Innovation : Create Marketplace Disruption - How to Stay Ahead of the Competition

Adam Hartung

Adam Hartung has helped redefine the strategy of companies many Fortune 500 companies such as Air Canada, Honeywell, Subaru of America, Kraft, 3M, and P&G. At PepsiCo, he led Pizza Hut’s home delivery effort, launching Pizza Hut to a new level of growth. Adam is a regular contributor to Forbes magazine and recently wrote Create Marketplace Disruption: How to Stay Ahead of the Competition ( Financial Times Press, 2008 ). See his Phoenix Principle blog.

Marketplaces are dynamic, shifting things. There are few rules. Many businesses (and business schools) approach running a business as if it were an engineering exercise. That may have worked a generation ago, but today it’s a different world. This change is particularly tough on large, bureaucratic companies. Think AT&T, GM, Kodak and Xerox. But all companies following a traditional approach to management have enormous difficulty responding to marketplaces that change much faster than they can.

Companies react to shifting markets by focusing on the short term, and on the incremental. How do we do things faster, better, cheaper ? Too many managers think that by undertaking continuous improvement programs or Total Quality Management, they will achieve 1% per quarter or 4% per year gains from incremental improvement in cost, price, delivery, etc, - hoping these will sustain their position.

In this way, business leaders hope to create predictable performance, and who doesn’t feel good about predictability and continuous improvement ? But what if a competitor that you haven’t even thought about enters your market with a different product altogether, on a different performance curve, and you’re rendered irrelevant overnight ?

Think about personal computers. Initially PCs develop a price-performance curve, continuously improving via better, faster and cheaper RAM, hard disks, monitors, keyboards and so on. One competitor, Compaq, even created a PC you could carry around. All on a predictable performance curve.

But then something like the iPhone comes along. It can handle email, web surfing, and increasingly sophisticated applications. Or the Kindle e-reader begins to take the place of everything published – from books to newspapers, magazines and pdf files. These new products create entirely new and different performance curves. They behave like Trojan horses, taking a huge chunk out of the industries they target. 

When market shifts happen traditional players struggle. What are the signs ?

  • The first and biggest tip-off is obsessing about cost. When a company is in the lifecycle growth phase it is willing to add cost to generate more revenue. When any business starts to cut costs that means it has given up on growth. And if it can’t grow, it has no future. When business stop growing, they die.
  • The next sign is obsessing over “best practices.”  Best practices are simply another way of saying, “Maybe I can lower cost if I can run my business just like Z does.” Quality programs have the same impact – trying to find a new door to cost cutting. Both approaches have the potential to lower cost, but at the price of growth. 
  • Other signs ? Cutbacks. Reducing R&D, sales offices, people, advertising or bonuses and salaries. Fewer, and slower, new product launches are another sign of ineffective reaction to market shifts. Or how about cutting back travel ? Most travel is to meet customers and vendors in order to find ways to grow. When people stop traveling, management admits it doesn’t intend to grow. All these are telltale signs that a business is no longer in a growth phase. It’s in decline.

How do companies slip into this sorry state ? They were successful in their entrepreneurial stage. They previously achieved enormous growth. But then they locked in to the behavior that got them there. And why not ? It worked for them in the past. They begin to define themselves according to their history, and their “lock-ins.” Like defining the business around a product line - “we’re in the PC business.” But that’s about the past – what the business has done – and it sets up barriers to doing anything else.

It’s human nature to repeat what works well. But it locks you into behavior that will one day create your demise. Because markets will shift. New mobile devices – part cell phone, part PC, partly something entirely different - come along, and suddenly people want a lot fewer laptops – certainly not at the old prices. In essence, every day a company says that it is in the PC business, it is making a decision not to try something else. It’s shutting out options. It keeps making investments in people, plants, products, and processes as if that business in the future will be like it was in the past. Until it’s gone.

Like Sun Microsystems, Silicon Graphics and Digital Equipment Corporation learned the hard way. These one-time leading computer manufacturers were made obsolete by new products they chose to ignore.

Remarkably, this behavior is described positively in most business schools, and by most business gurus in their many books. They call it focusing on your core values. Core values sound appealing. They sound like religion, something inviolate. But we’re not talking about religion, we are talking about running a business. Why does a business need a “core” ? Especially when the markets it serves are completely fickle, lacking any “core” at all.

Such language itself puts blinders on our ability to look clearly at the marketplace and see what it is telling us. We feel compelled to defend our core, rather than find new ways to succeed. We become victims of our old success formula.

All businesses have an identity. Their strategies are designed to reinforce that identity. Their tactics fulfill the strategy and identity. For example, Sun Microsystems developed an identity as a company that made computing boxes. The company gradually improved those boxes, adding more and more hardware. That new hardware had a lot of software in it, including Sun’s proprietary UNIX operating system called Solaris. Sun kept developing UNIX extensions, helping make UNIX one of the most successful operating system ever utilized, and the company grew by double-digit rates annually. By 1990, Sun had outsourced all of its hardware production.

