One of my favorite research studies on excellence and inertia is by Prof. Dorothy Leonard-Barton, who is one of those rare business academics able to do rigorous research and also translate it into useful information for business leaders. Usually we get the situation where the research is unintelligible or the information for business leaders is based upon bad research. As Tim has said in a previous post, there is a real need for business academics to do a better job with filtering business ideas by testing them with good research.

In a research study published in the Strategic Management Journal in 1992, Prof. Leonard-Barton did twenty case studies of new product development within five firms that she later translated into the bestselling book, Wellsprings of Knowledge. Through interviews and observation, she developed a model of core capabilities that shows four interlocking dimensions.

Firms that are really good at doing something (logistics at Wal Mart, for example) will have a combination of employee knowledge and skill (obvious); physical technical systems such as machinery, databases and software; managerial systems such as education, awards and incentives (less obvious); and values and norms such as rituals, status and beliefs, which acts as a powerful knowledge filtering system (often overlooked). Successful innovations in areas where these dimensions are overlapping will reinforce the connections and make further innovations in that particular competency more likely.

The really interesting finding from Leonard-Barton’s work is that the model for inertia is exactly the same as the model for core competencies. A dominance of a particular skill set tends to marginalize people without skills in that area, resulting in one type of legitimate thinking in the business. People become promoted and rewarded for their skills in the dominant technical systems and the cultural effects of status and beliefs effectively screen information from the outside world that might challenge the status quo. This is exactly what I saw in the case study that I did with the Tioxide company and I wonder if I went into News Limited or Fairfax Ltd, would I observe the same factors?

It’s a powerful model because it shows how businesses are most at risk when they are most successful. By using Leonard-Barton’s framework, managers should be able to detect the early warning signs of overconfidence and lock-in to a dominant technology or business model.

So, success sows the seeds of failure but where’s the supporting evidence? Eric Beinhocker quotes a US study which showed that in a sample of 6772 firms from 1974-1997 only 5% of them achieved sustained outperformance for a period of more than 10 years and only 32 of these firms (0.5%) were able to outperform their peers over a twenty year period. The challenge to keep innovating and changing is immense, and most firms won’t succeed. So much for “Built to Last” or “Good to Great”. The cold, hard data tells us a story more like “Condemned to Being Average” but I won’t even try to sell a book with that title.

Finally, here is a positive thought. Failure and disruption presents the best chance to build new core competencies. When we fail, we should really see it as an opportunity to build the next phase for growth.

Perhaps the great evolutionary economist Bob Dylan summed up this paradox best by saying, “There’s no success like failure, and failure’s no success at all”. I wonder if His Bobness has read Beinhocker?