Porter’s contributions in the field of strategy by way of his path-breaking books Competitive Strategy (Porter, 1980) and Competitive Advantage (Porter, 1985) are unmatched. While the former deals with strategy in the context of an industry, the latter discusses how firms can build competitive advantage. Though there have been important contributions to the field of strategy from other scholars, for example, Prahalad (1990, 1994), Hamel (1989) and Hammer (1993) there is, perhaps, no work which is as integrated and solid as Porter’s in approaching the myriad complexities of strategy. Together, Porter’s treatises on competitive strategy and competitive advantage provide a powerful array of concepts and analytical techniques that can help craft meaningful business strategies.
It is paradoxical that despite the availability of such a powerful repository of concepts and tools for achieving competitive advantage, firms tend to develop strategies based on followership rather than differentiation. It could be natural and over tempting for most firms to follow the pioneers to exploit emerging market potential. At the firm level, however, there is ample scope to innovate even while following such paths of pioneers - provided the CEOs and planners focus on developing differentiated strategies. In this context, this paper conceptualizes “competitive innovation" as a differentiator of corporate strategy in industries. This concept is a relevant supplement to Porter’s framework of competitive strategy and competitive advantage, taking into account the accelerating pace of technological innovation. Fundamental to this is an understanding of competitive innovation as distinct from corporate followership.
Corporate followership
Corporate followership can be defined as the phenomenon of several firms in an industry following simultaneously a set of corporate strategies to address a market opportunity same as or similar to that of the pioneer in the industry.
This is best illustrated with the help of two examples. The strategies followed by a host of new passenger car manufacturers in India such as GM, Ford, Honda and Mitsubishi to address the mid-size sedan market with an import-led assembly strategy represent corporate followership. Another example relates to similar strategies being adopted by a host of Indian pharmaceutical companies to enter the US generics markets. The drivers for corporate followership almost invariably are the opening up of a huge market on one hand and the initial success of a pioneer company in the market space on the other.
In practice, corporate followership leads to less than optimal results. Deployment of undifferentiated strategies often forces companies to compete on price rather than on product offering. The follower companies merely trail the pioneer in its path, and end up competing in a limited market space. Fragmentation of market and drive-down of industry returns characterize the aftermath. Over a period of time, mindless pursuit of corporate followership leads to painful consolidation of a sub-optimal industry structure through exits, partial or full divestitures, acquisitions and mergers of companies.
Competitive innovation
Competitive innovation, on the other hand, considers the pioneer’s success as a directional trend rather than as a strategic template or a winning formula. This is again illustrated with examples from the Indian industrial scene. The first ever introduction of small car by Maruti-Suzuki in the 1990s has been a pioneer’s action. Introduction of a “tall boy” small car, Santro, by Hyundai in the 1990s, a good many years thereafter, has been an example of competitive innovation. Without doubt, the development of a highly affordable small car, Nano, by Tata Motors is a masterpiece of competitive innovation, even at a global level. Similarly, Toyota’s unwillingness to follow the others who were preoccupied with the mid-size car segment and its deliberate choice to go in for a multi-utility vehicle, Qualis, has been an example of competitive innovation. Similarly, in the frenzied race for the US pharmaceuticals generics market, if an Indian firm treads a path of biologics boldly, it would be a competitive innovation.
Firms seeking to follow competitive innovation must spend considerable time analyzing the product-market space and the factors influencing evolution of the industry, as opposed to adopting a quick-fix solution of replicating the pioneer’s strategy. While the initial triggers for competitive innovation tend to be the same as the drivers for corporate followership viz., market space and pioneer’s success, the core drivers for competitive innovation are entirely different.
In practice, competitive innovation when followed by a large spectrum of players leads to highly beneficial results for the overall industry. Deployment of differentiated strategies enables companies achieve growth based on intrinsic positive features of their products and their market positioning rather than on price. As innovative followers lay out their own distinctive paths they contribute to opening up of a number of new product-market segments. Competitive innovation results in expansion of market space and healthy industry returns, in the overall.
