Creative People Must Be Stopped (16 page)

Substitutes for Your Product

The third source of competition that can affect innovation takes the form of substitutes that completely displace the market need that the current industry of existing rivals is focused on meeting. As an example, consider the free music sharing service Napster, created by Shawn Fanning and Sean Parker. Launched in 1999, Napster (named after Fanning's hairdo) allowed music copied from CDs onto a computer to be easily, freely, and anonymously shared with others over the Internet. This served as a ready substitute source of music for large numbers of music fans. Rather than going down to the local record store and paying up to $20 for a new CD to buy eleven songs you hate to get one song you like, simply install Napster and belly up to the free all-you-can-eat music buffet. Not surprisingly, this was a pretty difficult substitute for existing record companies to compete with.

Substitutes often come from industries totally unconnected to the ones they disrupt. It shouldn't be hard to see why; surely the record industry had better means of innovating than two undergraduates at a small university. Why weren't record companies the ones doing the innovation that would revolutionize the industry? Probably because they didn't have to; they had music fans right where they wanted them—buying eleven songs they hated to get the one song they liked.

Overcoming Competition Constraints

Of course, organizations can't always single-handedly change the constraints that affect an entire industry. Still, you can gain strategic insights by understanding how your industry dynamics will shape your competitors' innovations and how you can drive innovation in your own organization in response.

Find New Ways to Compete

In normal competition against existing rivals, firms tend to try to increase profits and market share by improving product performance. Think of how much more performance you get from a personal computer at a much lower price than you did five years ago, thanks to the cutthroat competition in the PC industry. To fuel this competition, organizations invest significantly in R&D activities aimed at improving technical performance and reducing production costs.

Yet this is not the only or necessarily the best way to compete. The Doblin Group (2010) notes a number of ways that firms can innovate—for example, through
business model
innovation, which Dell Computer employed by preselling computers and then building them to order instead of building a large inventory of products that would go quickly obsolete as the computer industry evolved. Or a firm might use
process
innovation, as Walmart did, to build a core strength around its inventory management systems. Apple's iTunes music service was an innovation in the
delivery
of the product.

You might even consider combinations of alternative forms of innovation. Avis, Hertz, and Budget rental car companies competed mercilessly on product performance, waging a battle of increasing car availability, model variety, add-on services (for example, cell phones, onboard GPS, rapid pickup and return), and more. This had the effect of driving down prices and driving up costs, especially as the competition also encompassed jockeying for the space closest to the popular terminals in airports. As you can imagine, it would be quite expensive to enter that raging battle expecting to prosper if you approached innovation the way the current competitors did. Instead of joining the fray, Enterprise Rent-A-Car found an alternative path for innovation by creating a new
service offering
with a focus on insurers, fleet renters, and occasional renters; by focusing its
business model
on being efficient at charging insurers and fleet renters directly; and by using a mode of
delivery
that was innovative in that it would bring the car to the customer. By focusing on alternative forms of innovation in a cutthroat competition, Enterprise found a lucrative new customer base, which quickly became the largest in the industry.

Become Partners to Learn, Not to Kill Innovation

Mergers and alliances are usually justified with an argument that complementary strengths of the two firms, when combined, will make a stronger, more capable firm. But the end goal is always going to be an increase in profits and long-term viability through growth in size, revenue, and market share. From an economic perspective, an added benefit is that partner firms can reduce the need to innovate their products if the partnership co-opts or removes a significant source of outside competition. This is the reason that utility companies (that is, regulated monopolies) are often maligned as having such poor service quality; they don't have to improve the product or provide higher levels of service to stay in business. By merging or forming partnerships, firms take a step in that direction.

However, it is only a step. In most industries or sectors, firms still have to innovate to survive. And even though a partnership may reduce competition, it can increase the cost of innovation in the new entity, especially when an innovation requires both partners to participate. Pitched primarily as a way to cut costs during a downturn in the computer industry, the acrimonious 2002 merger of HP and Compaq caused palpable tension. Long after their merger, one predicated on complementary strengths and expected operational efficiencies, the new firm still seemed to lack the promised unity and effectiveness. One subtle symbol of the disunity was on the combined Web site landing page. The search box (see
Figure 5.2
) begged the question: Where do you
really
want to go? To HP or Compaq or both?

Figure 5.2

Source:
www.compaq.com
.

If you are considering an alliance, think about it in terms of how it improves your competitive position through learning and innovation, and not simply through removing competitors. Once integration begins, stay focused on creating systems that decrease the cost of innovation in the partnership—for instance, by creating an entirely new R&D entity to service the new organization. This may seem costly in the beginning, but given the constraints that occur even in functional organizations, putting the innovators from both firms on equal footing and giving them a clear strategy can work wonders for innovation in the long term.

Don't Overinvest in Efficiency

Increasing an organization's production to drive economies of scale has the effect of increasing profits, because more products are produced at a lower cost. Achieving these economies also reduces competition by discouraging new entrants from entering a market. The ability to produce cheaply creates a significant hurdle for potential new entrants; they will have to compete with your significant cost advantage to enter the market.

