goals. This matches new and existing competencies against new and existing markets and enables the firm to identify different types of opportunities:

  • ‘Fill-in-the-Blanks’ opportunities (strengthening positions in existing product markets by importing competencies that reside elsewhere in the firm).
  • ‘Premier Plus 10’ opportunities (the new competencies we must be building today to ensure we are seen as the premier provider by our customers in five or ten years’ time).
  • ‘White Spaces’ (opportunities to extend existing core competencies into new product markets).
  • ‘Mega-Opportunities’ (opportunities that do not overlap the company’s current market position nor its current competence endowment but which the firm may consider especially significant or attractive).

3. Building core competencies: As it is a long-term process, consistency of effort is key for building new core competencies. This is unlikely unless senior managers agree on what new competencies should be built. Stability in senior management teams and strategic agendas is key.

4. Deploying core competencies: To leverage a core competence across multiple businesses and into new markets often requires redeploying that competence internally from one division or strategic business unit to another. Although corporate managers often retain the right to allocate capital across business units, in many firms there is no similar process for allocating the talent that comprises the firm’s core competencies. The difference between a firm’s asset value and its market value is not goodwill, it is core competence – in other words, people-embodied skills. This reflects investors’ beliefs about the uniqueness of the firm’s competencies and the potential value that can be generated by the exploitation of those competencies.

The mobility of competencies is aided when employees with a particular competence meet frequently to exchange ideas and experiences - seminars and conferences are important for instilling a sense of community among people working in the same competence.

5. Protecting and defending core competencies: Protecting core competencies from erosion needs continued vigilance by top management. Divisional managers should be assigned cross-corporate stewardship roles for particular competencies and should be held responsible for the health of those competencies. Regular ‘competence review’ meetings should focus on levels of investment, plans for strengthening constituent skills and technologies, internal patterns of deployment, the impact of alliances, and outsourcing. The core competence perspective should not supplant a product-market perspective, it should supplement it.

‘Soft-wiring’ the core competence perspective into the head of every manager and employee means: (1) Establishing a deeply involving process for identifying core competencies; (2) Involving strategic business units in a cross-corporate process for developing a strategic architecture and setting competence acquisition goals; (3) Defining a clear set of corporate growth and new business development priorities; (4) Establishing explicit ‘stewardship’ roles for core competencies; (5) Setting up an explicit mechanism for allocating critical core competence resources; (6) Benchmarking competence-building efforts against rivals; (7) Regularly reviewing the status of existing and nascent core competencies; and (8) Building a community of people within the organisation who see themselves as the ‘carriers’ of corporate core competencies.

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Securing the future

The final tasks in managing the migration path to the future are ‘expeditionary marketing’ and global pre-emption. The most important thing, as the future begins to come into view, is to learn faster than competitors about just where the heart of future demand actually lies, about the precise dimensions of customer demand and required product performance. This calls for two things: expeditionary marketing and global pre-emption.

Expeditionary marketing. To accumulate market understanding as rapidly as possible, a series of low-cost, fast-paced market incursions is imperative. Market research is great for refining existing product concepts but is of little use in helping a firm better target its development efforts around emerging markets. True learning only begins when a product or service is launched into the market. The practical problem is how to reduce the time and cost of product iteration but each iteration unfreezes one or more aspects of the product or service concept and provides an opportunity for a company to apply what it has learned.

The way in which many large companies define success and punish failure in new product development is one of the biggest impediments to expeditionary marketing. All too often failure is personalised and there is a search for culprits rather than for lessons when initial goals are not reached. Not surprisingly, if the personal price of experimentation is high, managers will become conservative and that will lead to much grander, though less visible, failures.

To create new competitive space, a new yardstick for managerial performance is required. A manager who loses $20 million in the pursuit of an exciting, though nascent, opportunity should be treated differently from a manager who loses $20 million through mismanagement of a core business where the company has traditionally been a leader. New opportunities require a degree of management attention disproportionate to their short-term revenue prospects. If a simplistic definition of failure vests new opportunities with a high degree of personal risk or if management talent is allocated on the basis of the current size and importance of the firm’s businesses, new markets will not be created. In too many companies, the best managers shuffle between the safest businesses. The result is status-quo strategies and a dearth of new business development.

Global pre-emption. Developing new competencies and reconnoitring new competitive space can take a decade or more. But the final dash to the finish line can be an all-out sprint, a race to pre-empt competitors in key markets and capture market leadership in the biggest and fastest-growing national markets. The time interval that must be minimised is not just ‘concept to market’ but ‘concept to global market’. A product development cycle that is 50% shorter than a competitor’s is of little use unless it is coupled with a strong worldwide distribution capacity. The real returns go to those companies who are first to global markets.

The imperative of global pre-emption is no excuse for a hasty global launch of an ill-conceived and undertested product or service. Early market expeditions will be on a small scale and may be geographically limited as well. But once the market looks set to take off, the innovator must be capable, either alone or in partnership, of ‘blowing’ the new product or service around the world as quickly as possible. Just as a firm must begin investing in a new core competence area before all the opportunities are clearly defined, so a company must begin to develop global brand and distribution positions in anticipation of the new products and services. If a firm has not developed its global presence in advance of the introduction of its hot new product or service, it will hand much of the market to its competitors. Key prerequisites are proximity, predisposition and propagation:

Proximity: Competition here is for access to critical national markets and distribution channels. Markets may be critical because they offer access to a group of ‘reference’ customers (the world’s most sophisticated customers in that particular product); because the size of the market and the opportunity it offers to amortise development costs; because of its expected future growth; or because it offers access to a competitor’s domestic ‘profit sanctuary’. Pre-empting competitors is not just a matter of having built a physical presence in key ‘strategic’ markets. Access to the most effective distribution channels in each key national market is also very important.