In general, firms pursuing competitive innovation out-perform firms pursuing only corporate followership. An innovative firm has not only the advantages of strategic differentiation which are unique only to the innovator but also the benefit of a freedom to deploy any and all tactical moves that are used by follower firms.
The differentiation advantage
The paradigms of corporate followership and competitive innovation are compared in terms of five core attributes below:
1. Core concept
Corporate followership: Mimic the pioneer in product-market positioning
Competitive innovation: Emulate the pioneer in opening up product-market space; Develop novel product-market segments
2. Key generic strategy
Corporate followership: Cost leadership
Competitive innovation: Differentiation
3. Key success factor(s)
Corporate followership: Excel by execution superiority
Competitive innovation: Excel by product-market differentiation as well as by execution superiority
4. Key functional drivers
Corporate followership: Sales and production
Competitive innovation: Research and business development
5. Envisaged end-play
Corporate followership: Fragmented market, with low returns
Competitive innovation: Diversified market, with healthy returns
A firm following the strategy of competitive innovation tends to emulate the pioneer more in terms of its pioneering spirit rather than in terms of the nuts and bolts of its strategy. An innovative firm may follow the overall market direction but will develop its own innovative product-market positioning. In contrast to follower firms which rely on cost competitiveness to penetrate and grow, an innovative firm focuses on differentiation to break into the market space. Needless to say, cost leadership provides the added edge to such innovative firms. The key success factors for a follower firm are purely in terms of execution capability, by which the strategies of a pioneer and other players are executed better or faster. On the other hand, an innovative firm’s success lies in its capability to differentiate itself by fulfilling a new customer need. This does not, of course, exclude a shared competence for execution superiority with the follower firms. An innovative firm is likely to be driven by strong research and business development orientation while a follower firm is likely to be highly production and sales driven. The end-play for an industry characterized by innovative firms is one of a diversified market with healthy returns while the end-play of an industry dominated by followers is one of a fragmented market with low returns.
Sources of competitive innovation
Given the premium on corporate innovation, firms must consciously seek sources of competitive innovation. While these sources would seemingly be the same as the sources of sustainable competitive advantage, the qualitative depth of the factors and the timing of access to the sources vary. Firms seeking to achieve competitive differentiation from the very start, however, look at these sources very innovatively compared to firms that build competitive advantage over a period.
The essential sources of competitive innovation are varied and impact each constituent of a firm’s value chain. Broadly, these can be viewed under two categories: specific levers of innovation and generic enablers of innovation.
Following Porter (1985) with some modifications, the core functions of a firm are viewed in terms of logistics, product development, materials procurement, manufacturing and marketing (including sales and service). Each of these five core functions can benefit from two distinctive types of levers of competitive innovation (i) specific levers of innovation and (ii) generic levers of innovation.
Specific levers of innovation
The specific levers of innovation can be viewed in terms of (i) technology convergence (ii) alternative materials (iii) flexible manufacturing systems (iv) customer relationship management and (iv) supply chain management.
A company’s prime foundation of business is its product range. Technology convergence in product development is fast emerging as the prime lever of competitive innovation. Value-added cellular phones with multi-media and imaging capabilities are examples of such convergence-driven new product innovation. Similarly, laptop computers with wireless connectivity and handwriting, speech recognition and imaging capabilities represent the new dimensions of technological convergence. By adding new features to existing products and refashioning existing products into new gizmos, innovative firms often outperform pioneers even while tracing the overall product path opened up by the pioneers. The competence in technology convergence will be dependent on the ability of a firm to fuse a wide variety of technologies to achieve a dramatically superior product range. This attribute will increasingly influence competitive innovation in future.
A company’s ability to achieve technological convergence and competitive innovation is often dictated by its innovative capabilities in materials and manufacturing. Alternative materials are the key to innovation. Miniaturization, weight-effectiveness, cost- competitiveness and life cycle assurance are essentially rooted in the nature and quality of materials used. Firms which focus their resources on researching into basic materials or which network with specialized institutes of materials research are likely to achieve competitive innovation relative to users of traditional materials.
