Strategic Innovation

In spring 1902, Jim Penney opened his first dry-goods store in Kemmerer, Wyoming, and began his attack on the big retail chains of the time, including Sears and Woolworth, which date back to 1886 and 1879, respectively. By 1940, J.C. Penney had grown to 1,586 stores and annual sales of $302 million.

  • In January 1936, Lever Bros., a subsidiary of Uni-lever, introduced a new food product in the U.S. market, a vegetable shortening called Spry. The new product went up against Procter & Gamble’s established market leader, Crisco, which had been introduced in 1912. Spry’s impact was phenomenal: in a single year, it had reached half the market share of Crisco.
  • In the early 1960s, Canon, a camera manufacturer, entered the photocopier market — a field totally dominated by Xerox. By the early 1980s, having seen such formidable competitors as IBM and Kodak attack this same market without much success, Canon emerged as the market leader in unit sales. Today, it is a close second to Xerox.
  • In 1972, Texas Instruments, a semiconductor chip supplier, entered the calculator business — a field already occupied by Hewlett-Packard, Casio, Commodore, Sanyo, Toshiba, and Rockwell. Within five years, TI was the market leader.
  • In 1976, Apple introduced the Apple II in direct competition to IBM, Wang, and Hewlett-Packard in the professional and small business segment and Atari, Commodore, and Tandy in the home segment. Within five years, Apple had become the market leader.
  • In 1982, Gannett Company Inc. introduced a new newspaper into a crowded field of 1,700 dailies. By 1993, USA Today had become a top-selling newspaper with an estimated 5 million daily readers.
  • In 1987, Howard Schultz bought Starbucks Coffee from the original owners. In the next five years, he transformed the company from a chain of 11 stores to some 280 stores in 1993. Sale revenues grew from $1.3 million in 1987 to $163.5 million in 1993.
  • In the late 1980s, Yamaha tried to revitalize its declining piano business by developing digital technology so customers could either record live performances by the pianists they’d chosen or buy such recordings on diskettes and play the same composition on their pianos. Sales in Japan have been explosive.

These are certainly nice success stories, but there is more to them than that. The common theme underpinning all these accounts is simple: the companies succeeded dramatically in attacking an established industry leader without the help of a radical technological innovation.

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References

1. There is only one major exception to this generalization: in cases when the attacker utilizes a dramatic technological innovation to attack the leader, seven of ten market leaders lose out. See:

J.M. Utterback, Mastering the Dynamics of Innovation (Boston: Harvard Business School Press, 1994).

2. S. Davies, P. Geroski, M. Lund, and A. Vlassopoulos, “The Dynamics of Market Leadership in U.K. Manufacturing Industry, 1979–1986” (London: London Business School, Centre for Business Strategy, working paper 93, 1991); and

P. Geroski and S. Toker, “The Turnover of Market Leaders in U.K. Manufacturing: 1979–1986” (London: London Business School, mimeo, 1993).

3. Whether these new approaches make sense for a particular firm (i.e., whether they will lead to success or failure) depends primarily on the economic merits of these ideas and the company’s ability to deliver them competitively. For example, do these new moves allow the company to offer something new to the customer (that he or she wants)? Do they allow the company to offer something better or more efficiently? Are the new offerings something that the customer values? Thus the success of the new ideas will depend on customer needs and on the core competencies of the innovating company.

4. D. Abell, Defining the Business: The Starting Point of Strategic Planning (Englewood Cliffs, New Jersey: Prentice-Hall, 1980).

5. H. Rosenbluth, “Tales from a Nonconformist Company,” Harvard Business Review, volume 69, July–August 1991, p. 32.

6. C. McCoy, “Entrepreneur Smells Aroma of Success in Coffee Bars,” Wall Street Journal, 8 January 1993, p. B2.

7. The whole purpose of redefining the business is to identify a specific definition that allows you to maximize the impact of your unique capabilities relative to your competitors. Thus what is a good definition for your company may be totally inappropriate for another company; and what is a good definition for your competitor — given its particular strengths — may be totally inappropriate for you. Thus what is a “good” definition is in the eyes of the beholder. However, even if you can find a “good” definition for your company, you just enhance your chances of success, but this does not mean that you are guaranteed success.

