Chapter One
Spotting the Real Innovators
Take this quick test: Which firm is the innovator that brought us online bookselling in the 1990s? If your answer is Amazon.com, you are wrong. The idea for online bookselling-and the first online bookstore-came from Charles Stack, an Ohio-based bookseller, in 1991. Computer Literacy bookstore, a successful retail chain, also registered an Internet domain name in 1991. Amazon did not enter this market until 1995.
Another quiz: Which innovator came up with the idea for online brokerage services? If you answered Charles Schwab or E-Trade, again you are wrong. Two Chicago brokerage firms-Howe Barnes Investments and Security APL Inc.-launched the first Internet-based stock trading service, a joint venture called Net Investor, in January 1995. Schwab did not launch its Web trading service until March 1996.
Both examples highlight a simple point that is at the heart of this book: the individuals or companies that create radically new markets are not necessarily the ones that scale them up into big mass markets. Indeed, the evidence shows that in the majority of cases, the early pioneers of radically new markets are almost never the ones that scale up and conquer those markets (see Table 1.1). For the last twenty years, the Xerox Corporation has been derided for its inability to successfully commercialize scores of new products and technologies, notably including the now ubiquitous personal computer OS interface developed at its PARC research center in Northern California. In reality, Xerox's failure is more the norm than the exception!
This may surprise people who have been brought up to believe in pioneering and first-mover advantages! However, there is no escaping the evidence. Henry Ford did not create the car market but the Ford company ended up capturing a lot of the value in that market in its first hundred years of existence; Procter & Gamble did not create the market for disposable diapers but it is P&G that ended up harvesting most of the value out of the mass market for disposable diapers that blossomed in the last fifty years; and General Electric did not create the CAT scanner market, yet it was GE that made most of the money out of this market. It turns out that when it comes to radical, new-to-the-world markets, the pioneers almost always lose out to latecomers.
This is a puzzle. The early pioneers tend to have the necessary technology and by definition enter the market much earlier than other firms. This should, in principle, give them first-mover advantages over any latecomer. Why then do they consistently lose out and surrender the markets that they create to other firms?
It's not because the pioneers are small or insignificant players with no resources or bad management. And it's not because their products are inferior to the products that latecomers introduce. Consider, for example, the market for personal digital assistants (PDAs). This market was created in 1993 when Apple Computers introduced its revolutionary handheld computer called Newton. Apple's CEO at the time, John Sculley, called it "nothing less than a revolution" and predicted that it would launch "the mother of all markets," with PDAs and similar gadgets constituting a trillion-dollar market.
Less than ten years later, PDA demand had grown into a billion-dollar market. While not as huge as predicted at the time of its creation, it had soared from zero to $1 billion in ten years and had established itself as one of the new markets of the Internet era. Yet even a casual observer of this market at the turn of the century could not fail to notice that the company that could legitimately claim to have been the creator of this market-Apple Computers-was nowhere to be seen. Instead, all the spoils from the growth of the PDA market had gone to firms-such as HP and Palm-that followed Apple into it. It is hard to see why. Nobody could claim that Apple lost out to Palm because of lack of resources or lack of expertise. Nor could the Apple Newton be considered an obviously inferior product to the Palm Pilot.
Why then did Palm succeed where Apple failed? More generally, why is it that the firms that create radical new markets are rarely the ones that scale them up into mass markets? And what does the answer to this question imply for firms that aspire to create the markets of the future? We aim to answer these questions in this book. It turns out that there are specific reasons why pioneers fail to scale up markets, and understanding these reasons will help you appreciate what the modern corporation needs to do if it wants to achieve radical innovation.
Radical Innovations
It should be obvious from the examples that we have used so far that this book is concerned with one specific type of innovation-namely, radical innovation. By this we mean something concrete. Innovations are considered radical if they meet two conditions: first, they introduce major new value propositions that disrupt existing consumer habits and behaviors (for example, what on earth did our ancestors do in the evenings without television!); second, the markets that they create undermine the competences and complementary assets on which existing competitors have built their success.
Everyone knows that there are different kinds of innovations with different competitive effects. It is, therefore, important to appreciate that what we say in this book does not apply to all kinds of innovations, just to the subset of innovations that can be classified as radical. Our interest is in radical innovations because these are the kind of innovations that give rise to new-to-the-world markets.
Not all innovations are radical. When we classify innovations along the dimensions of their effect on customer habits and behaviors and their effect on the established firms' competences and complementary assets, we get four types of innovations, as shown in Figure 1.1. The dividing points in the matrix are obviously subjective and our intention is not to defend the boundaries of a particular definition. Rather, our goal is to simply suggest that "innovation" can mean different things to different people, that different types of innovation exist, and that a given innovation may be more or less radical than another innovation.
Our interest in this book is on those innovations labeled as radical innovations in this matrix. These are innovations that have a disruptive effect on both customers and producers. They are based on a different set of scientific principles from the prevailing set, create radically new markets, demand new consumer behaviors and present major challenges to the existing competitors. The introduction of the car at the end of the nineteenth century is an example of radical innovation. Incremental innovations, on the other hand, merely extend the current proposition facing consumers. They introduce relatively minor changes to the product or service, build upon the competences and assets of the existing competitors, and tend to reinforce the dominance of the established players. The introduction of new features in a car (such as four-wheel drive, power steering, and fog lights) are examples of incremental innovations.
