In a world of increasing globalization, companies of all sizes need to stay attuned to new developments and currents of innovation beyond their core markets. Now more than ever, managers need to be aware of the dangers of dependence on entrenched beliefs and technologies. This article highlights an intriguing way in which managers at smaller regional companies in the United States improve their ability to stay abreast of industry trends: with the help of networks of non-competing peers from other geographic areas. We call these networks industry peer networks (IPNs).

While trade associations are the best-known venue for interaction among companies in the same industry, industry peer networks comprise small groups of noncompeting peers who gather regularly, in an atmosphere of significant intimacy and trust, to exchange information and discuss matters of company performance. The group members come from companies that provide similar services but operate in different regional markets and compete for different customers. Although industry peer networks have not received very much attention in the business press, thousands of U.S. companies in dozens of industries participate in them.

IPNs help members learn vicariously from the experiences of their peers and address deep-rooted problems common to many companies. These problems assume various forms, but the most important can be categorized as myopia and inertia. In a strategic context, myopia refers to managers’ tendencies to emphasize the significance of local developments and familiar things at the expense of the global, distant and unfamiliar. This fixation on the local frequently leads managers to ignore more distant developments that are likely to be important sources of learning over the long term.1 The inability of U.S. manufacturers to respond effectively in the 1980s to the entry of Japanese brands into the automotive, camera, copier and television markets is a prime example of how immersion in a local context may blind companies to disruptive external events.

Related to the problem of myopia is that of inertia. Employees and managers alike tend to cling to assumptions and time-tested ways of doing things, and companies grow comfortable in their familiar niches. Managers tend to give priority to knowledge and procedures that are well-mastered and controllable, rather than investing in the exploration of unfamiliar terrains. This inertia is usually accompanied by a sense of overconfidence, based on the belief that things will continue as they are. There are many instances of now-defunct companies that saw themselves as market leaders with superior products and customer loyalty, only to fall victim to wishful thinking and complacency in the face of rising competitive threats.2

As a key preventive measure against tendencies toward myopia and inertia, managers are often advised to compare their companies’ capabilities systematically to those of more successful rivals.3 Yet, such comparison is no small feat. It is natural for competitors to do everything possible to prevent critical knowledge from leaking to their rivals. Because of the difficulties involved in getting a good look at the competition, learning from other companies is often less effective than desired. And even success at replicating the capabilities of well-known rivals is insufficient, because it does relatively little to reduce vulnerability to unfamiliar solutions.

The tendency toward myopia and inertia and the difficulty of learning effectively pose threats to companies of all kinds, but the challenges are particularly acute in industries in which competition is predominantly local, such as auto retailing, residential remodeling and the restaurant business. The nature of the competition in such fragmented industries reinforces managers’ natural tendency to focus on the local market. It is therefore not surprising that industries of this kind have witnessed the proliferation of industry peer networks as a means of offsetting the forces of myopia and inertia. Our research explores the nature of these networks and the way they help members improve their competitiveness through opportunities for learning.

The Origins and Characteristics of Industry Peer Networks

IPNs appear to have originated in the auto retail industry in 1947. The owner of several Ford Motor Co. dealerships in the Kansas City, Missouri, area came up with the idea of convening managers from his dealerships to share information and exchange ideas with each other. Once he realized the broader appeal of the concept, he and other partners established a company to facilitate meetings among owners of dealerships from different regions. These gatherings were called 20 Groups, a name that reflects the use of size caps to restrict each group’s membership to no more than 20 members. The company is now known as NCM Associates, Inc. and is based in Overland Park, Kansas; it remains the leading IPN in the auto retailing industry. It has consistently sought to diversify by developing IPNs in other industries.

To gauge the pervasiveness of IPNs, we carried out a broad Internet-based survey of U.S. industries. (See “About the Research,” p. 35.) The survey revealed that IPNs are most widespread in the retail and service sectors; about 10% of industries in these sectors have one or more IPNs, with penetration rates varying from about 1% in industries such as residential remodeling to at least 25% in the auto retailing industry. No IPNs in manufacturing were uncovered, probably because competition in this sector tends to cross geographic lines. Examples of industries with IPNs include advertising agencies, car rental agencies, community banks, office furniture distributors and graphic arts and printing companies. Common names for these networks include share groups, peer forums and executive roundtables, but the most common term we encountered was 20 Groups, reflecting the concept’s roots in the auto retailing industry.

While IPNs vary in their practices and structure, typical key practices and characteristics include:

Multiple groups of noncompeting peers.

IPNs comprise multiple groups, with each group’s membership capped at 20 members. A group’s members come from companies of similar size, and, within a group, no two members compete in the same local market. For example, one auto retailing IPN facilitates groups of same-brand (such as Toyota, Ford) sole-dealer-ship owners from different cities, groups of owners of multiple dealerships from various parts of the country (“megadealers”) and groups designed specifically for dealership managers rather than owners.

