THINK AHEAD TO STAY AHEAD OF THE COMPETITION

In the early 1990s, unemployment in Denmark had risen to 10 percent, so business leaders, government and trade unions worked together to change the labor market and succeeded in halving the number of people out of work. Mango and Apple have reinvented themselves in order to be more competitive, while Easyjet has revolutionized the air travel business. Each case shows that innovation is vital in order to maintain competitiveness. IESE professors consider the many different ways of achieving competitive advantage.

Competition and innovation go hand in hand. Being competitive means doing what everyone else does better or, better still, doing something new. This holds true across the board, whether the innovation is in products, operations, business models, new technology or employment practices. At the end of the 1990s, unemployment was running at 10 percent in Denmark but, after employers and unions agreed on changes to the labor market, it fell by a half. Companies such as Mango have used innovative business models to gain competitive edge, while with Zara and Dell, it was innovation in operations that put them ahead. At Apple, a lucrative new income stream was created simply by offering users an application: iTunes. As IESE professors and other experts explain, when it comes to being competitive, everyone – employees, businesses and government – has a role to play.

Michael Porter, director of the Center for Competitiveness at Harvard University and a contributor to IESE’s Center for Globalization and Strategy, says that almost everything, from schools to transport to customer sophistication, contributes to competitiveness. There is no single policy or grand step that can create competitiveness, he says. “Improving competitiveness is a marathon, not a sprint.” He adds that the intuitive view of competitiveness is fl awed and that the need for low wages reveals a lack of competitiveness. “Exports based on low wages and cheap currency do not support an attractive standard of living,” he says.

Competitiveness can be viewed at the level of the state and at the level of businesses. A country’s competitiveness is the sum of the competitiveness of its businesses, which is in part determined by the impact of government policy on the business environment. The overall economic environment is also a determining factor, and in good times there is less pressure to innovate. “When business is good, companies generally don’t change that much,” says Christoph Zott, a professor in IESE’s Department of Entrepreneurship. “One of the problems successful companies have is that they become complacent and are less prone to question their business model because they’re doing well and there’s no need to question anything. There’s a term for it – core rigidity. Companies have core competencies but also core rigidities. Why change a winning formula?”

However, necessity is the mother of invention, and the crisis is forcing companies to innovate. “In the short term in a crisis you have more capacity than you need and that means you are free to do things you weren’t able to do when you were running at capacity,” says Jaume Ribera, an IESE Professor of Operations Management. “You have spare capacity and if you were smart and saved some buffer

during the good times, now you can do those things. It’s not only a good thing to do, it’s necessary. Now is the time to improve efficiency.”

To many, efficiency means cutting costs and that means cutting staff , but this may not be the solution. “The worst thing you can do is to say you want to cut 30 percent of your staff across the board,” says Ribera. “It doesn’t make any sense, because in some departments you may need some spare capacity to achieve more flexibility. First, you need to define how you want to compete and then redesign the capacity inside your system.”

MARKS & SPENCER SLUMPS

Although lean times encourage innovation, this doesn’t mean that when times are good you can live off the fat of the land without innovating. As the saying goes, while the grass grows, the horse starves. Take the case of Marks & Spencer. In the late 1990s, when there was still plenty of money around, the 117-ear-old retailer, a bastion of the British clothing trade, went into a nosedive. Its share price fell and it had to close its 38 European stores and cut back at home. Meanwhile, its competitors – notably the Spanish firms Mango and Zara – were growing by doubledigit figures.

“Their decline can largely be explained through the business model they had implemented,” says Zott. “It relied on an established value chain, and the sequential flow of goods through that chain, with a significant chunk of that chain being outsourced and off shored, so that the time it took for a new design to get into a shop was one year. Zara managed to do it in fi ve days. Even if you’re not catering to the most fashion-conscious part of the market, it still matters whether you’re producing the right color for the season or not. To change anything would have involved changing the whole system that had been in place for decades. They became captives of their one successful business model which no longer allowed them to respond to changes in the market.”

ZARA TAKES OFF

Meanwhile, Zara was revolutionizing the fashion industry by applying the supply chain vision to its business model, says IESE’s Philip Moscoso. “While many of its competitors have outsourced their production to countries with low labor costs, Zara is still assigning a significant share of its production to local suppliers,” Moscoso says. “This enables it to provide a higher degree of agility when the time and need comes to respond quickly to new market trends.”

“One of the things that Zara does very well is capture real-time feedback from their stores,” says Zott. “They have people in the stores with hand-held computers asking customers what they need, what they like, what they don’t like and they feed all this information back from hundreds of stores. That’s powerful information. Zara can respond and five days later these products are in the shops. It’s linking the activities that matters. You have one activity, retail, and another, design, but how are these linked? In Marks & Spencer it goes from design to retail, but it’s a one-way street, there’s no loop. In Zara, the ingenuity of the business model is engineering this loop back from the store into the design department and then having a system of activities in place that allows for rapid production.”

The first question you have to ask yourself is what the customer needs, today and tomorrow, because customers change, habits change, tastes change. Which part of the market do you want to cater to? Do you have all the activities in place to serve that market? Should you do everything yourselves or should other people do some of it? “These are the questions you need to ask to figure out what business model you need,” says Zott. “It’s like a key to a lock.”

