Wednesday, May 22, 2013 | Home› Articles
Cover Story - The Inside Out Strategy
Emerging economies today present a complex landscape of immense opportunity, disruptive low-cost innovation and rapid power shifts, in the backdrop of hitherto unknown constraints and cut throat competition. People Matters spoke to thought leaders in industry and academia about how business leaders can thrive by viewing their business less in terms of products, services or processes and more in terms of delivery capability & competencies – known and hidden – within their organizations.
Few companies and individuals epitomize Indian business success as Reliance Industries and Dhirubhai Ambani. Armed with phenomenal business acumen, impeccable execution and fund-raising abilities, Dhirubhai built Reliance into a business empire worth more than 100 billion dollars in a period of just 40 years. Undoubtedly one of the greatest success stories in corporate history from any part of the world and an unparalleled blaze of wealth creation.
A closer examination at these 40 years reveals a familiar style by which Dhirubhai ‘out-strategized’ the competition – Reliance would enter an industry with excess capacity and world-class technology, and then mop up all excess demand in the industry by providing the best quality product at the lowest industry margins.
While this strategy per se was potentially replicable, number of companies including public sector companies tried to achieve low costs by putting up high-scale plants… and failed. Reliance’s strategy worked because it was anchored in outstanding competencies. Reliance demonstrated the best project management abilities and it still is a champion in executing large-scale complex projects. The company virtually pioneered raising low-cost capital from broad-based equity markets in India and abroad. Further, it could manage the regulatory environment, partly through an extensive network and system for gathering and interpreting information — a key but often overlooked component. And it could move fast. These core competencies allowed Reliance to set up its world-class plants of scale at the lowest capital costs of any company in India.
Clearly, Reliance’s growth spiral was built on an iterative process. Its competencies in project management, finance mobilisation and influencing the regulatory environment supported its high volume, low-cost strategy built on creating mega capacities. Each large-scale project, in turn, allowed it to invest more in and deepen those competencies, thus preparing the company for even larger projects and greater cross-functional coordination.
While most can see the value in Dhirubhai’s strategy, the significance of deep-rooted market-beating competencies at Reliance, around which the strategy was woven, is often overlooked. And herein lies a strong message for business leaders today. In a period of phenomenal opportunity and cut-throat competition, managers who are able to build generic, value-creating capabilities within their organizations and leverage on them with relentless market focus, stand a great chance of creating dominant industry players which exploit bulk of growth opportunities.
The idea of Core Competence as an Inside-out strategy was first put forth by Hamel and Prasad in 1990, when they outlined what makes up the concept of core competence – It provides customer benefits, is hard for competitors to imitate and can be leveraged across products and markets.
Competitive advantage comes not from imitation but from using organizational processes and design to identify emerging competencies and build them into capabilities. Again, such disproportionate, asymmetric, advantages are hard-to-imitate ways in which an organization differs from its rivals—differences that could ultimately bring huge economic benefit. They may consist of outputs (such as complex project execution that infrastructure leader L&T can deliver), relationships and alliances (such as Tata Group’s network/contacts spanning generations, industries and countries), processes, nascent skills and knowledge (as with BPO sector leader Genpact)—provided competitors cannot imitate these within practical time and cost constraints. In fact, such competencies, because of their subtlety or uniqueness, confer a head start and discourage imitation, and give the company a sustainable edge over competitors.
Increasingly, the competencies that afford companies such sustainable edge over rivals are moving from the realm of tangibles to intangibles. Over the last couple of decades, many of the traditional tangible sources of
competitive advantage – technology, access to capital and product development have become commoditized in most industries and, the source of competitive advantage has shifted to the intangible strengths of an organization like organizational speed, culture and people. S.Y. Siddiqui, Managing Executive Officer – Administration (HR, Finance & IT) at auto giant Maruti Suzuki, emphasises this importance of intangibles. “Competitive edge will emerge from intangibles like speed, responsiveness, commitment and people excellence. In the past, core competency used to emerge from tangibles like technology, product road-map, quality control etc. Today, all these tangibles are replicable by competitors across the world. You cannot really replicate intangibles because there is a high level of ambiguity on how they are built”, he says.
Paradoxically, a continuous and intimate connection with the market and with customers is vital for the Inside-out strategy. First, companies have to understand the competition in order to know how they are unique. More
importantly, they need to track customer reactions to discover which competencies are relevant. It is this ability to constantly leverage on the intersection between the company’s emerging competencies and the opportunities in the marketplace that is the fundamental strength of organizations based on capabilities.
