Shedding Wings

Jul 01, 2005

With 16 years experience at prestigious McKinsey & Co. under his belt, author John Hagel III, now at the helm of his own consultancy, has made a career out of depicting snapshots of corporate America—and offering his two cents on how things can be improved. In his latest book, The Only Sustainable Edge: Why Business Strategy Depends on Productive Friction and Dynamic Specialization (Harvard Business School Press), Hagel and co-author John Seely Brown take on the issue of outsourcing. The likelihood of gaining competitive advantage, they say, lies in executives' ability to rethink how corporations benefit from working with world-class partners.

Pharm Exec: Why do you think the traditional view of corporate capabilities is wrong-headed?

Hagel: It's not so much that it's wrong-headed. I think that what we're trying to do is add on a more dynamic component to it. Historically, strategy has been viewed in a very static way as either structural advantage, such as particular elements in the marketplace that provide enduring advantage, or competencies. If you've got a competency, you're secure, and that's your source of advantage.

By looking at how global markets are evolving, we're focused on the fact that the real source of advantage becomes the institutional capacity to build capability more rapidly than anyone else. It's all about trajectories, as opposed to any snapshot of advantage you might have at any point in time.

One of the ways you talk about getting to that point is through dynamic specialization. What's dynamic specialization as opposed to traditional specialization?

In part, [my theory on dynamic specialization] was driven by reaction. I consult a lot with senior executives at large companies and when I talk about specialization, I kind of get an allergic reaction. Something like, "Oh God, you're talking about shrinking the business and becoming smaller and lower growth." But in fact, our perspective is that specialization is increasingly becoming necessary to drive profits and sustain growth over time. What companies really have to do is choose their field of competition.

Most companies today are really three very different kinds of businesses all brought together, tightly integrated into a single corporate entity. One type of business is a customer relationship business, which has to do with getting to know a particular set of customers better and using that knowledge to bring together the right bundle of products and services to meet that customer's needs.

There's a second kind of business, which is an infrastructure management business, managing high-volume routine processing kinds of activities. It could be a manufacturing plant; it could be a logistics network—anything that's high-volume routine processing.

And then there's a third kind of business that is more of a product innovation and commercialization business—coming up with creative new products, getting them into market quickly and capitalizing on their success in the marketplace.

Those three businesses have very different economics, very different skill sets required to be successful and ultimately, even very different cultures. If you look at a focus company in any of those three businesses, they've got a totally different culture than the other two businesses. Yet most companies have these three businesses tightly brought together into a single corporate entity.