The Agony of Victory

Why a company's greatest peril is often its own success.

By Jeffrey Pfeffer, Business 2.0 Magazine columnist

(Business 2.0 Magazine) -- While dissecting the Democratic party's landslide victory in November, many pundits have criticized the Republicans for making strategic and operational mistakes leading up to the midterm elections.

There were plenty of both, I'm sure, but what I see when I look at what happened last fall is one of the most intractable problems to beset corporations, nonprofits, and even pro ball clubs: falling prey to what's known to management scholars as a "competency trap."

The concept is deceptively simple. Organizations try things. If what they do succeeds, they "learn" that what they have done breeds success. So they persist, becoming ever more focused in what they do, and ever more specialized in the skills they acquire.

But two things invariably happen to undermine success. Competitors soon learn how to do the same thing, and conditions change, so that what worked in the past no longer applies. Companies have trouble adapting because they often build competencies that don't advance new products, markets, or strategies.

Hence the phrase "competency trap."

Chrysler, for instance, virtually invented the minivan during the 1980s and made a fortune from it. Then came SUVs and hybrids and more recently the spike in gasoline prices.

America's car-buying tastes changed, but Chrysler's factories had been configured to produce a particular style of car, and innovation had, of necessity, been narrowly focused on improvements in minivans. In the meantime, other car companies got into minivans, increasing the competition.

Under pressure, Chrysler (Charts) merged with Daimler-Benz.

There are plenty of instances of competency traps playing out in professional sports. Bill Walsh is credited with inventing the "West Coast offense" made famous by Joe Montana and the San Francisco 49ers of the 1980s and '90s. But when defenses figured out how to respond, and imitation by other teams eroded the advantage of this particular strategy, the 49ers lost their dominance.

Avoiding getting trapped by our own skill and success is a difficult, almost impossible, task. That's because one common recommendation - to keep innovating and doing things differently - has its own set of problems.

It's costly, and it can be just as prone to failure. But three strategies can help avoid competency traps.

The first is to avoid excessive specialization. Toyota has never put all its eggs in one basket - it makes high-quality trucks, minivans, even hybrids. By building a broad range of competencies and knowledge, Toyota can react quickly to changes in market conditions.

The second is to develop peripheral vision, which entails following Andy Grove's advice that "only the paranoid survive." Markets don't change all at once. Pay attention to the facts, not to what you want to believe.

Finally, understanding that a company's greatest strength can become its greatest weakness when circumstances change can help build a mind-set of continuous learning and vigilance.

No company, team, or political party can be equally good at everything. But understanding how success breeds its own problems, and acting on that knowledge, can help mitigate the problem.

Business 2.0 columnist Jeffrey Pfeffer is the Thomas D. Dee II Professor of Organizational Behavior at Stanford University's Graduate School of Business.

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.