Creative People Must Be Stopped (15 page)

CHAPTER 5

If It's Such a Great Idea, Why Isn't Our Competitor Doing It?

Industry Innovation Constraints

Figure 5.1

“You press the button, we do the rest” was the marketing phrase coined by George Eastman in the 1880s to pitch his idea to the American photographic market. Prior to that time, photography was an expensive and difficult process limited primarily to professionals because cameras were big and the negatives were made on glass plates that needed to be chemically processed soon after exposure. However, after Eastman's invention of a plastic-based negative film that could be formed into a roll and preloaded in a camera, photography was ready for the masses. Kodak's Brownie camera, which cost $1.00 at the time, came preloaded with film. Once you exposed the entire roll as a set of “snapshots,” you sent it in to Kodak so that it could “do the rest.”

Eastman's strategy of making photography for the masses continued successfully through the Brownie line and through the 1960s Instamatics, whose use of a film cartridge made loading and unloading foolproof. The cameras drove Kodak's strategy of selling the cameras cheaply but making serious money on the film (“Has Kodak Missed the Moment?” 2003).

Not one to rest on its technical laurels, Kodak also invested heavily in R&D and was generating more than a thousand patents a year. In 1975, one of these patents emerged from the lab as a prototype, and Steve Sasson of the Kodak Apparatus Division Research Laboratory demonstrated it. It was the camera of the future: Kodak's first digital camera (Sasson, 2007).

At 0.01 megapixels, weighing several pounds, and having been built from, among others things, bits of a tape recorder and a lens from the spare-parts bin, the camera was hailed as a technological success, but then was sent back to the lab. The feedback? It would be at least twenty-five years before the market was ready for a camera like this. It was too expensive and too low quality to be taken seriously. What would consumers print on? Why would they want to look at pictures on their TV or store photos on audiocassettes? (“Sony's New Electronic Wizardry,” 1981).

Around the same time, the Noritsu Company launched the QSS-II one-hour photo-processing machine. Kodak's power in the market was now reinforced as the supplier both of the film the consumers used and of the chemicals and papers consumed by the photo-processing stations. Things could not have been better.

At a conference in Tokyo in 1981, the same year that Sony announced the 3.5-inch floppy drive, Sony's chairman, Akio Morita, presented the company's prototype of the Mavica Electronic Still Video Camera, which recorded images on a two-inch disk. The Sony announcement hailed its Mavica (
ma
gnetic
vi
deo
ca
mera) as an “epoch-making innovation in the history of still photography” and, because it used no film or chemicals, as one of the most fundamental changes in the concept of photography “in the 140 years since the invention by Daguerre of France” (Sony Corporation, 1981).

Kodak vice president John Robertson begged to differ: “Why would anyone want a still camera that takes pictures only as sharp as those on your TV? It's an idea we've discussed for years and clearly decided that there's no market for the product.” He continued, “We expect traditional photography to grow and continue to be the predominant form of amateur picture-taking into the next decade.” The article reports Polaroid as commenting that it “has no plans at present to follow Sony down the route to electronic pictures” (“Sony's New Electronic Wizardry,” 1981).

Kodak's failure of vision cost the company dearly. Despite being first to invent a digital camera, Kodak was late to its commercialization and was never able to catch up. This leaves the question of what Sony's executives saw on the horizon that Kodak didn't. Why were they willing to take the chance on the new technology, despite its shortcomings and flaws?

It's conceivable that they saw the rapid development of faster and more powerful personal computers powered by Intel's chips in the IBM PC and Motorola's in the Macintosh. It's possible that they saw Conner's revolutionary hard disk design that would enable 20 MB and larger-capacity hard drives on users' desktops. And maybe they saw HP's development of the DeskJet inkjet printer and the emergence of photo editing programs like Adobe Photoshop 1.0. It wasn't enough to see just one of these, but putting it all together would show characteristic features of a perfect storm: other companies in other industries driving the development of the entire infrastructure that would enable the adoption of the electronic camera.

Driving Competition with Innovation or Innovation with Competition?

Competition among rival organizations is considered a natural and healthy activity within sectors, markets, and industries. Competition is considered to be so important to innovation that the Federal Trade Commission (FTC) disallows mergers within markets if it believes the merger to be “anticompetitive”—that is, if it removes a significant competitor and therefore reduces a firm's incentive to deliver lower prices and better performance through innovation. For example, in late 2010, Comcast, in its attempt to acquire NBC, the nation's fourth-largest broadcaster at the time, was forced to agree to a number of conditions which ensured that satellite providers and other rival services, such as innovative Internet video distributors like Hulu, Netflix, Amazon, and Apple, would still have access to the popular NBC programming they would need to grow and compete.

