How Some Companies Beat the Competition… For Centuries

AI is transforming the world. And it starts with the right compute. ARM is the AI compute platform trusted by global leaders, proudly NASDAQ listed, built for the future. Visit arm.com discover. Welcome to the hbr ideacast from harvard business review. I'm kurt nickish. Float down the Rhine river through the city of Basel in Switzerland, and the murky water will carry you past the red sandstone cathedral, up on the hill, along old stone embankments and under a medieval bridge. You'll also pass the gleaming Roche Tower jutting diagonally into the sky like an optimistic. And outside the old city, you'll drift past the shiny new sculptured glass offices of Novartis.

The campus looks almost like a modern museum in many ways. There are stone gardens, there are major art installations all across the campus.

Speaking there is Howard Yu. He's a management and Innovation professor at IMD Business School in Switzerland. And what really impresses him is that these enterprises have been on the shore of the Rhine river for the better part of two, two centuries. After all, Yu grew up in Hong Kong, where he saw industries rise and fall in short order. He says this enduring industrial cluster in Basel is unique.

And it's this interesting element around how a city, a cluster of industry, can enjoy so much bountiful prosperity that really trigger me to go explore this particular city.

How these companies have stayed on top for so long is the subject of his new book. It's called How Businesses Thrive in a World Where Everything Can Be Copied. I spoke to you recently on a day when my seasonal allergies were pretty bad. Maybe something that those drug companies in.

Basel could help with. Howard, thanks so much for Talking with the HBR IdeaCast.

My pleasure.

You have this title leap for your book, but when you talk about the pharmaceutical companies in Basel, they're companies that have been in one place for a long time. They look like they've just stayed the same and endured. So how do you explain that these pharmaceutical companies in Basel have leapt ahead?

Yeah, the pharmaceutical cluster in Basel, Switzerland is sort of an anomaly because in the field of competitive strategy, I think we are so well trained and thinking is so entrenched that you want to build up a defensible competitive position, that you want to build structural barrier to protect your businesses against competition over long period of time. That seems to be the dominant thinking among executives and manager.

Right?

That is a mirage because no value proposition can stay unique forever. Any blue ocean may turn red over time. If we were to looking at different industry for a moment, from automotive to textile, for example, to heavy Machineries, personal computers, all the way to mobile phone. Inevitably what we see is expertise and capital and know how migrate from one country to another. This anomaly in Basel kind of jumped out at me. And they've been settling in the same location for almost close to 200 years.

So what is the conventional thinking, at least, you know, in Switzerland or elsewhere, about how these drug companies have endured there?

Yeah, the usual response I get is executive would say well drug discovery is very high tech. Or you know, drugs are subject to FDA approval, which is hard to get. And there's patent. Right. And yet personal computer once upon a time also have a lot of IP, automotive have a lot of IP and even textile industry 200 years ago is the high tech of the day. And yet they couldn't stay away unscarved by global competition. What's really interesting about Basel is how do these drug companies continue to reinvent itself. So I decided to spend some time to just to understand from a historical development, a historical perspective, what have this pharmaceutical company have been doing throughout its long history of time, 200 years or so, to stay competitive, to fend off other low cost competition differently than other industries we've seen.

What did you find?

Yeah, so it turns out at first they were actually all chemical dye maker for the textile industry. Now some of these chemists somehow they discovered there are medicinal benefit of the chemical dye. So the first blockbuster in the world in the 19th century essentially is antipyrint. It's a fever reducing drugs. So in many ways organic chemistry is the hotbed for innovation. Now we all remember back in high school, Alexander Fleming, who discovered antibiotics, penicillin. So after the second world war all the pharmaceutical company essentially begins to study intensively around microbiologies. They send in field worker to go down mine shaft, they send a balloon to collect air sample. They call the employees to ask them to looking at the back of the fridge, to looking at interesting mold.

Really?

Yes. In search for the next pay dirt. So essentially the innovation discipline gradually move away from organic chemistry to microbiology. Now of course, now these days, if we ask anybody what is the hotbed for innovation for medicine, it's genomics. So if you're looking at pharmaceutical industry, what's really interesting is for these pioneers to discover new drugs, essentially they need to leap from one knowledge discipline to the next, starting from organic chemistry to microbiologies and then today is genomics. And I believe it is because the recurring or the continuous leap from one discipline to another that allows pioneering company such as the one in Basel that are Able to stay on top of competition and is essentially leaping to a new discipline that open up new path for growth so that the latecomer, the copycats always have a hard time in catching them up.

Got it. They essentially have to be pioneers and then become pioneers again. And then become pioneers again.

That's right.

You said this is different from other industries.

Yeah, that is a sort of stark contrast. And that really draw my interest to understand what causes some company to stay pioneering and prosper a long period of time versus others kind of being swept away.