Manufacturing is the key differentiator of firms which are able to successfully translate exciting technological concepts into viable product offerings. Utilizing a broad array of technologies including information technology, industrial electronics and robotics, firms can build innovative foundations of flexible manufacturing systems which can cope with shorter product life cycles, higher product varieties and larger asset costs successfully.
In firms that follow competitive innovation, marketing has also experienced a paradigm shift, from a predominantly communicative function to an entrepreneurial discovery function. Today’s successful marketer is one who phases out his own brand with a novel enhancement. By continuously discovering latent consumer needs and product application potential, today’s entrepreneurial marketer enthuses a firm to be on the virtuous cycle of product innovation on an ongoing basis. The new-age marketer creates value for the company in terms of customer connectivity, customer relationship and broader brand equity of the corporation. In this context, customer relationship management has emerged as an important lever for driving innovation in the sales and marketing functions of an innovative firm.
Logistics, both in-bound and out-bound, constitute the backbone of competitive innovation for the firms. Ability to seamlessly and efficiently integrate a firm with vendors at the back-end and customers at the front-end of the value chain helps the firm to continuously discover new sources of competitive advantage. Judicious deployment of supply chain management as an integrating concept from materials procurement to product delivery has helped firms achieve greater degree of control and efficiency in their logistics operations.
Generic enablers of innovation
If the above core activities are specific levers of corporate innovation, a firm also needs generic enablers which make these specific levers of competitive innovation a feasible proposition. These generic enablers relate to the overall infrastructural capabilities of a firm. These are (i) depth and scope of the firm’s physical infrastructure, (ii) the strength and resilience of its financial infrastructure, (iii) the vintage and solidity of its IT infrastructure and, most importantly, (iv) the spark and creativity of its talent pool. An organization needs to have these four service areas organized such that specific levers of innovation consistent with the goals of the firm can be appropriately deployed.
In today’s business environment, a firm has to be proactive in laying the economic, technical and human foundations of business. With increased liberalization, locational choices for the firm have become varied, even as environmental considerations force firms to adopt locations and technologies which are the least harmful to the environment and most beneficial to the society. A firm should have, ab initio, a total vision of the scale of its operations so that appropriate location and facility choices are made consistent with the need to ramp up operations in harmony with the community and environment. If due attention is not provided to this important factor, the entire value chain of the company will be constrained by the physical infrastructure and the technologies deployed in the site.
Secondly, a firm needs to devote sufficient attention to prudent but proactive financial management. Means of funding and corporate structuring are important facets of overall financial strategy. A company which has a strategy-led business structure and is well supported by a robust financial infrastructure is likely to remain flexible and resilient in the face of growing resource commitment that innovation demands. The recent and unprecedented economic meltdown has demonstrated the importance of robust financial management as a foundation for business sustainability.
Thirdly, the firm needs to deploy an information technology architecture that is modern and flexible. The IT capability of a firm particularly influences the ability of the firm to deploy and utilize specific levers of innovation such as supply chain management, flexible manufacturing systems and customer relationship management.
Finally, considerable management attention must be devoted to building a high-energy and high performance organization with top-class talent. As market opportunities and innovative alternatives explode exponentially and when financial and other markets are precariously perched, firms face a challenging task in retaining the talent pool and supplementing it. HR policies of the firm have to be increasingly driven by business strategy considerations. HR development initiatives with external institutional networking have to be always operational to ensure continuous development of talent in-house.
Summary
Porter’s combined paradigm of competitive strategy and competitive advantage is a historic contribution to the field of strategic management. The application of these strategic concepts in practice by individual firms has, however, been inadequate resulting in corporate followership rather than competitive differentiation as a dominant corporate strategy. By adopting competitive innovation as a proactive driver of corporate strategy, chief executive officers and business planners can chart the growth plans for their organizations in a differentiated manner. The concept of competitive innovation has to be integrated with the concept of a firm’s value chain and specific levers of innovation adopted to drive innovation. Corporate level strategies must simultaneously focus on establishing an appropriate physical, financial, technological and human infrastructure that supports innovation.
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Posted by Dr CB Rao on April 19, 2009
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