8. T. Levitt, “Marketing Myopia,” Harvard Business Review, volume 38, July–August 1960, pp. 24–47.

9. See, in particular:

G. Hamel and C.K. Prahalad, Competing for the Future (Boston: Harvard Business School Press, 1994), p. 83.

10. C.A. Jaffe, “Moving Fast by Standing Still,” Nation’s Business, October 1991, p. 58

11. “America’s Car Rental Business: Driven into the Ground,” The Economist, 20 January 1996, pp. 76–79.

12. This point is also raised by Gerard Tellis and Peter Golder. Their argument is that “strategic innovators” have a vision of the mass market and actively try to produce quality products at low prices to make them appealing to the mass market. Thus the secret of their success is the fact that they target the mass market and succeed in serving it. Although I agree with the point, my research suggests that the importance of luck, good timing, and external events should not be underestimated as ingredients in the success of the strategic innovators to “pick” the right niche at the right time.See:

G. Tellis and P. Golder, “First to Market, First to Fail? Real Causes of Enduring Market Leadership,” Sloan Management Review, volume 37, Winter 1996, pp. 65–75.

13. There is a vast literature on the usefulness and the limits of “getting close to the customer.” See, in particular:

S. Macdonald, “Too Close for Comfort?: The Strategic Implications of Getting Close to the Customer,” California Management Review, volume 37, Summer 1995, pp. 8–27; and

I. Simonson, “Get Closer to Your Customers by Understanding How They Make Choices,” California Management Review, volume 35, Summer 1993, pp. 68–84.

14. K. Ohmae, “Getting Back to Strategy,” Harvard Business Review, volume 66, November–December 1988, pp. 149–156.

15. “What Makes Yoshio Invent,” The Economist, 12 January 1991, p. 61.

16. T. Steward, “3M Fights Back” Fortune, 5 February 1996, p. 44.

17. For a fuller discussion of this point, see:

C. Markides and P. Williamson, “Related Diversification, Core Competences, and Corporate Performance,” Strategic Management Journal, volume 15, special issue, 1994, pp. 149–165; and

C. Markides and P. Williamson, “Corporate Diversification and Organizational Structure: A Resource-Based View,” Academy of Management Journal, volume 39, no. 2, 1996, pp. 340–367.

18. “Osborne: From Brags to Riches,” Business Week, 22 February 1982, p. 86.

a. A very good discussion of mental models and how to escape them is found in:

J.C. Spender, Industry Recipes (Oxford, England: Basil Blackwell, 1990); and

P. Grinyer and P. McKiernan, “Triggering Major and Sustained Changes in Stagnating Companies,“ in H. Daems and H. Thomas, eds., Strategic Groups, Strategic Moves, and Performance (New York: Elsevier Science, 1994), pp. 173–195.

A very practical discussion is found in:

J.A. Barker, Paradigms: The Business of Discovering the Future(New York: HarperCollins, 1992).

b. A recent survey of the academic literature has identified eighty-one words that have been used to describe the same thing. See:

J. Walsh, “Managerial and Organizational Cognition: Notes from a Trip down Memory Lane,” Organization Science, volume 6, May–June 1995, pp. 280–321.

c. See G. Hamel and C.K. Prahalad, “Strategic Intent,” Harvard Business Review, volume 67, May–June 1989, pp. 63–76.

d. Other tactics to use to question mental models include: monitor the company’s strategic health as opposed to its financial health, experiment with new ideas, benchmark, ask the “what if” question, monitor maverick competitors and new entrants, talk with noncustomers, bring in outsiders, institutionalize a questioning culture, develop the right incentives, etc.

Acknowledgments

The author thanks Sumantra Ghoshal, Dominic Houlder, Jane Carmichael, Charles Lucier, and Paul Geroski for many useful comments on earlier drafts.