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The Strategic Advantage of Incumbency

Here is an excerpt from an article written by Thomas W. Malnight and Ivy Buche for Harvard Business Review and the HBR Blog Network. To read the complete article, check out the wealth of free resources, obtain subscription information, and receive HBR email alerts, please click here.

Credit:  Heiko Hellwig/plainpicture/Spitta + Hellwig

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How to unleash the power of complexity, trust, and commitment ? Read on.
A few years ago, as part of our work with large, established companies, we created a mock cemetery filled with tombstones bearing the names of industry giants that had suffered untimely bankruptcies or fire sales. The burial ground included former icons like Kodak, Blockbuster, Digital Equipment Corporation, Pan Am, Borders, HMV, Nortel Networks, and Saab. The point of the exercise was to ask business leaders to reflect on this question: Is a slow demise inevitable for incumbent companies?

Over the past two decades many corporate leaders have become focused—perhaps too focused—on that existential question. For most of the 20th century a company that had been in business for many years and had a strong market share and a large employee base was viewed positively. Size was seen as an asset, not a liability. But in the early 1990s long-dominant firms like IBM and General Motors began experiencing significant losses. Later in that decade, Clayton Christensen’s theory of disruptive innovation, which describes how established companies fall victim to their own success, became a popular concept in strategy. That caused a shift in the prevailing mindset: Today age and size are often perceived as vulnerabilities, and “legacy” firms are typically cast as Goliaths that will ultimately be taken down by smaller, nimbler Davids. This conventional wisdom—that corporate disruption and death are inevitable—has put many market leaders in a defensive stance. Inside such firms innovation and transformation efforts can take on an air of desperation.

We see a different path forward. Instead of embracing a defensive posture, established companies should adopt a mindset and a set of behaviors we call strategic incumbency. We define strategic incumbency as an established firm’s ability to dynamically convert age, size, and tradition into the key advantages of market power, trusted relationships, and deep insights. That conversion, when managed well, allows incumbents to reinvent themselves, their strategies, and their business models and create new opportunities and ward off upstarts.

The question is: How? What steps do successful incumbents take to prevail through tough circumstances? How are they better equipped than other firms? What critical pitfalls do they avoid?

To answer those questions, we conducted a three-year study of global incumbents across a variety of industries. Starting with Global 500 companies and other firms we had encountered in our work, we applied six criteria (age, market share, financial performance during downturns, ability to adapt the core business, ability to create a second engine of growth, and resilience in the face of negative events) to ultimately identify 38 companies that had fended off challenges and were still thriving. We examined those firms in depth over the period from 1995 to 2019, conducting scores of interviews with their C-suite leaders to understand how their organizations have stayed ahead.

Despite their long track record of success, the companies we studied resist the temptation to accept the status quo. Instead of making passive assumptions, they actively question whether customer needs are stable, competitors are clearly identifiable, and a solid brand name offers protection. How might customer needs change? they ask. How might competitive threats appear from nontraditional players? What might cause brand loyalty to shift rapidly, allowing insurgent brands to grab share?

They also use their incumbency to their advantage. In our research we identified three capabilities that give them an edge: the ability to manage complexity, the ability to maintain a long-term focus, and the ability to leverage customer relationships to expand into adjacent spaces. In this article we’ll describe in detail the competitive moves of three firms that have exploited those strengths.

Harnessing Complexity

Although complexity has a negative connotation, it has both good and bad facets. Bureaucratic processes that slow down decision-making, create internal power plays, and add “busyness” to an organization are bad complexity. Anything that boosts the top or bottom line and creates alignment, energy, and focus is good complexity. Strategic incumbents systematically eliminate bad complexity and effectively increase good complexity—often by approaching a wide set of customer needs in ways that smaller competitors can’t replicate.

For an example of value-adding complexity, consider Hindustan Unilever Limited (HUL), the Indian subsidiary of Unilever, the Anglo-Dutch multinational. When Sanjiv Mehta became the CEO of the then 80-year-old organization, in 2013, he challenged the internal sentiment that there was little room for the largest fast-moving consumer goods (FMCG) player in the country to grow. To counter that viewpoint, he asked a simple question: “What is the identity of the Indian consumer?”

There was no single answer for a country of more than a billion people, where language, culture, taste, and preferences change every few hundred kilometers. Instead of approaching India as a monolith, Mehta and his team devised a strategy called “Winning in Many Indias.” First they divided the country into 14 consumer clusters based on consumption patterns and stage of economic development. Then they identified ways to use localization to drive growth—not only by adapting products for local tastes but also by using different distribution and supply chain strategies in different regions. To improve his organization’s agility, Mehta set up 15 country category business teams, such as home care, laundry, hair care, skin care, naturals, and food. Each team was independently run by a mini board and headed by a general manager with a mandate to deliver on the P&L.

This decentralized organization helped HUL invest resources where it would obtain the highest returns by catering to regional needs and tastes. For example, HUL used the consumer insights mined from the regions to make and sell different kinds of tea blends and create beauty products with a wider range of pigments suited to local skin tones. The complexity of the strategy was illustrated by a 14-by-15 matrix in which each cell represented an approach to marketing a category within one of India’s distinctive local markets. HUL’s size and resources—its incumbency—allowed it to tackle a broad variety of approaches at once. No start-up could hope to localize so many products for so many regions.

Incumbents often look with envy at agile new entrants that don’t have to contend with the burden of legacy systems. But in doing so, they fail to recognize their own edge.

How many leadership teams would have dared to undertake a structural change of such magnitude—in a successful company at that? For Mehta, the only way to launch HUL on its next growth trajectory was to align the company’s operating structure with the heterogeneity of the country. He explained to investors, “It [the new structure] added complexity to the business, but it is like good cholesterol—it’s a complexity which we welcome, and it’s a complexity which we manage.” HUL’s efforts led to 41% revenue growth from 2013 to 2019, a doubling of pretax profits, and consistent margin improvements. Investors rewarded the company: In October 2019, HUL’s market capitalization of $60 billion made it one of the most valuable FMCG companies in the world, ahead of Colgate-Palmolive, Kraft Heinz, and Reckitt Benckiser.

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Here is a direct link to the complete article.

Thomas W. Malnight is a professor of strategy and faculty director of the Business Transformation Initiative at IMD in Lausanne, Switzerland. He is a coauthor of Ready? The 3Rs of Preparing Your Organization for the Future (2013).
Ivy Buche is an associate director of the Business Transformation Initiative at IMD.



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