Organizational capabilities
Always be the best
‘Always be the best and maintain your superiority over others’
Homer, The Iliad
Two of the most striking things about Apple and Sony are how radically different their products were and how consistently innovative they have been. Innovation sometimes appears to be the result of a sudden flash of inspiration, like Morita’s idea of making a product of the Walkman, but it invariably builds on knowledge and abilities developed over a long period.
Few companies are able to build a lasting success on the basis of a single innovation – typically these are imitated or improved upon by others. Most technology pioneers never reap the rewards of their inventions – they are quickly by-passed by others with more capabilities and assets. In industries where product innovation is critical, the winners are those who can produce a steady flow of them. This requires rather more than a few brilliant flashes.
Apple and Sony at their best were organizations optimised for innovation. They did not just depend on the genius of a Wozniak or an Ibuka, vital though they were. Innovativeness and engineering excellence became organizational capabilities. They were engrained in the DNA of these companies.
Organizational capabilities
Capabilities, in particular what business gurus call distinctive capabilities (or core competencies – there are lots of terms for what is essentially the same idea) are the most important and lasting source of competitive advantage for most firms. They are what the organization does better than its competitors, what differentiates it from them. They are part of the architecture of the firm, part of its culture. They are more than just the talents of individuals, they are what the firm does so well that it is almost second nature. In cases like Sony and Apple they define the company.
The Apple II redefined the market for personal computers. Nobody else at the time could produce anything remotely as good for those early adopter customers. Apple had assembled such an array of talent, so dedicated to developing insanely great products, that for a while no competitor could touch them. One of its distinctive capabilities, which never entirely deserted it, was the ability to innovate, to produce yet more beautifully designed, easy-to-use products. Even during the darkest days, it had enormous competitive advantage in markets like design, publishing and education, and amongst its dedicated following of idiosyncratic individuals, prepared to pay a premium for great products. Since its renaissance it has been universally acclaimed as the most innovative company in the world.
Innovation, engineering excellence and originality were key principles in Ibuka’s founding charter for the organization that became Sony. He had been pursuing these goals most of his life and the founders never deviated from them. Although Morita became, like Jobs, a brilliant self-taught marketer, great engineering was in his bloodstream almost as much as his partner’s. Like Apple, for which it was long a model, Sony achieved consistent excellence in innovative engineering, in design and in marketing. It had an unequalled capacity to acquire new capabilities and to master one technology after another.
An organization that understood the importance of capabilities for competitive advantage long before the invention of the modern corporation was the General Staff of the German Army. For most of the nineteenth century and up until 1945, the Prussian, then German, army was the most consistently effective military force in the world. In the Franco-Prussian War of 1870 it swept aside the armies of Napoleon III. In almost every month of the First World War, German soldiers, man for man, killed or captured more French, British and Americans than their opponents. Even in 1944, when Germany was clearly losing the Second World War, facing overwhelmingly greater Allied forces, they consistently out-planned, out-manoeuvred and out fought the Allies. Trevor Dupuy has calculated that 100 German troops were the equivalent of 130 British or Americans.
This superiority has been popularly attributed to a militaristic mentality or to Nazi fanaticism, but even if there were some truth in this, it could not account for such a persistent disparity. Much more plausible are the analyses of those historians who have shown that the German army was simply better organised, better trained and better led. Its officers were competitively selected, and if they did not perform were quickly removed. Contrary to popular legend and unlike the rank-conscious British army of 1914, junior German officers were trained to use their initiative in the chaos of battle, not to await orders and obey them blindly. According to Dupuy, the army was successful for so long because it had ‘institutionalised military excellence’.
That is very close to the achievement of outstanding companies like GE, Shell, HP and IBM, who have performed consistently better than their rivals over decades. The excellence they have institutionalised is in management, technology, logistics, and the areas where they have strong specialist capabilities. They have also, of course, developed other sources of competitive advantage, notably strategic assets like strong brands and binding relationships with their customers and suppliers. Ultimately, however, it is their organizational capabilities that have been their greatest strength.
Capabilities in new markets
In new markets capabilities are the single most important factor in success or failure. It is capabilities more than anything else that enables a company to make a new market its own.
Every firm that succeeded in creating a new market started with at least one unusual capability that gave it a unique edge and generally developed more. Between 1999 and 2001 Google redefined Internet search, because its radically different approach was simply so much better than anybody else’s. Southwest worked out a way, which eluded conventional airlines, to keep its aircraft in the air for twelve hours a day and full of paying customers. It was this more than anything else that enabled it, and its imitators like Ryanair, to create an enormous new market for cheap air travel. Amazon’s rapid early growth was primarily due to the careful design and meticulous professionalism of its overall operation. It developed highly distinctive capabilities – in user-friendly software, in direct marketing, in customer service, in the logistics of storage and delivery, in the presentation of information about books and other products and in the processing of payments. Everything from the ordering process to the delivery was honed endlessly to maximise customer satisfaction. It was years before competitors like Barnes & Noble could catch up.
Companies who rely for competitive advantage on a single innovation are vulnerable to attack from others, who may have other capabilities and assets. This is why it is so important for capabilities to be truly distinctive. Those that are easy to acquire attract many suppliers and the markets quickly become crowded – it is not difficult to learn how to become a fast-food outlet, a bicycle courier or a mini-cab driver. For most manufacturers of consumer electronics it was easy enough to produce an MP3 player, and there were soon dozens on the market (though only one iPod).
If, however, the capabilities are complex, entering a new market is much more of a challenge. It is even more so if the would-be supplier does not understand what the challenges are.
