Authors Chris Zook and Nikhil Ojha say the ground will continue to move under our feet. But continuous improvement is the best way to survive — and thrive — in times of rapid change
Anyone who has spent time in Mumbai has encountered the dabbawallas, the army of about 5,000 white-dressed men who have been delivering lunches throughout the city, from homes and cafeterias to the workplace, every day for 125 years. It looks like a simple act, but the dabbawallas have become so proficient at it that they have achieved “six-sigma” status in the 200,000 lunches they deliver per day, making an error just once in six million lunches. It is a testimony to the power of focus and constant improvement.
Yet, even their world is not a static one. The dabbawallas have had to evolve continuously, and ever faster, as smartphones, the internet, and new forms of fast food have altered their customer needs and their competitive environment. These disruptions are not like the chaotic, repeatedly disrupted mobilephone business, but even lunch delivery has new forces and new technologies that require fast adaptation. Indeed, in a faster moving and more uncertain world, the ability to anticipate and adapt relative to the competition is becoming an increasingly important determinant of winners and losers.
Our recent book, Repeatability, is based on years of research on the relative ability of hundreds of companies to adapt. We arrived at three conclusions of special importance to Indian companies today.
First, the accelerating rate and heightened uncertainty of change (evidenced in everything from plummeting product cycle times to the increased speed at which competitive positions change in most markets) provide a premium to simpler business models with strong, crystal clear sources of differentiation. Companies like IKEA in furniture, Scania in trucks, Amazon in online retailing, Asian Paints in coatings, or Four Seasons in lodgings have such clarity and focus. These businesses have an organisation that better understands their customers and what is happening at the front line better than the competition and can adapt faster than more complex or bloated rivals.
Consider that in the average company today, three employees in every five say that they have no idea what the company stands for uniquely, or what its strategy is. When that is true, complexity becomes the silent killer of profitable growth. As in the biological world, complex organisms are much more challenged to adapt. Simplification takes courage, but it is at the essence of the ability to see and embrace change. Those that do not, wage a losing battle against an inevitable future.
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Second, we found that investment in systems to measure and drive continuous improvement in the customer experience and in costs faster than rivals is becoming an increasingly important source of competitive advantage. Our research showed more than seven-fold difference in how we rated “learning systems” in the best performing versus worst performing companies.
For instance, Amazon has invested heavily in real-time learning systems online. An additional one-tenth of a second in the time it takes a web page to load can lead to a one per cent decline in customer activity. As a result, the company has about 500 metrics that it tracks every day, the majority of them relating to the customer experience. Many companies pride themselves on moving from quarterly to monthly customer feedback sessions. Due in part to the simplicity of its model, Amazon measures a feedback loop in tenths of a second. It is no wonder why Amazon is rated at the top of most customer satisfaction lists and why traditional book retailers are in disarray.
A faster rate of continuous improvement in most industries can be a powerful competitive weapon. By taking advantage of innovations in supply chain, materials, and even design, for instance, the inflation-adjusted cost of IKEA’s iconic Billy Bookcase has declined by almost 80 per cent over the past three decades. It is no wonder that no one is able to copy IKEA and that IKEA (soon expected to enter India) has had a profit margin and growth rate that has been more than twice that of the industry for 25 years. It is the power of a simple repeatable model fuelled by a discipline of constant improvement.
Consider Apple. The first thing that Steve Jobs did when he returned as CEO was to radically simplify the product line to four major products and eliminate corporate activities that were not absolutely essential to them. As devices become commoditised, we believe Apple’s competitive advantage will move towards its knowledge of and end-to-end approach to the customer through its retail outlets and iTunes store.
During the past year, we have personally led more than 150 workshops and presentations on the findings from Repeatability to groups of executives in 20 countries. By far the most common questions we heard relate to the third key area of our findings—disruptive innovation. They often cite the case of mobile phones in the 1990s when Nokia controlled over 90 per cent of the global profit pool and was able to invest whatever it needed. Yet, even though Nokia possessed some of the key early technology, the company today is in disarray and has ceded virtually the entire profit pool to smart-phone innovators like Apple, Google, and Samsung. Nokia failed to mobilise its organisation around reinventing the future. We refer to this as the “Engine 1” versus “Engine 2” problem in business and believe it is the toughest challenge facing complex companies today — how to redesign their model for past success far beyond what continuous improvement would allow.
Less than one business in a dozen faces massive disruption like Nokia did, but all businesses are threatened by it to some degree or other. It comes in many forms — from the emergence of the hybrid car in the automotive industry (where incumbent Toyota has adapted well), to the shift in profit from hardware to software in computing (where IBM has made the transition), to the movement of media and information online (where most newspapers have struggled mightily). In each case, it was not the entire business model that was replaced, but parts of it. And there were usually years of warning. It was typically not the time needed to react (Nokia engineers were talking about smartphones over a decade ago), nor the resources to invest (Nokia had the cash), nor insufficient capabilities (Nokia had the early touch pad for phones). Rather, it was the organisational ability to change and the will to reinvent the future rather than resisting it.
Finally, we found that companies that have been the most adaptive to major threats were the ones that had better early warning systems to identify the big threats, talked about them openly, and forced reaction. These capabilities have taken many forms. In the case of IBM, it was a formal part of the planning process to tap into almost 100,000 employees’ perceptions and concerns. Other times they were built around an annual top-management offsite that brought in the independent views of outsiders to shake things up. But always, they instilled what Andy Grove, founder of Intel, referred to as “paranoia” about disruption. Learning systems are becoming the critical tool for sustaining competitive advantage across more and more companies. The three elements that we highlight in Repeatability — the power of simplicity, the art of continuous improvement, and early-warning systems — will increasingly be the difference between “one-hit wonders” and enduring, repeatable success.
Chris Zook is a partner in the Amsterdam office of Bain & Company and a leader of the firm’s global strategy practice. He is co-author, with James Allen, of Repeatability (Harvard Business Press, 2012).
Nikhil Ojha leads Bain’s strategy practice in India and is based in the firm’s New Delhi office.