One of the ‘quick facts’ that I like to mention in my strategy seminars is that only two of the top 100 US firms in 1900 are still around today. In Australia, the stat isn’t much improved and it points to the extreme difficulty of maintaining the performance of organizations over extended time frames.
Of course, some organizations disappear through mergers and acquisitions but a major reason for the disappearance of firms is that they fail to adapt to a changing environment. Often, the environmental threat seems to be obvious to everyone except those inside the business. The strange rationalization of old business practices seems to defy rational explanation. Tim has previously used the example of a media company trying to work out how the internet can augment the newspaper offering. To the rest of us, the newspaper is a burning platform and the question of ‘how do we use the new technology to support the core business’ is simply the wrong question.
There are many other examples of these situations where organizations get stuck in the old business. A colleague who was a Monsanto executive tells me that Monsanto went into genetically-modified crops as a way of supporting the core business of herbicide manufacturing. Under patent, Roundup (glyphosate) was a license to print mony. After in went off patent, Monsanto looked for a way to make it profitable again by making Roundup resistant crops and thus began their fateful GMO journey.
In fact, this situation is so common that business academics have developed the idea of ‘dominant logic’. I’ve been doing a bit of reading on this recently and the following model by Bettis and Prahalad summarises how a dominant logic forms and how it stops new information coming into the organinzation.
It’s a simple model that shows how organizations learn to become very good at a particular business. For example, Monsanto and herbicides, newspapers or Nokia and mobile phone products. To become leaders in the industry, firms need to have an intersection of culture, performance measurement and strategy. The trouble is that this focusses managerial attention on the information that fits with the business. If I am in the business of manufacturing gasoline-powered cars then I will focus my attention on what my competititors are doing and what my customers are wanting. Information beyond this immediate environment is of lesser concern. The creation of a dominant logic might help with maximising short-term returns but it also makes the company highly vulnrerable to disruptive innovation.
One way of avoiding the dominant logic trap is to create space inside the business where new logics can be created. Tim talks a lot about the importance of experimentation in business model innovation and the real challenge here is that these experiments will often contradict the dominant logic. If the standard business case test is applied to these experiments, the risk is that they will be knocked over by the dominant logic. Alternative logics need to be incubated and shielded from the core. This requires leadership and vision.
Having more than one logic in a business makes it more resilient and able to detect changes in the environment. The formation of a singular dominant logic will mean that significant changes in the operating environment will be ignored or misunderstood.