Developing High Adaptive Capabilities: The Case of CISCO.
| Author | Salwan, Prashant |
Background
A firm creates its enterprise value through four major strategies, viz. developing cost leadership, increasing value and increasing price, increasing its products or services consumption in current markets and entering new markets. Successful firms pre-empt the changes in the external environment and develop their organizational capabilities in such a way that helps the firm sustain its enterprise value (Porter, 1981).
Learnings from the market help organizations develop its repository of knowledge which in turn helps in sustaining its competitive advantage (Vorhies & Morgan, 2005). Companies need to develop high adaptive capabilities (HAC) to clock above average reruns. HAC helps in managing sustained performance even in high cost and operational stress environment (Tracy, Lim & Vonderembse, 2005). Market driven firms need to develop market sensing and customer linking capabilities (Moore & Fairhurst, 2003). R&D, manufacturing and marketing are regarded as core innovation assets, but they cannot alone help in increasing enterprise value. Learning organization, resource allocation and strategy planning which are defined as supplementary innovating assets enable firms' technology assets to permeate into the entire competency integration (Gua & Ma, 2003).
To develop high adaptive capabilities, a firm needs to understand and use its business ecosystem. "Making strategic choices to compete between and within ecosystems is now an increasing focus on a firm's business strategy" (Yan-Ru li, 2009). In a high technology industry a firm faces issues ranging from shortening life cycle, consumer dynamics, value addition, globalization, convergence from external environment but also managing balance and synergies in internal activities which helps in creating and sustaining enterprise value. Firms need to analyze the whole business ecosystem to develop its strategies (Yan-Ru li 2009).
CISCO, a Fortune global 500 firm, quite successfully converted itself into a high tech HAC firm. In 2018 Jan the stocks of CISCO were up by 12%. Cisco transformed itself from a hardware company to more software. Cisco, regarded as "original gangsters" of the 1990s, reinvented itself and developed huge adaptive capabilities to be relevant in a dynamic high tech industry (Brian, 2018). Our research is on the learnings from CISCO's journey to develop as a firm having high tech adaptive capabilities.
Literature Review
For sustaining competitive advantage, a firm need to contentiously innovate and reinvent its products and business model. The biggest challenge any firm faces is how to sustain its financial performance over time. As per research of Harvard Business School, the profitability of firms in one industry varies a lot. The research found out that the median returns on invested capital (ROIC) of S&P 500 companies recorded 12% growth in a 10 year period, out of which the bottom firms lost money and those firms which were at the top recorded ROIC of more than 25% to 40%. This concluded that being in a growing industry is not so important, but to capture and record above average returns are more important.
A firm needs to continuously increase the switching costs so that customers do not leave using its products. A firm increases its switching cost by creating unique value proposition through finding opportunities and developing strategies to minimize threats through analyzing the industrial and external forces effecting their business. In high tech industries network effects play a big role in creating and sustaining the competitive advantage. A firm needs to understand the whole ecosystem where it operates (lansiti& Levien, 2004) .
"Cisco created an enterprise ecosystem which seamlessly links together customer, suppliers, employees, contract manufacturers, and other supply chain partners into a multisite, multi -location, electronics network based on practices and technology of internet" (Yan Ru Li, 2009). In high tech firms internet communication technology, consumer dynamics, globalization, entrepreneurships and networks have increased to hyper competitiveness. To counter these threats, high tech firms in IT and ITES services initially used merger and acquisition strategies to reposition themselves, but post 2008 these firms are using co-operation/ collaboration among vertical channel partners and developing a symbiotic relationships to sustain their competitive advantage (Yan Ru Li, 2009).
Business ecosystem (BE) has three characteristics. First, BE has "a loose network of suppliers, distributers, outsourcing firms, makers of related products or services, technology providers and a host of other organizations and is affected by the creation and delivery of a company's own offerings" (lansiti & Levien, 2004). Second, BE is a "Platform" where majorly services, tools and technologies are used to enhance performance (Moore, 1993). Third, when BE develops a new landscape "Business ecology entails a broad community of firms and individuals that add value to a technology standard by supplying complementary assets to the core product" (Moore, 1993). Business ecosystem helps company to create value which no single member of BE could create individually (Adner 2006).
How a firm uses its business ecosystem to develop sustaining competitive advantage can be captured through business model lenses. Business model (BM) is defined as the logic which a firm uses to create and capture value. BM is a reflection of the firm realized strategy (Ramon, 2010). Business model "consists of four interlocking elements (customer value proposition, profit formula, key resources and key processes) that taken together create and deliver value (Johnson at al, 2008). "A BM articulates the logic, the data and other evidence that supports a value proposition for the customer and a viable structure of revenues and costs for the enterprise delivering the value "(Teece, 2010)
Resource Based View (RBV)
A firm formulates its strategy through matching its resources and capabilities to the opportunities and threats that arise in the external environment. RBV advocates that resources and capabilities play an important role in the primary source of profitability for a firm (Kay, 1999). Industry attractiveness and competitive advantage are the major sources of superior profitability of firm. Research shows that the industry factors account for only a small proportion of inter firm profit differentials. Firm specific resources and capabilities help in creating and sustaining competitive advantage through the development and redeployment of sources and capabilities. The profits arising from superior resources are defined as Ricardian rents. Economist David Ricardo proved that even when the market for wheat was competitive, fertile land would yield high returns. (Trailer, 2002)
As per RBV company resources are the productive assets owned by it and capabilities are what the company can do. Synergy between resources and capabilities create competitive advantage. Resources and capabilities together create organizational capability. As per RBV a firm develops its strategy so that it is able to exploit the uniqueness of its portfolio of resources and capabilities (Petrash, 1996). According to Prahalad and Haemal (1990) "it is not the size of a firm's resource base that is the primary determinant of capability, but the firm's ability to leverage its resources". Resources can be leveraged through concentrating, accumulation, complementing and conserving.
Adaptive Capabilities
In their 1990 landmark paper, "The Core Competence of the Corporation," C. K. Prahalad and Gary Hamel pointed to the potential for capabilities to be the "roots of competitiveness," source of new products, and foundation for strategy. In high tech technology industries new companies are built around specific technological capabilities.
A firm has four levels of capabilities. First, managerial capabilities where in a firm nurture and develop people, empowered decision making and encourage creativity and...
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