Yeah. You also went to Harvard Business School where your dissertation advisor was Clayton Christiansen. And so you studied disruptive innovation as well. The title of your book is how to Thrive in a world where Everything can be Copied. But I think a lot of people think of disruption or companies going out of business as not having their stuff copied, but having other people basically rather than copy them, it's more like they pull the rug out from under them. Is this a world where everything can be copied or something a little different?

That's a great question. What we see in my research is disruption oftentimes is a real threat. But that's not the only threat. In fact, even when an industry seemingly stay constant, nothing change the pioneering company, if it doesn't leap to a new knowledge discipline, sooner or later its financial resources or its market positioning will get threatened. The latecomer will catch up. Let me give you an analogy here. Competition, industry competition is always like mountaineering, meaning every company tried to reach the mountain peak. Now, if the knowledge discipline stays stagnate, from automotive to textile to piano making, sooner or later the latecomer will reach the same height. However, if the knowledge discipline evolve from organic chemistry to biology to genomics, such as the one we explore in pharmaceutical, then the mountain is almost feeling like there's a constant mudslide that pushes everyone downwards. In those situation, it turns out it's the most experienced one, the most early one that have mastered all knowledge that would stand a better chance to stay on top of this game. And which is why if you're looking at industries such as solar panel manufacturing, mobile phone making and wind turbine and heavy machineries, the latecomer that is the Asian competitor, they all have pretty much a meaningful or even formidable position in the global market versus in drug discovery. The western company paradoxically still lead the pack in leading drug discovery itself. And I think it's because this leap of knowledge discipline that pushed out the late comer so much that they had a hard time in catching up.

For now, for now. Yeah. That's so interesting. I like how you reference the mastery of the old because it sounds like it's not just about focusing on the new or leaping to some place new. Can you help explain why that mastery is so important?

If we go back to the study of microbes or microbiologies. In fact, at that time the scientists and engineers, they were pouring different dyes and acid onto bacteria to understand the mechanism and the reaction. In fact, the discovery of chromosome is because some of these chemists actually pouring dye to dye the nuclei of a cell. Then they see the structure of a chromosome as cell divided. What's their role? So it's this idea that what you know in the past is the pre knowledge for you to understand the future. And I think there is a lot of fear about disjoint or discontinuous disruption that causes people to completely disregard about the past. Now sometimes this continuous change does hit an industry in a very big way. But complete disregard in the past and forget about everything that you have as the unique asset and never reimagine how to repackage this unique asset for future use. That's a big pity.

So what's an example of a company outside of Switzerland that you think has done this? Well, sort of in modern times where they've been able to use their pre knowledge of where they've been to make leaps into new places and stay experts and stay ahead of the, you know, the followers.

I deliberately try to find international example or seemingly impossible example during my research. And one company that I came across is from Japan. Its name is Recruit holdings and it used to be a classified post publisher. So they make print magazine like the yellow page. And I thought this company should have died long time ago because of their obsolete business model. Interestingly enough, Recruit holdings was able to reinvent itself leaping into new knowledge discipline and today is an Internet service provider for small medium sized company across Japan. That today if you're looking at a PE ratio, price per earning ratio or revenue or sales per stock price, they were at the same range as Google and Facebook.

How specifically did they do that?

Yeah, so when Recruit begins to notice the emergence of the Internet, one thing that they've done is to do small scale experiment. They move one of the magazine online and provide all those content for free. Now they don't turn profitable overnight. In fact they suffer some corporate loss over the course of three years and it's only the fourth years, then they see the online magazine begins to rake in revenue.

Right, this sounds, I mean this sounds Like a classic job of managing disruption of your industry.

Absolutely right. Because in many ways they don't know what they don't know. And you have to go into the field and do it by yourself rather than outsource to a management consultant in order to gain that early experience. Because this is we're talking early 2000s, no one has worked out the Internet rules. It was at the time that even academic research about platform strategy is still very little. But what they have learned over time, a lot of the customers are putting on ads on their magazine as more time proprietor, mom and pop store, beauty salon and small time restaurants. They don't just want sales, but in fact there are a host of administrative tasks that were distracting. For example, if you are beauty salon, the last thing you want is to have double book your customers who are trying to get a haircut at the same slot. But yet at the same time, all this small time proprietor, they continue to do a lot of these booking system on paper, very labor intensive, take up a lot of time that distract them from serving the customer better. And so recruit holdings begins to experiment beyond just selling advertising space online. They provide Internet based solution such as a booking system for customer such as table reservation at restaurant. The interesting thing for recruit is they never just stop from one single services, but they move into a vertical stack. Meaning every time they encounter and discover a pain point of the customer, they think about a new solution and provide that solution to wrap it around job to be done so well that their customer find it very hard to resist. Now eventually they begin to change their business model from simply selling advertisement space online to much more akin to a subscription base for services and so on. So today what they have been doing is to really thinking about how can we harness our database through artificial intelligence. So again, a new knowledge frontier.

