In a recent Harvard Business Review article, Martin Reeves, Claire Love and Nishant Mathur of the Boston Consulting Group (BCG) explored how the rise in turbulence demands a new dynamic source of competitive advantage: adaptive advantage. In their research adaptive companies adjust and learn better, faster, and more economically than their rivals. By learning how adaptive they are compared with others and what practices make some players more adaptive, companies can learn how to enhance their own adaptive capabilities. In assessing adaptiveness, the BCG partners created the BCG Adaptive Advantage Index, which takes an outside-in, cross-industry perspective, using publicly available data.
The index measures a company’s outperformance relative to its industry during the quarters of highest turbulence in demand, competition, margins, and capital market expectations. By examining outperformance in the seven most turbulent quarters of the past six years, we were able to identify the set of companies that outperformed their peers under the most difficult circumstances.
In the analysis, BCG assigned Adaptive Advantage Index scores for 2,500 U.S. public companies across a wide range of industries for the period from October 2005 to September 2011. The research found that the quality of adaptiveness had measureable benefits for both the short term (six years) as well the long-term (over 10 years.) “Highly Adaptive Large Companies, 2012” highlights 27 companies that had a market cap greater than $20 billion and that were classified as highly adaptive because they ranked among the top 50 percent of their industry peers achieving scores at or above 100 on its adaptiveness index. The trio of researchers excluded companies in the financial sector from this list because government intervention in this sector had a distorting effect. Similarly, they excluded companies whose marked increase in outperformance during turbulent quarters was coincident with major M&A activity.
The BCG study’s authors argue that few industries are immune from this turbulence which they define by high rates of change in demand growth and profit margins as well as the volatility of capital market expectations and revenue rankings. They present what they observe are a number of unsettling facts:
· Turbulence strikes more frequently than in the past. More than half of the most turbulent quarters over the past 30 years have occurred during the past decade.
· Turbulence has increased in intensity. Volatility in revenue growth, in revenue ranking, and in operating margins have all more than doubled since the 1960s.
· Turbulence today persists much longer than in preceding periods. The average duration of periods of high turbulence has quadrupled over the past three decades.
Further the BCG analysts say that the adaptive advantage is rooted in five capabilities.
· Signal advantage. –The ability to read and act on change signals.
· Experimentation advantage.—the ability to experiment rapidly and economically to learn new and better ways of coping with change.
· Oganizational advantage—the ability to organize in ways that promote adaptation, including enhancing knowledge flow, diversity, risk taking, collaboration, and flexibility.
· System advantage. –the ability to harness the diversity and adaptive potential of multicompany ecosystems.
· Ecosocial advantage.—the ability to continuously adapt the business model to changes in the ecological, social, and economic spheres over both the short and long-term.