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There is a strange duality to these industrial relationships: initially, they are the reason for a firm’s success, but later the reason for its failure. So something must change over time.
Let’s examine these relationships over the life cycle of an industry.
At the start, the market is typically fragmented–no firm has a high share of it, technologies are underdeveloped but stable, there is little disruptive innovation, market growth is low, as are returns on capital. Networks are undeveloped–there aren’t many links, strong or weak. Then something different happens. Maybe an existing firm, a new entrepreneur or an innovator is able to concentrate the market–to gain market share by buying up rivals, providing a new product or cutting costs and prices. As this innovator succeeds, the market changes shape. It grows; more customer links are added, but principally to the innovating firm. It becomes a large hub–much larger than any of its rivals–and so reaps the benefits of volume production: lower unit costs, fatter margins, higher profits.
But the new leader also suffers side-effects from being bigger. It becomes more hierarchical, more confident, more set in its ways. Strong specialised and rigid links, together with specialised and capital-intensive assets, are formed to support automated, repetitive mass production. Strong links multiply, both internally and with its key customers and suppliers, as well as with regulators, local authorities and central government. The inside of the firm becomes bigger and more important relative to the outside world; because the firm is master of its technology and its market, outside threats and opportunities appear to recede. Weak links are downgraded–certainly relative to strong links–and may fall into disrepair. The people inside the firm become more alike; the corporate culture grows stronger and more uniform. The business becomes less like the ragbag of individuals who started it, more like a well-run army.
The leader was the innovator in its industry–think of Ford, IBM, Xerox, Texas Instruments, US Steel, Deutsche Bank, Philips, Unilever, Saint Gobain, Gestetner, Encyclopaedia Britannica, Fairchild Semiconductor, Kodak, Wang Computer. But second time around, it’s probably going to be a different story. The rigidities of strong links–their very success: the tight and warm relationships that are enjoyed with key customers, the efficiencies of production, the beautifully orchestrated harmony of the whole distribution system, the mastery of the existing technology, the confident conformist mindset instilled throughout the firm–ensure high profits today. But what of tomorrow? Tomorrow will be fine, and the day after…but then suddenly…
It might be disruptive technology. Or it might be another business model, a new entrepreneur with a bright idea, a fresh way of delivering better value to some or all existing customers, a refugee firm from a part of the market that seemed far away but suddenly is close, as the firm starts to invade the leader’s domain from an unexpected and undefended direction.
The leader is typically in a good position to pick up the new ideas and run with them. It has the resources, the market intelligence, the distribution system, the firepower, the expertise. Yet it nearly always passes up the new idea, even when its significance is apparent to independent observers. It is hard for the leader to break or rearrange its existing strong links, to write-down its huge fixed investments in dedicated equipment, to slash its prices, to turn its back on its traditional markets and its biggest customers, or to do something new.
The innovation typically involves individuals and firms from outside the mainstream. A small hub emerges, the synthesis hub, comprising eclectic weak links between individuals, firms and new customers. Ideas and people come from the periphery, a motley crew, often with no previous experience in the industry, assembled from scratch to form the vehicle for innovation. They bring new perspectives and, even more important, are free of old ones. Consequently, everything is worked out from first principles. This means it is usually a shambles, but no matter. If the new technology or new business idea is sufficiently strong, it will win through. The vehicle will eventually become roadworthy. Sometimes the new firm will challenge the incumbent head-on. More likely, it will carve out a new market, consisting partly of the existing one and partly or mainly of new customers.
Let’s assume the new market grows fast and becomes significant. The start-up attracts rivals, there is no clear leader, and market shares ebb and flow. Inevitably, though, a leader emerges–perhaps the original innovator, perhaps one of its rivals. If the market has strong economies of scale, or marked network effects, it will concentrate. Volumes grow. Specialisation increases. Relationships are cemented. Strong links form. We now have a dominant firm. A big hub. A success. Even more strong links. Just as before. The wheel has come full circle.
Then, sooner or later, it all happens again.
The cycle seems to be that firms with a greater balance of weak rather than strong links are better at innovating–Apple, for example–while those with a preponderance of strong links, such as IBM, are better at efficient production. Successful firms can fail if the world outside–the market or technology–changes. When the environment shifts, it is usually another firm–smaller and more entrepreneurial, more in tune with the outside world through its variety of weak links–which steps forward to accommodate the change. Of course, a firm does have some control over the balance and effect of its weak and strong links. These are not preordained by its maturity and success. But changing the mix of links usually means changing people–enriching the firm’s gene pool–which almost always goes against a firm’s deepest instincts and inclinations.
We found three organisations that understand this point.
Boston, Massachusetts, late 1990s–early 2000s
The partners of management consultants Bain & Company knew they had a problem–not the usual sort of problem, but a problem flowing from success. One of those partners explains the firm’s dilemma:
We knew we had an intense and effective culture. We have incredible shared identity and values. Any partner will go to the ends of the earth, quite literally if necessary, to help any other partner. But we knew we had a weakness. Yes, we knew each other and we knew our clients and we knew our clients’ affairs inside out–but there was quite a lot of stuff going on in the outside world that we suspected we didn’t have a handle on. So we decided to do something different. We’ve always had a policy of promoting from within and this has been a great strength. But not since the very early days had we hired in many senior people from the outside. We decided it was time to try this. And not just any excellent partner from another consulting firm. No, we wanted people
who were not like us
. We wanted people who had spent a long time working in industry, preferably entrepreneurs; people with a lot of external contacts that we didn’t have.
Then we thought some more about it and we realised that one or two partners would get swamped if they just joined the regular practice. So we looked for people around whom we could build new units, where they could have a degree of autonomy and keep their external contacts, while not interfering with our culture or being too bothered by it. Then, gradually, we could draw the new partners fully into our way of doing things.