So that's a pretty remarkable digital transformation, right? To go from being a classified company on printed pages to a company that's working in new forms of artificial intelligence to stay ahead as a tech company. How did they do that? How did they know to make the transformation as they did and not go the route that most companies did?

Yeah, that's a very important question. Because in many ways when company leaps the investment it represent or the payoff of these investment represent is very, very hard to translate into a financial or conventional financial analysis. And I think this is actually the root cause why we see so few companies are successfully able to leap into the new knowledge frontier. If I take a broad view about recruit holdings and as I go through the whole Corporate Archive 2 theme jumped out. One is the company have a bias for experimentation. And in many ways that is the only way to reduce the dark space of ignorance. Because we can debate all day long whether this is our strategic intent, whether this should be going forward or not. But unless the company really try things out on the ground, they don't know what they do. They know. And so one is the idea of empowering middle manager to experiment with different initiative around a new knowledge discipline. That's absolutely paramount. However, that's not sufficient because time and time again I have observed companies who are quite happy to do small scale experimentation, but no one finally make the call of pulling the trigger and move from an emergent strategy into deliberate strategy. This is really important because from R and D to product development into scale and commercialization, it require major double down of the investment amount. Yet again, what we see from recruit to other company who are able to leap forward is at some point the senior management team will essentially review all the early evidence and at some point they will pull the trigger. Despite the short term payoff, doesn't look very favorable.

How rare is this organizational skill and insight and commitment?

You know, I thought it was pretty rare at first, but it's actually more common. As my research continued to unfold, I saw that type of CEO behavior also from companies such as Procter and Gamble. Apple is another example, Amazon is another example. Even NGO at Novartis, the CEO, once he understand the new knowledge discipline, actually could reconfigure how the company bring drugs to the market. He essentially tell his direct report quote, money doesn't matter. Let's go ahead now. It does require senior leader to say something like of that type of nature, right? Money doesn't matter, full steam ahead. And so it's this idea of combination of experimentation at the middle manager who are close to the market, close to the ground and get the learning. But at the same time, at some point you do require a senior executive to move from a experimentation mode into deliberate mode and to make that resource allocation accordingly. That would result to a leap of an organization. I admit it's rare, but rare not in the sense that it's not a learnable skill, but it requires executive and senior manager to really change the way they spend their time and delegate as much as possible of their main business to people who can take up that responsibility, but also use more time in understanding the new business. The new knowledge discipline which require personal learning and I think is this disjoint between the two. As a result we see less occurrence than we hope to have observed.

How do you know if you work at one of these companies?

One key element that could be quite obvious would be whenever the company suffers some short term ups and down in terms of earnings or revenue, would they immediately cut off all the initiative, regardless of early traction or not that start, stop, start, stop usually is a very, very dangerous sign that a company don't take the initiatives or the importance of leaping forward seriously enough. On the contrary, there are times that when companies suffer a short term hit of the mainstream business, they continue to persist certain element of the experimentation inside a firm and that's usually a good sign, this ability to acknowledge when things doesn't work out, it's okay to exit. When things are still persistent, we would continue to reinvest and when the signal is right, then there would be a pull of the tracker and move the organization along through a deliberate strategy that are the usual signal whether these companies take it seriously or not. And that's usually quite obvious once we zoom into that level.

Yeah, well, the same way an animal leaps, you can sort of see if an organization's really sort of coiling up for the jump.

That's right.

Howard, what's your hope from writing this book and illuminating these companies and clusters that have sort of defied the usual track record?

When I talk to managers and executives around the topic of innovation, oftentimes there is almost this inevitable pessimism going on. It's almost this decoration that if you're not Google, if you're not Facebook, if you're not like Internet company, our future will be inevitably threatened. And as an industry incumbent, we are trapped in this inevitable downward spiral. And the reason that I write this book is to provide a counter narrative with evidence. In fact, if you are able to repackage what you know, in fact the odd of success is even higher. So I think it's this type of example and know how and framework that we need so that manager would no longer condemn their own industry collapse in into something of an external factor. But in fact we can shape the environment and shape the future of one's company.

Howard, this has been great. I want to thank you for showing a better way up and over I guess a good way to leap and move ahead.

Thank you so much Kurt, it's been wonderful talking to you.

That's Howard Yu, he's the LEGO professor of Management and Innovation at IMD Business School in Switzerland and he's the author of Leap How Businesses Thrive in a World where Everything can be Copied. This episode was produced by yours truly, Adam Bucholtz is our audio product manager. And we get technical and production help from Rob Eckhart. Thanks for listening to the HBR IdeaCast. I'm Kurt Nickish.

Sam.