Major innovations are those that require fundamental changes in consumer behavior but build upon the established players' competences and complementary assets. For example, the introduction of picturephones could be considered a major innovation for phone manufacturers, as could the introduction of online banking for most banks. These are innovations that the established competitors will champion because they build upon their existing competences.
Often an innovation produces seemingly modest changes to the existing product but has quite dramatic consequences on competition. For example, the introduction of small cars (and small motorcycles, copiers, earth-moving equipment, radios, and cameras) by Japanese manufacturers in the 1970s brought havoc to U.S. manufacturers. The challenge was not so much technological as strategic-the new products required fundamentally different business models from the ones that U.S. producers were using to sell their existing products. This change undermined the established players' complementary assets and allowed the Japanese producers to steal market share. These innovations are called strategic innovations, and they are based on new business designs. Examples of such innovations include low-cost point-to-point flying, online brokerage, and private label in fast-moving consumer goods.
Different innovations produce different kinds of markets. For example, Table 1.2 lists a number of markets that have been created through innovation-those on the left came about through radical innovation while those on the right came about through strategic innovation. Our real interest in this book is on the markets that are created through radical innovation-how and when they emerge and how firms ought to compete in these markets.
Academic researchers have been studying radical innovation for the last fifty years. As a result, we now know many things about the markets that get created by this kind of innovation. For example, we know how they get created and by whom. We know who colonizes them and who makes money out of them. We even know how they will evolve and how they will die. Our book builds upon this knowledge to offer advice to firms that aspire to create radical new markets. More specifically, our book addresses the question, How could big, established firms achieve radical innovation?
Misconceptions About Markets Created by Radical Innovation
Over the past fifty years, a lot of ideas have been developed and much advice given to companies on how they can become more innovative so as to create entirely new markets. This advice has been hungrily consumed by corporations large and small. After all, what company does not want to become more innovative and what CEO does not dream about leading the way into virgin territories, discovering in the process exciting new markets?
Yet, as we will show in this book, this is nothing more than misplaced hope for the majority of big, established companies! There are two reasons why we say this: first, most big companies cannot create radical new markets; second, such companies should not want to create radical new markets.
Big companies are unlikely to create radical new markets for two main reasons. First, the innovation process that creates radically new markets cannot be easily replicated inside the modern corporation. As we will show in this book, radical innovations that give rise to entirely new markets are rarely driven by demand or customer needs. Rather, they are pushed onto the market by scientists working on independent projects all over the world. Supply-push innovation processes emerge in a wide variety of industries and share certain characteristics:
They are developed in a haphazard way without a clear customer need driving them.
They emerge out of the efforts of a large number of scientists and engineers working independently on seemingly unrelated research projects, who sometimes devise the technology for their own uses.
They go through a long gestation process when nothing seems to happen until they suddenly explode onto the market.
Now ask yourself: Is this an innovation process that can be replicated in the R&D facility of a single firm? As we will show later, big companies cannot simply import or replicate such a process inside their R&D laboratories.
But there is a second reason why big companies cannot create radically new markets: they do not have the skills or mindsets for it! Even worse, all attempts to learn the necessary skills or adopt the necessary mindsets will not do the trick for them. This is because the skills and mindsets that they currently have (and need) to compete in their mature businesses conflict with those they would need for creation. Trying to incorporate the new skills and mindsets into the existing organizational DNA will end in failure.
This simple fact has not discouraged academics from continuing to offer advice to big companies on how they could adopt the skills and mindsets that will make them successful discoverers of new markets. For example, noting that big companies operate with so many rules and regulations that end up stifling creativity, several researchers have proposed that not only should the strategy process in the modern corporation be modified to allow everybody in the company to contribute strategic ideas but the culture of established corporations should be changed to encourage and promote activists and revolutionaries-rather than employees who simply obey the rules. Similarly, arguing that the incentives and planning processes within the established firm can suffocate the growth of new disruptive markets, other researchers have proposed a separate business-planning process to develop and nurture new business creation.
Yet, despite all this advice and good intentions, it is very rare to find a big company among the innovators that create radically new markets. Why not?
What people forget is that successful innovation is essentially a coupling process that requires the linking of two distinct activities: first the discovery of a new product or service idea and its initial testing in the market, a process that, if successful, creates a new market niche-an activity that we will call colonizing a new market; and second the transformation of the idea from a little niche into a mass market-an activity that we will call consolidating the market. It turns out that the skills, mindsets, and competencies needed for discovery and colonization are not only different from those needed for consolidation and commercialization, they also conflict with the latter set. This implies that the firms that are good at invention are unlikely to be good at commercialization and vice versa.
Some firms-primarily young, small, and agile-are good at colonization. Other firms-primarily older, established, and big-are good at consolidation. It's extremely hard, however, to find firms that are good at both colonization and consolidation. This suggests to us that instead of advising the established corporation how to adopt skills and mindsets that are alien to its DNA, we should be encouraging it to focus its attention on what it does best: consolidating new markets.
Continues...
Excerpted from Fast Second by Constantinos C. Markides Paul A. Geroski Excerpted by permission.
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