Large Companies Need To Understand Their Strengths And Act Like Strategic Incumbents

Large Companies Need To Understand Their Strengths And Act Like Strategic Incumbents
Large Companies Need To Understand Their Strengths And Act Like Strategic Incumbents

For most of the 20th century, size, longevity, and a large market share were seen as assets in business. Then they began to be viewed as vulnerabilities, putting many companies in a defensive stance. Successful incumbents, however, convert these traits into market power, lasting relationships, and deep insights and use them to create new opportunities and ward off upstarts. Three capabilities in particular give established firms an edge: the ability to manage complexity, the ability to focus on the long term, and the ability to leverage customers’ trust in new arenas. This article describes how companies like Hindustan Unilever Limited, Deere and Company, and A.P. Møller–Maersk have prevailed by exploiting their strengths in these areas.

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.

Maintaining A Long-Term Focus

In our study successful incumbents showed exceptional ability to stick to a long-term agenda. Whereas passive incumbents get caught up in quarterly performance, strategic incumbents strive to balance delivering in the present with preparing for the future. The CEO of one company we studied explained, “The short-term metrics are the outer scorecard, but you also need a more important inner scorecard that looks at the contribution you make to employees, customers, and society in the long term.” We find that commitment from the CEO and active oversight by the board are key to the steadfast focus required.

Consider the iconic U.S.-based Deere and Company, which operates in the highly cyclical agricultural equipment industry. One reason the company has survived many catastrophic downturns and forged on, decade after decade, is its long-tenured CEOs. It has had just 10 CEOs in its 183-year history. Samuel Allen, Deere’s CEO from 2009 to 2019, was with the company for his entire 45-year career. During his time at the helm, Deere saw the worst down cycle in half a century. From 2014 to 2016, the prices of key agricultural crops fell, U.S. farm income declined, and farmers put off buying new equipment. As sales slumped, industry analysts became skeptical about Deere’s prospects. But Allen remained true to the company’s long-term strategy of being a leader in precision agriculture – the practice of combining farm equipment and technology to help farmers increase yields and profitability in an efficient and environmentally friendly manner – a goal set by his predecessors in the 1990s. He adhered to strict cost discipline to manage the immediate financial pressures but continued to make acquisitions and R&D investments of about 4% to 6% of annual sales to build digital capabilities, even in the most difficult years.

As Deere pursued this strategy, incumbency provided it with a set of advantages: an immense installed base and a reputation that extended back more than a hundred years. Farming tends to be a multigenerational business, so customers know Deere as the company behind the steel plow that transformed the Midwest into an agricultural heartland. Deere had built on this legacy of innovation to modernize its value proposition. By outfitting its products with automation, telematics, computer vision, GPS, and sensors, it helped farmers produce more, reduce costs, increase efficiencies, and boost their profitability and growth. In the early 2010s, Deere began focusing on game-changing digital technologies such as artificial intelligence and machine learning, which made farming decisions on a plant-by-plant level in real time. For example, Deere’s recent acquisition, the California-based Blue River Technology, integrates computer vision and machine learning to enable farmers to spray pesticide only on weeds.

Selling farmers on new technologies isn’t easy: They tend to be conservative and frugal. However, Deere persevered, using its deep knowledge of customers to target leading-edge farms for initial adoption, establishing proof that technology helped them operate more efficiently, and then spiraling out to the rest. But Deere sought to do more than merely optimize input and maximize output for farmers. Its bigger motivation is a global reality: Given that the world’s population is expected to rise to 9.7 billion by 2050, agricultural yields will need to double to produce enough food to meet demand then with the same amount of arable land in use today. Precision agriculture isn’t just a product strategy; it’s a way to sustain the next generation.

  • Leveraging Trusted Customer Relationships To Expand Into Adjacencies

One potent enabler for redefining the playing field that we observed is trust. Strategic incumbents build on strong relationships to have deep conversations with stakeholders about how their needs are evolving, critical issues that should be addressed in the future, and the interests that they and the company have in common.

One firm that did this was A.P. Møller–Maersk. The name of the 117-year-old company adorns cargo ships all over the world. (Maersk’s Alabama attracted worldwide attention when it was seized by Somali pirates in 2009, an event that became the subject of a movie starring Tom Hanks.) When Søren Skou took over as its CEO, in 2016, he was tasked with one of the biggest transformations in European industry. He jettisoned Maersk’s oil and energy businesses in order to focus the company on two pillars – marine shipping and land-based logistics.