By the mid-1990s, Sun had developed a whole new computer language called JAVA – a revolutionary upgrade dramatically improving the ability to utilize the Internet. But Sun was so tied up in its identity as a computer box company that it literally gave JAVA away. Within 10 years Sun had become a fraction of its earlier size, and by 2009 it disappeared, purchased by a software company. Sun was unable to evolve its identity. It defended and extended its box identity into oblivion.

What could Sun have done differently, and what should every other successful company be thinking about ? First, most companies organize their planning around past data. They take the old data and project it into the future. The market grew at 5% last year; next year it will grow at 4.8% to 5.1 %. Most companies spend 90% of their planning cycles looking at the past. What they should do is implement scenario planning in order to look into the future. What will the marketplace look like in 2015, and 2020 ? How can we get ready for that ? It doesn’t matter what happened last year; to plan for success you have to position yourself into growth markets with solutions that meet emerging customer needs. Skate to where the puck will be.

Once your scenarios give insightful options to what the world might look like, including dramatic changes from the way things are done today, then work backward to develop your 1- and 2-year plans. Let the future drive you to understand what you must do, and thus what you must change: processes, people and customers. Decisions become much more apparent when you’re reaching for the future rather than defending and extending the past. Transitioning your planning process toward using scenario planning rather than past data will focus your business on the future, and is the critical first step.

Next, look at your competition. How can you box them in ? How can you trap them in one way of going to market, then leapfrog them ?

Most companies get into price wars, or features and function wars. Those simply drive down margins and doom your business to eventual failure. Instead, create a new opportunity where competitors won’t challenge you. Then you can set the terms. For example, Domino’s Pizza entered the pizza delivery business at a time when all its competitors were talking about quality. Domino’s said, in effect, “Pizza Hut makes a great pizza but we’ll deliver our pizza to your home or office.” So Pizza Hut was trapped inside its own box. It was stuck pushing quality and sit-down restaurants. Domino’s scenario planning included customers getting busier, wanting more convenience, and willing to accept different quality levels for that convenience. Domino’s quickly owned the pizza delivery business, even though its ad spending was less than 25% of Pizza Hut spending. Domino’s disrupted the pizza marketplace.

Tribune Company focused its planning on how to run a major city newspaper. By 2000, management felt it was a world leader, buying the Times Mirror Company to obtain The Los Angeles Times and 3 other large newspapers at a huge premium.

But Tribune management ignored new competitors, entering from the fringe. Although Internet use was growing exponentially, management ignored it. Craig’s List gave away classified ads, but was ignored. Yahoo and Google built on-line ad placement engines that could move customer ad dollars from print to digital, but Tribune ignored these trends. By focusing on its core business of newspapers, Tribune completely missed the shift in customer behavior and in December, 2008 filed for bankruptcy.

Traditional competitors are worth studying to figure out how to box them in. Fringe competition must be studied to develop new solutions that keep you shifting with the market, and locking old competitors into old positions. Possibly the position you left.

Most people, and by extension most companies, think of disruption as bad. Such thinking reinforces lock-in. We must be willing to talk about things that are outside our identity, strategy and tactics. We must be willing to engage the disruption conversation. Instead of trying to reinforce the status quo, leaders must encourage people to challenge it.

When organizations learn it’s OK to be disruptive, they use “white spaces” to implement market disruptions. White space requires a team that is given explicit permission to go do something different. Only when explicitly freed from having to play by the traditional rules is it possible to violate sacred norms, change metrics, use different technologies and create new solutions. Once given the right permission, white space teams with dedicated resources have shown they can act as the ship’s bow sailing toward new business growth.

Organizations demonstrate repeatedly that it’s easier to get resources than it is to get permission. The organization and its entrenched managers do not appreciate people breaking the rules that they follow. Thus if leaders and managers don’t explicitly focus on granting such permission, the traditional the organization will crush the ‘skunk works’ project. Then you have a disturbance, not a disruption. Lots of anxiety and anger without positive gains. Disturbances go away with no lasting benefit.

Companies like Cisco, Nike, GE, Apple, and IBM have made these disruptions happen. And they have become skillful at establishing white space projects that can develop radically new solutions driving profitable, high growth. It is possible. But it’s not easy. It requires courage and the willingness to think very differently inside an organization, where the norm is to apply pressure on everyone to think the same way.

But the old ways lead businesses to sink beneath the marketplace waves, another company dragged under by locked-in anchors, unable to sail toward a new future. The new approach keeps your ship upright, and able to ride the waves of shifting marketplace storms.

© Copyright 2010 Adam Hartung

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