Michael Porter postulated, in 1980, three generic competitive
strategies that are appropriate for most industries and their several phases of
evolution. These are cost leadership, differentiation and niche (or focus).
These are both intuitively and practically elegant. Any firm that has cost
leadership can ensure price competitiveness or earnings superiority, or a
combination thereof with certain inter se trade-offs. A firm that follows
differentiation can achieve a superior market and price position based on a set
of differentiated features. A firm that follows a niche strategy seeks to adopt
narrow product-market strategies that are unique to the firm. Some firms are
successful in adopting a mix of the three strategies to eventually emerge as
industry leaders. The three generic competitive strategies are yet to be
dwarfed by any other superior set although over thirty five years have elapsed
from the time the framework was first postulated by Porter.
A question may arise if the three generic strategies are
relevant for companies engaged totally in innovative products or services. By
innovative products or services we may mean products or services that fulfil a
new use (or application) and/or fulfil an existing use (or application) in a
novel manner. From Sony Walkman to Apple iPad and from diagnostic imaging to
new molecular entities, innovator companies fulfil the above two criteria
through their products and/or services. That said, firms that deliver an
existing product or service through an innovative way of delivery may not be
considered innovator firms; for example, firms engaged in transportation of a
product utilizing trucks tracked by RFID devices may not qualify as innovator
firms although they have struck upon a somewhat inventive component in their
service value chain. Regardless of innovation levels, innovator firms also
require the three fundamental generic competitive strategies.
Basic purpose
Many times innovation gives a strong entry into, and a significant
time-reprieve in, the marketplace, and even provide a monopoly, but only so
long as a strong follower product or service does not get introduced. The three
generic competitive strategies help the firms develop brand equity at product
or service level and secure staying power at firm level. Without cost
leadership, innovators could get priced out when new competitors enter the
market with lower cost of products. Even if such competition takes time, cost
leadership builds a reservoir of accumulated profits to invest aggressively in
new product innovation. With differentiation on certain specific attributes,
innovators are able to build brand equity which provides a strong defence
against market erosion. The association of Toyota with quality or Mercedes Benz
with safety, for example, is reflective of how brand equity accumulates over
time.
Niche or focus strategy is particularly relevant for small
firms. This strategy is well deployed by small firms in drug discovery area
(focusing on just one target or at most on one therapeutic area) and in
component area (focusing on just one component or at most on one system).
Clearly, individually or together the generic competitive strategies are a
vital adjunct to innovator firms even though innovation provides them with the
first mover and monopoly advantages. That said, innovator firms would do well
to have certain strategies that are unique to innovator firms, and which could
work in a synergistic manner with the three generic competitive strategies. This blog
post proposes three innovator competitive strategies that would be foundation strategies on which generic competitive strategies can be superimposed or
worked as adjuncts. Prior to that we may review why R&D itself is not being
seen as the sole innovator strategy.
Revisiting R&D
Clearly, Research & Development (R&D) is recognized
universally as the foundation for new product development. A clear R&D
roadmap and a robust R&D budget have always been seen as the drivers of innovation
in a firm. It is, in fact, expected that the level of R&D budget both in
absolute numbers and as percentage of sales determines the difference between
an innovation-led industry segment and a generic industry segment. In each
category as well, the R&D focus determines the relative inter-firm scaling
in innovation. There are firms that still stand by R&D as the engine of
organic growth while increasing number of firms are opportunistic about
inorganically acquired R&D. It may, therefore, be questioned as to why
anything other than R&D leadership is required as an innovator competitive
strategy.
The answer lies in the fact that over a period of time,
R&D has also become a “mechanical” or routine function rather than the kind
of dynamic innovation hotbed that the domain is expected to be. It is seen as a
product renewal domain rather than product redefinition domain. From time to
time, product re-definitions do occur but the overall theme of R&D in a
great majority of companies is to find a new product for the same application
or to make the existing product better. In a recent McKinsey Quarterly (April
2015), it was postulated that innovation is indeed difficult for established
companies and suggested eight essentials for innovation: Aspire, Choose, Discover,
Evolve, Accelerate, Scale, Extend, and Mobilize. The first four attributes are
considered to be strategic and creative elements and the balance four organizational
and delivery components of an innovation operating system of a firm. The author
of this blogpost feels that these eight essentials are enablers or practices
but not innovator competitive strategies like the Porter’s generic competitive
strategies.
Three strategies
As with the generic competitive strategies, the innovator
strategies must prescribe end-goals which are not project-specific,
project-dependent and also are not firm-specific or firm-dependent; rather the
goals should be somewhat universal strategies of innovation that provide a
sustainable competitive position for an innovator firm. These are Application
Leadership, Experience Leadership and Application-Experience Hybrid. These are
discussed below.
Application leadership
Every product is designed to meet an application. Password,
for example, is a product to ensure security for the user of either a computer
or a safe. Depending on the product, passwords have been taking more
user-friendly but more secure forms. Patterns and colours have been the first
step. Fingerprint scanner has been the next step. Iris scanner and face reader are
the more recent ones. These developments are done more easily on a smartphone
because the smartphone has a processor as well as a camera. If, for example,
the same functionalities (of processor, camera and communicator) are brought to
the password mechanism of a safe, an entirely new safety system of not only
multiple password possibilities but also recording all those who attempt to
open the safe and communicating the photo identity of those who break the safe
would be possible. It would be a game changer, at least for the domestic or
office safe industry.