Although it may act to reduce competition, this behavior may also have an unintended effect. If a new entrant is committed to entering your industry or market for strategic reasons or even ideological ones (for example, charter schools), it cannot compete according to the accepted rules of that market. There is too much risk; you will be too efficient to compete with head-on. Instead it will seek radical new ways to serve your market—and it will choose ways that give it significant cost benefits and possibly give the customers significant performance benefits as well.

Clayton M. Christensen discusses the disruptive innovation dynamic in his book
The Innovator's Dilemma
(2003). Using the disk drive industry as a case study, he describes how new entrants gained a footing by using altogether different technological approaches to disk drives than were current among the market leaders. For example, disk drives moved from ferrite heads to thin-film technology to magneto-resistive technology, with each change in technology offering an immense performance jump. He also shows how incumbent firms were unable to keep up; they had too much invested in the efficient old technologies to be willing to abandon them.

This is not to say that efficiency is not a good thing; it is. However, as your organization pursues efficiency, be sure to recognize that the competitive protection this provides may not be long lasting. Don't let your role as a big player or market leader make you overly confident that the inefficient and money-losing thing that those
idiots
are doing over there—for example, giving away free Web searching, as Google did early on—has no bearing on your organization and industry. Instead, try to pay attention to what the start-ups are doing, especially if they are doing something in your industry that makes no sense at all from an efficiency perspective. They are doing it for a reason—try to find out why.

Develop New Tests for New Ideas

Consider a product that you've used at one point in time, but then later abandoned in favor of a better alternative. USB thumb drives were substitutes for floppy disks, digital cameras were substitutes for film, and watching television became a substitute for going to plays or to the opera. Substitutes fill a need in a completely different way than the conventional products in an industry do, and as they do so, they change our expectations of how they should perform. For example, when perusing USB drives in the store, customers were likely to look at price and capacity in ways they never did for floppy disks. And as competition arose in the form of online data storage, allowing people to access their data from any computer, the way they thought about price, capacity, and convenience began to change again.

Unfortunately, the changing standards can be devastating. Substitutes will always perform relatively poorly when they first arrive in a new industry. They are too expensive, too big, and too slow as compared to the existing market leader. This poor showing lets incumbent firms become complacent and ignore or ridicule the new approach. Kodak executives and engineers laughed at the poor one-third of a megapixel resolution of the Sony digital Mavica, suggesting that Morita should have been embarrassed to announce the product, not even ready for shipping, in worldwide press releases.

However, they forgot that Sony was driven by competitive pressures just as they were; Pentax showed a prototype of its Nexa video still camera in 1983, Hitachi showed its version in 1984, and Canon launched its RC-701 in 1986. Sony was under great pressure to improve the performance of the camera. Of course it was not as good as Kodak film, but it was good enough for taking a picture. To Kodak, this was still not a threat since the camera didn't perform as well, and people, Kodak felt sure, remained interested in picture quality. If they wanted convenience as well, the ubiquitous one-hour photo-processing machine provided all they would need. Unfortunately for Kodak, customers' preferences were shifting. What was important was not so much resolution, which was Kodak's test of performance, but convenience and instant gratification. Suddenly film's one-hour convenience seemed infinitely long compared to the immediate review provided by a digital camera, even if the picture was relatively mediocre. And as digital cameras improved thanks to new competition, questions of relative picture quality began to recede even as other advantages, such as being able to take as many shots as you want at no additional cost and easily manipulate them with editing software, came to the fore.

Supplier Constraints: No Organization Is an Island

To participate in an industry or sector, organizations typically must negotiate with
suppliers
that control needed resources, such as raw materials, product modules, ideas, capital, or any other input an organization requires to fulfill its mission. Because suppliers make money by providing components essential to the organization's operation, you might assume that the suppliers would have the organization's interest in mind. But this is not necessarily the case. Suppliers may have trouble or be unwilling to provide the resource where the organization needs it; an organization may need your skills, but are you willing to move to Asia to supply them? Suppliers also may balk at helping with innovations they perceive as reducing their importance, or they may have their own bases of power and control, as, for example, skilled labor does through the mechanisms of unions and professional guilds.

Although suppliers to an organization benefit from their relationships with organizations, a number of constraints can arise. Here are three of them.

Suppliers Favoring Their Own Interests

Suppliers of critical goods to an organization—be they raw materials, labor, or even knowledge—have a vested interest in ensuring that there can be no substitute for their contribution to the final product. (Like the organization, they also do not want competition.) This is not a cynical view; it is simply looking at the situation through the lens of economics.

Suppliers therefore have a high incentive to attempt to supply inimitable and otherwise irreplaceable goods and services. These may take the form of highly integrated solutions—for example, supplying the entire dashboard assembly to a car manufacturer. This will make it very difficult for an automobile maker to simply switch to another supplier as a way of lowering prices by driving competition between potential suppliers. While raising the value of the supplier's contribution to the final product, it also reduces the risk that the client organization can or will change.