Dr. Pritam Singh, Professor of Eminence, MDI elaborates “Inside must be linked and re-aligned as many times as required with the outside for it to be a competitive strength. What differentiates successful leaders and organizations is that they are able to ‘begin with the end’; they are able to look around, look beyond and look within at the same time. Those leaders are able to hear the unheard sounds, they can see the unobvious and they can synthesise purpose by combining the outside and the inside.”
In this context, it becomes crucial for leaders and organizations to constantly look for emerging competencies, shortlist ones that could be built into market-beating capabilities, nurture these by building organizational structures and processes around them and finally, pursue market opportunities that build and leverage on these capabilities. And even more so for large organizations.
To do well, companies need to develop important capabilities or resources that their rivals cannot. It is, however, hard for them to develop these resources unless they already have some realized or potential edge. The first step lies in discovering the competencies that underlie that edge.
Phanish Puranam, Professor of Strategy, London Business School, explains this succinctly “Capabilities can be built up by design but some emerge through serendipity. A call centre may discover that in analyzing call volume, they have the seedling of a data analytics capability. An IT outsourcer may find that they have learnt enough about their client’s business to be able to offer business consulting advice. This happens all the time, because what people learn and how this knowledge will prove useful is difficult to anticipate perfectly. But being able to see it when it happens is vital as it can form the basis for differentiation within the same business or diversification into a new one.”
A good place to begin the search for internal competencies is to find the more obvious external ones—the reasons why clients and business gravitate to a company rather than its competitors. Managers might look for the kinds of opportunities they can capture that their competitors cannot and vice versa. Robert Kaplan, Professor of Management Practice at Harvard University, is a firm believer in the importance of talking to clients for identifying competencies. “The most important way to identify competitive advantage is to look outwards…talk to customers”, he says. “If you understand why customers chose you to do business with over competitors, you have the most accurate response to the competency question. Customers are like a mirror to the organization and companies can very easy let their advantage slip by not being close to their customers.”
Tiger Tyagarajan, COO at Business Process Outsourcing major Genpact, explains this process of getting customer feedback. “We have many processes and mechanisms that allow us to get ‘outside-in feedback’…we do
rigorous customer feedback processes…net promoter scores from about 2500 customer touch points globally every 6 months. We have done this for 10 years without a break. The learnings from this and other win-loss analysis when our leaders talk to customers when we win or lose business, are tremendous.”
Competence search could also take place inside a company. In many cases, the most useful ‘asymmetries’ are buried deep within the organization and have to be traced back from surface level abilities. This identication can take place by spotting pre-existing but unexploited assets or in an evolutionary manner that requires managers to recognize an emerging edge, mostly in intangible assets such as knowledge, relationships, and reputation.
Maruti Suzuki’s evolution into a company known for superior after-sales service and its developing a comprehensive customer service network over the last decade began with both an inward and outward search. In 2000, the company acknowledged the need to capture a greater portion the total lifetime value of cars it sold, as more and more customers began changing cars at shorter intervals. The company recognized its edge, in terms of scale, for providing a nation-wide servicing network and started building on its existing service station base with a focus on developing superior maintenance services. A decade of effort later, Maruti Suzuki today has an extensive network of more than 2500 service stations covering 1200 cities, which it plans to expand by 45% over the next 3 years. This strategic expansion has helped Maruti Suzuki to capture a huge portion of the maintenance market and today allows the company to compete not just on the basis of product and price, but also on the basis of superior after-sales service.
Competencies evolve into sustainable core capabilities largely through organizational design, which builds and supports capabilities by embedding people and processes into a cohesive conguration. This involves a combination of aligning people to leverage on the competencies using the right reward structures, creating feedback mechanisms to reinforce organizational understanding of competencies and institutionalizing knowledge through learning and development.
Organizational structure is the key to creating and sustaining capabilities according to Dave Ulrich, co-founder of RBL Group. “Line managers are ultimately owners of the organization choices. HR professionals are architects who offer insights and advice. Organizations should be designed around capabilities, what they are known for by their customers”, he adds.