The Danish behemoth knew that it had to protect its superiority in shipping – the heart and soul of the company. Maersk had pioneered large-scale container shipping back in the 1970s, repeatedly setting and breaking world records with the launch of ever-bigger container ships. However, the industry had been plagued by commoditization, volatility, consolidation, low margins, and the longest downturn in six decades (2008 to 2016). Against this backdrop, Skou’s strategy was to create value for customers by connecting and simplifying their global supply chains, instead of just moving containers from port to port. The opportunity was immense, since Maersk transported one-fifth of all seaborne freight but sold land-based logistics products to fewer than 20% of its ocean-shipping customers.

However, the company’s traditional capabilities in shipping alone would not drive new value propositions. So, Maersk hired new talent, restructured its logistics arm, and invested in M&A to build its logistics capabilities. The company made a big shift from a supply-driven approach (pushing its products to customers) to a demand-driven way of doing business, creating offerings to address customer needs and pain points. Says Vincent Clerc, the head of Ocean and Logistics for Maersk, “We are getting into a solution model where the customer need is at the heart of the proposition. We take away the hassle, combine different ocean and land-side products, make it work, and take accountability for the outcome.” But what gives Maersk the ability to win? Part of its advantage lies in asset ownership, which translates into control over the outcomes it promises to customers, and its ability to orchestrate end-to-end visibility through a wide array of data, such as real-time information on inbound and outbound cargo, shipment tracking, bottlenecks, the impact of weather on shipping routes, and delivery schedules.

Technology was key to achieving that shift. The company started integrating digital innovations that allowed customers to go to to get prices, make bookings, handle documents, and make payments.

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 edge. That was not the case at Maersk, however. It saw that its longtime shipping business and existing relationships with thousands of customers gave it a tremendous advantage as it expanded into land-based transport – and within the short span of four years it had redefined its value proposition and moved into a new market.

Why So Many Companies Play Defense

What keeps companies and leaders stuck in the passive mode that prevents them from leveraging the advantages of strategic incumbency? We’ve noticed five syndromes that tend to derail efforts to adopt a more active posture:

  • Senior leaders resist addressing (and often outright deny) the causes of inertia, primarily because doing so would involve dismantling the very structures they have meticulously put in place. A global consumer products company that we worked with, for instance, had slow growth in emerging economies because it relied totally on its own high-cost manufacturing facilities, which couldn’t deliver products at the desired price points for those markets. Instead of pivoting to comanufacturing and copackaging with local partners, the company’s leaders kept defending the sunk costs in its facilities and arguing that local partnerships would dilute product quality.
  • An “us versus them” mentality takes hold when the top management drives people out of their comfort zones. By pushing too hard, leaders can demotivate people.
  • When change efforts do begin, they often suddenly lose momentum. That’s why leaders need to assess those efforts midway, as coaches do at halftime, and ask: Are we winning, or are we losing? If an organization is falling behind, it needs to change its tactics, change its pace, or change the players.
  • Companies devote the most attention to the “D” in R&D – that is, incremental product improvement. In contrast, strategic incumbents invest in dramatically different value propositions or business models – projects that require more-substantial research investments. Securing funding for such far-out ideas can be difficult because the business case is hard to prove and the associated risks are significantly higher. Often risk-aversion results in a wait-and-see approach or spreading R&D too thin across multiple projects.
  • Even when companies do devote energy and resources to bold reinvention efforts, too many isolate them from the core business. They set up a new unit dedicated to disruption in a remote location, with a flexible structure and a new leader; staff it with new talent; and give it different performance metrics (such as the number of new ideas seeded, new concepts proved, or partnerships formed with start-ups). The logic for this separation is to protect the fledgling venture from being crushed by the incumbent mindset, business model, and operating processes. However, this approach only highlights how hostage large companies are to incumbent liabilities. The disadvantages of separation invariably become clear when companies attempt to scale up their innovations by integrating the new unit into the core business. Most of the strategic incumbents we studied, however, avoided shunting their change agents and innovation efforts off to faraway skunkworks and kept them integrated with the primary business.

Companies that are plugged into their customers gain insights that can help them shape the future of their industries. The question is whether they can overcome inertia to act in time. Here the role of the leader is critical in moving an organization from passive to active incumbency. Leaders need to ask questions, constantly scan outside their own industry, seek successful growth models, and follow through on new pathways with commitment and patience. They must take accountability not only for creating the new but also for transforming the old, ultimately achieving strategic congruence between the two.

Despite the prevailing ethos that disruption is their inevitable fate, large legacy firms do not need to wither and die. Instead they must learn to tap into their inherent strengths and behave like strategic incumbents.

originally posted on by Thomas W. Malnight and Ivy Buche

About Authors:
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.