Viewed in this way, innovation is rarely thought of as being constrained by competition. Yet sometimes competition positively discourages innovation. Especially when competition in a market or industry is intense, organizations can have difficulty mobilizing the knowledge, equipment, capital resources, and, not least, the focus they need to innovate.

This chapter looks closely at how the behaviors of the key actors in an industry can impede innovation. We'll focus on

• Competition:
  the tactical and strategic actions and reactions that organizations enact in order to remain viable in a field of rival organizations
  
• Suppliers:
  holders of the specialized capabilities and resources that organizations use to compete, including labor and capital
  
• Markets:
  the larger group of interacting agents that includes the producers, the consumers being served, and all other stakeholders, including, for instance, the regulators of that market
  

For many people in business, the economics-based perspective of this chapter is deeply ingrained in their vocabulary and thinking. Such terms as
profit, competition
, and
value chain
are part of everyday conversation. The same may not be true of many people who work for nonprofits, government agencies, and the like. But whatever kind of organization you work in, the material in this chapter applies to you. For example, I will use the word
profit
in this chapter in the technical sense of generating value in excess of the cost required to produce it. If you work in a tax-exempt (that is, nonprofit) organization, don't be intimidated by the word or alienated by its connotations. Instead, think about it this way: society expects your organization, like all others, to generate “excess value”—that is, to produce or output something of greater value than what was consumed in producing it. Profit is simply what's left when you subtract the value of the input you received from the value of the output you generated. Tax-exempt organizations are also subject to competition. They are competing not only with organizations with similar missions but also with all the other investments of time, money, and energy a potential donor, volunteer, audience member, or government agency might make in the sector or industry in which they operate.

Whatever kind of organization you work in, and regardless of your role in it, understanding the external constraints that limit your organization's ability to innovate is critical to guiding your own innovation behaviors. This chapter provides insights into why these constraints operate and suggests ways of helping you overcome them.

Competition Constraints: Innovation as a Last Resort

Competition arises from the efforts of organizations to extend their own survival and increase profits by better serving the needs of a market among a field of rivals. Although competition is best served when firms innovate new products and processes, thus improving the performance of the products or reducing the prices of those products or services, innovation does not come without its own cost to the organization. Depending on the source of competition—existing rivals, new entrants, or substitutes—the innovation constraints may take different forms.

Competition Among Strong Rivals

Competition is good for the consumers in a market, as it results in increased performance and decreased prices. However, competition can be problematic for the producers in that market. A basic theory of economics holds that successful competition—that is, purely efficient competition—will have the effect of driving profit to zero in a market. You may have observed this in your own market; each time you increased the quality or performance of your product or provided it at a reduced price, your competitors did the same. This reduced your profit by forcing you either to spend more to deliver the increased performance or to receive lower profit margins due to the reduced price.

If this tit-for-tat continues unabated, there will eventually be no profits to be had for any producers in that industry. This dynamic is the source of firms' desire to reduce the competition in their markets; they'd like to maintain profits at least long enough to pay off the investments they made in innovation to gain those profits.

This is the source of a paradox: organizations have a good reason to innovate, to create new products that generate profits; but they also have an equally good reason to kill innovation, to reduce competition and prevent the erosion of profits. One possible outcome is that an organization will abandon a market instead of rising to the challenge of an innovator's strong product. A senior executive at a large medical center told me how they had recently built a world-class children's hospital, but were perplexed when it reached full capacity
years
ahead of schedule, requiring them to start expansion far earlier than they had intended. Some diligent market research showed that they had not made an error in forecasting the market size; rather, competitors had begun to pull out of that market, rather than paying the costs of upgrading their own facilities or innovating in some other way to stay competitive. We can assume that these other firms focused their innovation investments in some other market that was less competitive.

Radical Innovations by New Entrants

In addition to competing with existing rivals in an industry, where innovation commonly takes the form of product performance improvements, organizations may require a different kind of innovation to compete with
new entrants
in a market. New entrants aren't necessarily new companies; they are often established organizations entering a new market or sector. The firm Tata, for example, was a new entrant into the automobile market in India in 1998; Apple Computer was a new entrant into the mobile phone market in 2007; and Sony, in 1981, was a new entrant into the photography market.

New entrants believe that they can meet the needs of the customers in a market at a significantly more attractive price or at a much higher performance level, which should result in more profit for them. They do this by introducing more radical innovations that can significantly change the basis of price and performance. Either of these approaches can increase profits and value compared to the existing firms in the market. Otherwise, why take the risk of competing?

The firm Tata bet that by introducing a “people's car,” the Tata Nano, at a price point of $2,500, it would be able to compete in a way that existing companies could not. Although the jury is still out on the success of Tata's strategy, the company clearly bet on lower cost. The runaway success of the iPhone was a clear bet on performance: an enormous screen, a focus on media applications, and integration with the computer. Since its introduction, other smartphone companies have been struggling to keep up with Apple's trifecta of customer value.