It was through thinking about what the client wants that low-cost airlines introduced competition into a market that up until then had been carved up between de facto cartels. It began in 1971 in the United States with Southwest Airlines, now the world’s biggest airline in terms of passengers carried. The model was adapted for the European market by Ryanair and Easyjet. Stelios Haji-Ioannou, Easyjet’s founder, based his model on two premises. Firstly, that the airline business was oriented towards people who were buying their tickets with someone else’s money. Secondly, that for many people, fl ights were a means of getting away from country “A” to the more desirable destination “B”, and that country “B” was where they wanted to spend their money, not on frills such as in-flight meals. Consumers behave in a rational way when confronted with a value judgment,” he says. “Give them a product at the right price and they will take it. Business-to-business people and people spending the company’s money don’t work in the same way.” However, when traditional airlines have copied the low-cost model and tried to incorporate it into their operations, it hasn’t always worked out. It didn’t work for British Airways, whose Go! Operation was swallowed up by Easyjet, and it doesn’t seem to be
working for Iberia either.
“When I fl y to Brussels, for example, I can’t fl y business,” says Ribera. “Iberia forces me to fl y low-cost even though I could pay them more. Of course, they should have low-cost seats. There may be only four or five who want to fl y business, but they can probably get more revenue out of them than out of 50 low-cost passengers.”

COPIES VS. ORIGINALS
According to Moscoso, one reason why it is hard to copy successful operational models is that operational innovation implies major changes in the company’s DNA, such as giving more decision-making power to the lower levels or changing the way suppliers are dealt with. Without a change in attitude, attempts to implement operational changes are destined to fail. However, he adds that, compared to other ways of increasing efficiency, operational innovation is relatively cheap, reliable and carries little risk. But what is new today will not be tomorrow, and innovation must be a continuous process.

“Attempting to encourage innovation in the business model is the same as encouraging entrepreneurship,” says Joan E. Ricart, head of IESE’s Strategic Management Department. “The two are related, because if people aren’t prepared to try new ways of doing things, there’s not much you can do. That’s why any encouragement for entrepreneurs (meaning the individual entrepreneur as well as those within the company itself ) can help to change the business model.”

THE VIRTUOUS CIRCLE

The best companies are the ones that tend to innovate. And the ones that innovate, export and continue exporting longer. It’s a virtuous circle that begins with creating new products. Sometimes creating new products involves thinking a long way outside the box. This is what Apple did, first with the iPod, which, almost overnight, consigned the portable CD player to the museum of technological history, and then with iTunes. No sooner had the illegal Napster music downloading site been shut down by a U.S. judge in 2001 than Apple launched iTunes. This not only boosted sales of the iPod, already a “must have” accessory, but created a whole new income stream out of a relatively minuscule capital investment.

“Apple iTunes was not an incremental change,” says Zott. “It didn’t require a huge up-front commitment or a huge change in the original model. It’s an add-on that’s so complementary that it lifted Apple several orders of magnitude. Their share price rose by over 1,000 percent I think.”

The iTunes Store opened in 2003 and iTunes now accounts for 25 percent of music sales in the U.S. and 70 percent of worldwide digital music sales. In February they reached 10 billion downloads and, while iTunes revenues do not appear separately in Apple’s accounts, music-related income adds up to $1 billion per quarter. The launch of the iPad tablet earlier this year may lead to a similar revolution in the book and newspaper industries. The model however, will inevitably be diff erent from iTunes. People are willing to pay for songs that they will listen to tens or hundreds of times, while few will read a book or a newspaper article more than once.

Businesses are only just beginning to exploit the opportunities for greater competitiveness off ered by Web 2.0, says Sandra Sieber of IESE’s information systems department. “Web 2.0 can change the way of carrying out R+D and is very useful for so-called crowdsourcing (third party services on a massive scale, where problems are presented with an off er of recompense to whoever comes up with a solution), which can lower costs.”

One example of applying crowdsourcing as a way of developing systems is TopCoder, an online platform where businesses can post their IT needs so that suppliers – usually freelances or small businesses – can compete for the contract.

FLEXIBLE WORKING

If a nation’s ability to compete is the sum of the competitiveness of its companies, it is also a direct expression of its approach to work and its willingness to adapt its practices. The will to change must exist at all levels: business, trade unions, government and, of course, the individual. It was just such a social pact that allowed Denmark to cut unemployment by 50 percent in the 1990s by introducing an employment regime that has become known as “flexicurity,” a portmanteau of “flexible” and “security.”

Flexicurity comprises two dimensions: the internal (which is the domain of businesses) and the external. Businesses can adopt policies of continuous learning to improve their workers’ professional skills, upward mobility and employability. It is also important that businesses promote multi-skilling through flexible policies. Some businesses have also adopted “flexicurity measures” such as sabbaticals for workers with the right to return to their former job, occupational training, teleworking, flexible working days and shorter weeks. All of these measures improve productivity and therefore have repercussions on competitiveness.
“Flexicurity is Europe’s new employment strategy that is designed to encourage competitiveness by getting workers and employers to adapt to the new economic realities,” says IESE’s Esperanza Suárez Ruz. “It aims to facilitate the transition from one job to another in secure conditions and to create a flexible environment that helps people find work.” Flexicurity gives employers the flexibility they need but also answers the needs of people’s professional careers. It focuses on “employment” rather than “a job” and emphasizes continuous learning and active employment policies. “Active employment policies and continuous apprenticeship are measures that encourage competitiveness,” says Suárez.