In general, aligning behaviour with core competencies is a key challenge in innovation-driven companies. Nathaniel Sasikar, Vice President, HR at 3M explains how the right reward structure can drive such behaviour – “High performance is a result of organizational alignment through business processes. For example, new product sales is a key performance measure for all our sales employees. This ensures that there is a hunger and support for selling new products, which in turn keeps the labs busy in creating more new products. Thus we continue to innovate and invest in our people.”
At the heart of nurturing capabilities is the ability to create an organization that is capable of firmly capturing the essence of any competency and making it more valuable to the organization than to its competitors. A case in point is engineering and project management blue chip, Larsen & Toubro, which has managed to leverage on its project management capabilities to an extent that today, the company has little competition when to comes to the execution of mission-critical, capital-intensive, hi-tech infrastructure projects. U. Dasgupta, Executive Vice President and Operating Company (OC) Head Electrical and Automation OC at L&T, elaborates on how the company reinforces the understanding of key competencies. “Balancing between action and reflection is an ongoing exercise and we have many mechanisms to encourage this balance. We run learning sessions once the projects have been completed to explore the learning opportunities from each project. We also use cross functional teams extensively, to study past and current projects on how we can execute better, faster and cheaper.”
Ultimately, this process of designing structures, processes and policies with the objective to nurture and institutionalize competencies is what results in the DNA of an organization. The right DNA for an organization is capable of creating ‘virtuous spirals’ - a cycle of capability and aligned performance that enhances reputation, brings opportunities and creates resources to ultimately plough back into capability development. Organizational structure and design serve as a powerful tool in disseminating the capability within the organization and in leveraging the capability across the right market opportunities.
What business are you in?
Arjun Singh, Asia Managing Director for Outsourcing - Global Business Services and Technology, at Hewitt Associates recollects the large number of instances when market leaders fail to recognize their core offering, like when Pepsi and Coke took a good many years to realize their business was beverages and not colas – an oversight that saw them lose significant market share to iced teas, milk, juice and dairy brands. Noting that companies with a strong ‘core’ withstood the recession better, he adds, “The market pushes companies to understand what their core offerings are and what they do better than anyone else can. Companies need to pick their core, and the market will punish or reward their competitive positioning. In an ironic way, the recession of 2008-09 has really helped speed up this process because companies have had to understand which parts are still crucial and which ones that they can give away, or outsource to be able to build on their core capabilities”.
The market can be viewed as a set of niches and opportunities that a company must choose from to leverage its capabilities in the most effective manner. Fundamental to this is a deep-rooted understanding of what the
company’s core competencies are and where can these competencies be utilized for maximum economic benefit.
The ITC story of the last few decades has been one of a company that was pushed to pick its core offering carefully due to market conditions – operating as they originally were in one of the most persecuted industries in the world. Over the last 3 decades, the company has diversified into hotels, packaging, food, agri-business and apparel, with a clear understanding that the core competency of the business is its depth of distribution, its brand-building capabilities, raw material sourcing and managing outsourced activities. In effect, what seems like an unrelated diversification into FMCG, agri-commodities and apparel is an application of the company’s capabilities to a new product sector.
In effect, a company’s business is not defined by the products, services it offeres or even by the processes followes, but by a much more rich and complex definition of what the organization is capable of delivering. This is also the central thesis behind the growing trend of outsourcing non-core activities – companies that truly understand their core competencies can outsource non-critical activities and derive benefits both in terms of reduced costs and increased organizational focus.
S C Bhargava, Executive Vice President and Head, Electrical and Automation Operating Company at L&T, explains this from the perspective of his industry. “Outsourcing is used in two areas, either you are looking at taking an advantage in terms of differential costs in any given area or you are looking at building upon the strength of your outsourcing partner, as an alliance to build on their expertise. The latter one might not be cheaper but it provides a higher output and creates opportunities for improvement. In our case, customer centricity and excellence in execution are paramount… wherever we are able to ensure that quality is maintained or improved we would look at using partners.”
At the end of the day, the Inside-out strategy is all about identifying the company’s core competencies for which customers are willing to pay and continue doing business, followed by a relentless pursuit of opportunities in the market place where these competencies can be leveraged. It also entails constantly looking for emerging competencies within the organization that can exploit our view of external opportunities and nurturing them by aligning people, creating feedback mechanisms and institutionalizing knowledge.
The imperative for leaders, senior managers and HR professionals is to continuously map the external world of customers & opportunities with the internal world of capabilities and manage change with the firm knowledge that their company’s business is not defined by the products and services it delivers, but
by the core delivery capability of their organization.
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