Most firms today are excited if they manage to launch a single successful innovation in the rapidly changing marketplace. They find it difficult to imagine, let alone implement, major innovations happening over and over again on a sustained basis.
Continuous Sustained Innovation
In my last three articles, I delineated what’s involved in achieving continuous and sustained innovation. It means generating a fundamentally different way of thinking, working, and being throughout the entire firm. It’s a paradigm shift from the traditional management still practiced in most public companies, as shown in Figure 2 below.
In these articles, I called this different way of operating “networks of competence”, although “ecosystem organizations” and “a culture of innovation” are also labels that I and others have used. (No single label is yet agreed, although there is increasing convergence on the substance of what is involved.
The first article addressed How Networks Of Competence Are Crushing Hierarchies Of Authority. The second article explains the reasons for Understanding Why Networks Of Competence Crush Hierarchies Of Authority. The third article focuses on the business implications of How Networks Of Competence Achieve Superior Competitive Advantage
The three articles depict how strong action from the top can create and sustains continuing innovation in a way that doesn’t and cannot happen in the most common form of management today: hierarchies of authority (Figure 2).
The Role of Hierarchy In Networks Of Competence
Even in firms that are predominantly networks of competence, hierarchy still has a vital role. The move to networks of competence is not about abolishing hierarchy. In fact, hierarchy is needed to set up and maintain the network of competence.
Nor do the articles suggest that networks alone are responsible for the enhanced performance. In fact, sustained innovation means generating a uniform culture that also requires a passion for creating value for stakeholders particularly customers, autonomous self-organizing teams, and a whole set of processes that are radically different from the standard processes in hierarchies of authority (Figure 4 below).
Nor are the articles demonizing those who happen to be leading hierarchies. It’s just that the hierarchies in which they find themselves can’t move fast enough for today’s world. They need to understand why and move on.
Nor is it being suggested that a firm can quickly and easily shift from being predominantly a hierarchy of authority to one that is predominantly a network of competence. The record shows that it takes years of effort and, even with that effort, success isn’t guaranteed.
Sustained Innovation Gets Strong Business Results
Yet when successful, the business results are striking. For example, since 2002, Amazon deployed networks of competence to create multiple mutually supporting businesses, including retail, cloud computing, self-driving cars, computer hardware and software, groceries, videos, music, publishing, film production, consumer electronics, digital book readers, voice-controlled personal assistants, tablets, televisions, AI and more.
From the early 2000s. Google embraced a similar model. In the following decades it created multiple businesses, including search engines, online advertising, cloud computing, computer software, quantum computing, e-commerce, consumer electronics, artificial intelligence, email, navigation and mapping, cloud computing, web navigation, video sharing, operating systems, cloud storage, language translation photo storage, videotelephony, smart home security, smartphones, wearable technology, music streaming, video, machine learning APIs, AI chips, quantum computing, self-driving cars, and smart cities (Sidewalk Labs), and transformer models (Google DeepMind).
Similar results are now occurring in other sectors, including manufacturing, (NVDA, TSLA. BYD), technology and gaming (MSFT), retail (WMT) pharmaceuticals (LLY), entertainment (SPOT), cosmetics and beauty (LVMH, ELF). private equity (KKR, EQBBF) and agriculture (DE).
The impact on most people’s lives has been positive. These firms have shown that they can innovate more quickly, operate more efficiently, mobilize more resources, attract more talent, and use it more effectively, get benefits to customers more quickly and more cheaply, and raise more money for new endeavors. We as customers have mostly embraced their products and services, which have changed how we work, how we play, and indeed, how we live. Although no one can predict the future, the change looks likely to continue.
Staff engagement in these organizations of all sizes is generally above average and the business results are striking (Figure 3).
Will Digital Networks Possess Irresistible Competitive Advantage?
The consequences of these performance gains require attention. In his book, Everybody Wants to Rule the World (2021), business analyst Ray Wang predicts that that by 2050, the global marketplace may comprise around 50 giant duopolies. In each market, there may be only one or two dominant giants. In effect, Wang foresees that the same economic and technological forces that created today’s digital giants will inexorably work its way throughout the whole global economy.
Wang argues that we all need to “understand the digital giants’ DNA, how they operate, why they continue to build exponential barriers to entry, and where their next foray will take them.” In business, the rise of duopolies, says Wang, “represents a life-or-death challenge for your company—no matter what sector you’re in or how long you’ve held a secure position.” In the public sector, regulators need to understand them to effectively regulate them, as well as deploy the new management upgrade their own activities.
Digital Transformation Didn’t Work For Most Firms
Wang notes that “the most popular business buzz-phrase of the 2010s was “digital transformation.” Wang himself led the charge to help firms with their digital transformations.
But it didn’t work for most firms. “We did all the right things,” Wang writes. “We transformed business models. We changed engagement. We were supposed to come out winners. And yet only a few of us made it past the finish line. Suddenly successfully embracing digital transformation was not enough.”
It seems likely that the current business frenzy with the prospect of AI will follow a similar path. Massive investment, but remarkably few business winners.
The New Dominant Life-Form: Data-Driven Digital Networks
The new game, says Wang, involves a recognition that the most important asset in the digital age is data. The winners already are, and will continue to be, those who are able to exploit data in what Wang calls Data-Driven Digital Networks (DDD Networks).
DDD Networks “apply these massive digital feedback loops to all of their stakeholders — customers, employees, suppliers, partners — and use data – driven insights to mitigate risk, identify new opportunities, improve operational efficiency, anticipate customer demands, and drive dynamic pricing.”
“For example, Google can automatically and dynamically adjust ad pricing based on the popularity of a search term or engagement in a topic. Amazon can identify which routes and markets to expand based on logistic costs and profit margins.”
The Future
The emergence of firms run as predominantly networks of competence is not just a theory. It is living reality of the largest and fastest growing firms in the economy and seems likely to increase in importance.
While all of the current winning firms have flaws that warrant regulatory attention. the potential for customers, the talent, and shareholders offers exciting benefits for society as a whole.
And read also:
How Networks Of Competence Achieve Superior Competitive Advantage
Understanding Why Networks Of Competence Crush Hierarchies Of Authority