Saturday, May 2, 2015

Innovator Competitive Strategies: The APPEXP Framework for Competitive Advantage

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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