There's Nothing You Can Do That Can't Be Done

I've never quite understood what the Beatles meant to tell us with this line, but it turns out to be a very nice way to think about why many innovative new products give companies only a temporary competitive advantage and as an introduction to the strategic management concept of dynamic capabilities.

Unless protected by some effective legal monopoly (for example, a patent, although even that only delays the inevitable), the introduction of even the most brilliantly useful new product is the beginning of the end of its usefulness. There's nothing you can do that can't be done, so upon introduction of your brilliant product, your competitors will start their ultimately successful search for ways to duplicate your achievement. Even if they can't duplicate it exactly, they will ultimately find a way to achieve the same result. Thus, while you might be able to price your product so as to extract above-average returns for a while, once your competitors have found a way to offer customers the same functionality, your days of above-average returns will come to a sudden end.

In real life, the situation is even worse. Developing your brilliant new product might have been costly. You might have made false starts, or perhaps only one in ten of your new product ideas might actually reach the market. For a while, you'll have the customer to yourself, but much of your "above-average return" might actually go to pay off your research and development costs not only for that product but for all of your failures, too. Your competitors, on the other hand, don't have these same costs. Because they can go buy your product and study why customers like it, they don't have to take the risks or pay the price for research and development. You've kindly volunteered to do that for them. Even worse, they'll have the chance to see how your product can be improved to better serve your customers. Free-riding on your investment, they might be able to undercut your price and still make a better overall return. We call this the second-mover advantage.

Assuming you don't have a monopoly, the only way to beat these free-riding second movers is to present them with a moving target: by the time they have managed to copy your brilliant but dated product, you have to have a second even-more-brilliant product ready to go. Thus, one of the truisms of strategy: strategy is not what you do, but what you do next.

If coming up with a new innovative product is not the key to above-average returns, what should the firm do? It can wait for someone else to be an innovator, but that has it's own problems. There is also a first-mover advantage, and letting your competitors go first cedes to them the ability to decide where the industry is going and what the product looks like. Often, the key is to develop a "dynamic capability." A dynamic capability is a organizational talent for doing something useful not just once, but serially. In this example, not simply stumbling across one innovation, but the ability to introduce a series of innovations that always keeps your competitors one step behind.

The idea that a sustained competitive advantage has to be a process, rather than a one-off, comes from Kathy Eisenhardt, a professor at Stanford who studies the tech industry. It's application there seems fairly straight-forward, but it is not only applicable to high-tech companies. McDonald's, for example, pulled itself out of a long-period of sales stagnation by expanding its menu, but once it started it didn't stop. Coffee followed fajitas followed salads followed breakfast followed nuggets. Moreover, a dynamic capability doesn't have to involve new products. Toyota, for example, has a dynamic capability in quality control. It's cars aren't the most advanced, but they work while allowing Toyota to build them more efficiently.

There's nothing you can do that can't be done, but there are things you can do next that won't be done until you've already moved on.

Cars and Environmental Fit: Size Matters

Peter Egan has been writing for Road & Track magazine for several decades. He is an outstanding and thoughtful writer, as well as an engaging story teller. His column in this month's R&T (http://www.roadandtrack.com/column/dog-years-and-englishmen) was as interesting as always, but it also provided some though-provoking ideas on global business.

Egan talks of the merits of British and American cars of the 1950's, as restoration projects and in general. He notes that British cars of that era are somewhat temperamental, and were not designed with ease of maintenance in mind. They were also smaller, of course. He attributes these differences in part to the nature of the country (an island a fraction of the size of the good ol' USA) and their roads (narrow, winding, and brief, as opposed to broad, straight, and heading off into the sunset.)

It makes perfect sense and it's consistent with the idea that businesses must adapt to their environment in order to succeed. Cars and trucks in the U.S. continue to be much larger, on balance, than just about anywhere else. When a firm moves to a new environment, it's not just a matter of bringing a great idea across a border. It's unlikely that a 1950's Cadillac with a trunk so large that it would nearly accommodate an MG Midget would have sold well in England or Europe at that time. (When Briggs Cunningham brought a Caddie to race at Le Mans in 1950 it was nicknamed "Le Monstre".)

Environmental adaptation is a key to international business success. A move abroad to a very different environment often requires a firm to move from being a major brand to a niche provider, in order to maintain the status or perception of a global brand. Cadillac, for example, actually lengthened their STS full-sized vehicle for the Chinese market, looking to serve the niche market for chauffeur driven vehicles there. If you're Cadillac, when you go overseas, you go big or go home. Thank goodness, too, for people like Peter Egan. He's created his own interesting niche with unique writing and a love of old British sports cars.