Selective admission to groups.

Members exercise considerable control over group boundaries, with admission of prospective members typically requiring unanimous consent of the existing members. Prospective members have to convince the members of the group that their inclusion will benefit the group as a whole.

Face-to-face group meetings.

Typically, meetings among company owners and key staff members last for two to three days and are held two to four times a year. In many IPNs, members meet in a resort location and focus each meeting on a preset theme, such as a specific operational, strategic or industry issue. Sometimes the group invites an outside expert on that theme. Members typically spend the morning in discussions, in which they report on the state of their businesses, accept suggestions for improvement and describe their progress on implementing past suggestions. The afternoons and evenings are usually devoted to leisure activities; all IPNs include significant time for socializing as well as discussion. Some IPNs convene not in a resort location but in a member’s hometown, and devote much of the meeting to an in-depth examination of the host member’s business.

Detailed discussion of management issues.

Meetings involve discussions of topics such as organization design, personnel issues, marketing and sales, accounting, information systems and strategy. During group meetings, members report on the state of their businesses, accept suggestions for improvement and describe their progress on implementing past suggestions from the group.

Sharing of financial data.

During group meetings, confidential financial data are typically disclosed and presented in standardized formats that allow peer-to-peer benchmarking. In many IPNs, the data are compiled in a way that allows the comparison of performance averages within and across groups. This practice of disclosing confidential data is one of the most distinctive feature of IPNs. The financial data are for the specific IPN’s internal use only and are not to be disseminated outside the IPN.

How IPNs Help Companies Address Their Limitations

Our research shows that IPNs offer managers valuable opportunities to benchmark against similar companies, gain access to a rich pool of knowledge and obtain additional incentives to achieve high performance. IPNs help build superior capabilities by avoiding the competency traps associated with an overemphasis on local markets, past experience and existing technologies. (See “Why Companies Join an Industry Peer Network,” p. 36.)

Combating Myopic Tendencies

The information accessible through an IPN is critical in counteracting myopia. Participating in an IPN allows companies to enhance their capabilities on a regular basis and achieve a better sense of their market position. Members typically report that the in-depth information obtained from the IPN is unavailable through other sources such as suppliers, competitors or clients. In meetings and in informal conversations with their peers, members receive ample and, most importantly, credible information about industry trends and the performance of comparable companies in other markets. That information helps members build realistic expectations for the future and correct for misperceptions about the strength of their own performance. The access to reliable information is seen by most participants as a key aspect of IPN membership. In a survey of an IPN in remodeling, nearly all (99.3%) members acknowledged that an important reason for both joining the IPN and continuing to be a member was the desire to obtain new knowledge and skills. More specifically, 89.9% agreed that the desire to have clearer performance benchmarks was important to their decision to join an IPN. One member of an IPN in auto retailing summarized this membership benefit: “You cannot really get [the] information from other sources …With these guys, in informal conversations and in meetings we talk frankly about what’s going on in the industry.”

The information received about peers is to some extent a substitute for what companies would most like to have: information on rivals. The exchange of information also helps companies achieve competitive advantage by introducing them to a wide array of business practices. Key in this regard are the “best practice” contests common in many IPNs, in which members describe an innovation they have implemented and the group votes on which idea is the most useful. For example, in one auto retailing IPN, each dealer contributes $20 toward a pot, and then each member presents his or her best idea to the group. A secret ballot at the end determines who wins the pot. As the CEO of this IPN explained, “We want them to present an idea that fellow members could put into practice, and make at least enough to have paid for their time away from the dealership.”

Another way in which IPNs combat myopia is that their members are actively encouraged to critique one another and ask searching questions that challenge one another’s assumptions. In the process, members can achieve greater clarity about why a given company is performing as it is. The formal critique process and the creation of an environment in which assumptions are actively challenged promote a deeper understanding of cause-and-effect relationships within companies and a more effective transfer of knowledge among companies.

In addition, the extensive sharing of information helps companies maintain a big-picture orientation by keeping abreast of industry trends. One intriguing implication is that it also allows them to get a better sense of their local market position. Although the market landscape is relatively clear in some industries, many industries are too fragmented and turbulent to produce clear competition maps by which companies can orient their strategies. For example, in our research, many respondents from the remodeling industry reported that they have only a very weak sense of who their competitors are, how they operate and what their level of profitability is. This experience of the market seems to be quite common in other industries as well. The open disclosure of company-specific information in IPNs helps companies gauge industrywide margins and evaluate with greater precision how they stack up against their peers on key dimensions of performance. The sharing of information and experience also fosters greater sensitivity to the constraints imposed by suppliers and customers, offering companies insights into how to navigate more successfully the web of relationships in which they operate.

(Reprint #:47210)

Pages: 1 2