Predisposition: To pre-empt competitors, customers around the world have to be genuinely eager to buy a company’s new products. It helps to have a pre-existing ‘share of mind’ with customers around the world. A powerful global brand, fuelled with esteem and customer affection, can dramatically accelerate a new `product’s take-off, although a bad new product can damage the brand’s image. The goal of a banner brand is to help customers transfer the goodwill through positive experience with one of the company’s products to other products it offers or intends to offer.

Because customers have to be repeatedly exposed to a brand before it begins to stick in their mind, spreading advertising funds across a number of distinct brands yields less brand awareness than focusing the funds on a single brand. It also makes no sense to fragment brand-building efforts across individual business units. Any company intent on pre-empting competitors around the world must take a co-ordinated approach to building global banner brands. Building global share of mind is not a task to be left solely to individual business units which may not have the resources or inclination to build a global brand franchise.

Propagation: The imperative is to propagate the new business concepts and products around the world as quickly as possible. Organisational boundaries and the traditional strategic prerogatives of country managers have sometimes frustrated worldwide propagation of new business and product concepts. The challenge is to entice country managers to think more globally (by, for example, giving them worldwide or regional responsibility for a particular line of products). Global brands can help propagation as they can create a feeling among far-flung national managers that perhaps local markets are not much different after all, and that success in one market is transferable to others. Global brands may thereby act as a ‘pivot’, helping new product concepts swing from one market to another.

Those companies that have built banner brands that predispose customers to try their new products, that have secured access to critical channels around the globe, and have developed an internal capacity to propagate new product innovations quickly are the ones more likely to capture the competitive high ground.

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Thinking differently

Ultimately, a company must learn to think differently about the meaning of strategy and the meaning of organisations.

Thinking differently about strategy: The authors believed that the problem was not with ‘strategy’ but with the particular notion of strategy that predominated in most companies – strategy as pedantic ritual on one hand or a speculative and open-ended investment commitment on the other. In the old view of strategy, ‘long-term’ meant distant return, ambition equated with risk-taking, and commitment called for big financial investments. In the new view, long-term means a point of view about industry evolution and how to shape it; ambition is a stretching aspiration that is ‘derisked’ through the tools of resource leverage; and commitment becomes an intellectual and emotional commitment that ensures consistency and accuracy.

Thinking differently about the organisation: To create the future, the company must succeed in creating a synthesis of what are too often seen as antithetical organisational choices:

  • Beyond corporate versus unit: Rather than seeing the corporation as either a single entity or a collection of unrelated businesses, senior managers must seek to identify and exploit the interlinkages across units that could potentially add value to the corporate whole. There is often substantial hidden value buried in the linkages among business units.


  • Beyond centralisation versus decentralisation: The answer is not absolute decentralisation nor a heavy-handed corporate strategy but an enlightened collective strategy that requires managers to adopt a more co-operative and less competitive posture vis-?-vis their peers.


  • Beyond bureaucracy versus empowerment: The goal is to grant individuals the power to do their jobs in whatever way satisfies the customer but without allowing this to degenerate into anarchy. The notion of ‘strategic intent’, a shared direction, reconciles the needs of individual freedom and concerted, co-ordinated effort.


  • Beyond clones versus renegades: A company of like-minded clones is unlikely to create the future; neither is a company full of self-interested renegades. What is needed are ‘community activists’ who are not afraid to challenge the status quo and speak out, but who also have a deep sense of community and a desire to improve not only their personal lot but that of others as well.


  • Beyond technology-led versus customer-led: The goal is neither to be narrowly technology-led or customer-led but to be broadly benefits-driven.


  • Beyond diversified versus core business: The goal is not to find the narrow line between unattractive extremes nor to maintain an uneasy balance between counterposed forces. It is not to occupy the middle ground. It is to find the higher ground.

The book ends with 20 questions about the future that the reader can ask about their own company to give a sense of where to start and what the firm’s unrealised potential may actually be.

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Conclusion

Hamel and Prahalad provide an elegant, highly-persuasive analysis that is a pleasure to read. As they say, their book is as much about ‘how to think’ as about ‘what to do’. From one perspective, Competing for the future poses a counterpoint to the market-based school of strategy (e.g. Michael Porter) which emphasises product differentiation and/or cost leadership in order to achieve competitive advantage and profit maximisation. In contrast, Hamel and Prahalad propose a resource-based strategy which puts the emphasis on the company’s own strengths and competencies in determining the strategy to be followed. From another perspective, they offer a rapprochement between the school of thought which sees strategy as determined by a grand vision and the ‘emergent strategy’ school which sees strategy developing through a process of experimentation.

Hamel and Prahalad have inevitably had their critics. For example, it has been suggested that being the first to the future may not always be a wise strategy. Surely it is better to let the leaders make all the investments and take all the risks in creating a new market, and then simply copy or buy their product? Getting to the future first does not necessarily mean that you win. (Hamel and Prahalad actually provide a close analysis of why it is so difficult for followers to catch up but critics will always be able to find exceptions. For example, they have pointed out it was a now-forgotten American firm that invented video recorders but it was the Japanese who made all the money on them.)

Hamel and Prahalad’s concept of core competencies has also attracted critical comment. Some detractors have suggested that business success is more multifaceted than Hamel and Prahalad imply. Understanding your core competencies is not enough to guarantee your success and is only part of the story. Core competencies are just a part of the model for success.

Nonetheless, by reminding us that product-to-product rivalry is only the tip of the competitive iceberg and restoring the role of creativity and imagination to strategy-making, Competing for the future has secured its place as a management classic.

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