Application leadership requires a disruptive approach (in a
positive sense of making things better, of course) to how user functions or
product functions are to be performed. These usually require aspirations that
are far beyond the obvious (like a flying city car, for example). Such ideas
require breakthrough or disruptive technologies. In the example of flying car
aspiration, this requires a breakthrough combination of automotive and
aeronautic as well as electronic and communication technologies like mini-rocket engine for
vertical thrust, mini-jet engine for flying and an on-board computer which
controls these two engines alongside the traditional gasoline or diesel engine
and the navigation systems thereof. Reverting to the home or office safe
example, similar disruptive engineering is required. Firms committed to
application leadership would be having many laboratories dedicated to
discovering and developing fundamentally new technologies, and fundamentally
new ways of integrating them.
Experience Leadership
In contrast to application leadership which reengineers the
usage-product mix completely, experience leadership focuses more on a product
meeting higher levels of sensory satisfaction. The touch keyboard is an example
of transitioning from mechanical to electro-mechanical and electronic,
resistive and capacitive. Capacitive touchscreens have brought in a new level
of touch-feel to screens in smartphones and tablets. The next experience change
would be when 3D touchscreen keyboards are commercialized. The virtually silent
automotive engine, the passenger seats that reconfigure optimally to a driver
body profile, voice communicators (such as Siri of iPhone or Cortana of Windows
phone), the visual graphics of a high technology movie are all examples of
experience leadership. The movie blockbusters, in fact, are an excellent
example of experience leadership, bringing superlative experiences onto
conventional tales.
Experience leadership requires a combination of product and
process approaches to take user experiences to a different level. Often, novel
material and precision manufacturing technologies have to be used together to
conceptualize and provide an elevated level of user experience. Certain firms
(like Apple) focus on experience leadership to achieve market dominance (for
example, iPad was not the first tablet to be made but became the leader with
the experience leadership approach of Apple). Experience leadership typically
focuses on the worst case situation or the most demanding situation and
develops the products to meet such extreme needs. Low floor buses which are
designed to let even the old and disabled commuters enter the buses most
comfortably is an example of design perfection for the most delicate need. At
the other extreme, a rugged all-terrain sports utility vehicle caters to the
most punishing terrains while insulating the passengers from excessive trauma.
Application-experience hybrid
The application-experience hybrid innovation is a niche model
relevant for situations where markets are segmented or resources are varied. It
could vary from a resource optimized situation to a resource rich situation.
Unlike the earlier two models, a resource optimized application-experience
model would not be securing reputation dominance but could enable higher market
coverage, albeit with lower margins. Cadbury’s chocolate range to meet diverse
needs is an attempt to develop a hybrid of different applications and different
experience levels. To be really effective, however, there must be distinctive
and differentiated technologies to calibrate the application and experience
dimensions. Full-line firms are usually better positioned to achieve this
hybrid while niche firms would need to choose their competencies carefully.
One of the most interesting examples of
application-experience hybrid can be found in the watch industry where the
technologies of dial and movement and the design elements of form factors and
display factors enable a grid of application-experience hybrids. It is
interesting, for example, how Citizen focuses on ‘wear and forget’ super-light
perpetual movement watches while any typical Swiss watch focuses on bold
designs that need as well as seek attention. The success of Apple watch, in
this context, would depend on bringing to the user a high level of novelty in
both application (communication and healthcare) and experience (real-time and
selective), packaged in high standards to which the watches are typically made.
The hybrid model requires a much greater perfecting and fusion of new
technologies than the application leadership or experience leadership would
individually suggest.
Innovation mind-set
Innovator competitive strategies require a leadership
mind-set, both at firm level and functional level, to understand and implement
innovation enablers. The organizational DNA must encourage aspirations to make
transformational changes in product-market configurations, expressing of the
aspirations through multiple ideas, analysis, evaluation and prioritisation of
ideas, and development of implementation plans. It must also have the resource
framework to work on such action plans over long periods of time, retaining the
ability to be nimble and flexible in the face of changes in technology and
markets. Innovation requires creativity and steadfastness but openness for review and integration of new pathways.
Innovator competitive strategies require collaboration
between agencies. Low floor buses would be useless if civic authorities do not
construct bus shelters and pathways that are friendly to the differently abled.
Luxurious aircraft would provide little overall convenience in airports that do
not have aerobridges and have chaotic inter-aircraft transfer paths. The best
of ultra-high definition televisions would not provide the viewing pleasure
without commensurate transmission services. Oftentimes, the dilemma would be
who should be the driver of innovation – the product manufacturer or the
service provider? While there is no clear cut answer, as long as leaders in
vantage positions think and act by and for innovation, eventually, the total consumer
value chain would benefit. Innovation works best in an innovation-driving
organizational operating system nurtured by an innovation-inspired leadership
mind-set.
Posted by Dr CB Rao on May 2, 2015
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