Strategy : How to Put Yourself Out of Business
Peter Duncan is a consultant with Center forSimplified Strategic Planning, Inc., a consulting firm with a strict focus on Strategic Planning services for the small to mid-sized company. Before joining the Center of Simplified Strategic Planning, Peter held a wide variety of positions in several small technology-based companies. He was an original member of the start-up team that founded a semiconductor manufacturing operation specializing in custom circuits and contract manufacturing, and later he joined another company as part of a turnaround team where he re-established customer relationships and refocused the product strategy while managing the three shift manufacturing operation. More recently, he was the Director of Marketing for a mid-sized component manufacturing company, where he established the strategic direction of a new product line, built the product team, and profitably grew the business at a rate of 80% per year over a four year period.
Peter Duncan can be reached via e-mail at email@example.com.
It is a Company-eat-Company World
Everyday your rivals try to offer something better that will attract more customers to their services or products. Everyday you try to hold them off. You hope your offerings are better, but that can only last so long. Eventually competitors can find a way to surpass your current offerings unless you innovate and further raise the challenges they must overcome.
It¹s a Darwinian game where the victors are allowed to continue on to innovate again and move their industries forward. For the losers, irrelevance, obsolescence and ultimately business failure is all too common a fate. If you were to examine the Fortune 500 list from 1955 (the first year it was published) there would be some companies that you would recognize, but many more (well over 25% of the list) that went the way of the dinosaurs and became extinct- dying of changes in their environment or being gobbled up by more aggressive carnivores. This is frequently the fate of the largest organizations in the business world, and the challenge for survival is even greater for the small and mid-sized companies.
To survive, a company must be aware of its environment and alert to change. Change - it is everywhere. It is the current of business, sweeping over all like a flooding river. When it rages, it is frightening: bumping, bruising and even drowning those with its power. When it is calm, change is tolerable, and we build structures - systems, models and policies - that try to control and resist it. If we get a good thing going, instinct tells us to lock in the gains - to keep doing more of the same to capitalize on our success. But it is a fine line between capitalizing on success, and getting stuck in a rut while clinging to a dream of a past when business was easier.
But there are companies that get tired of clinging and embrace change. They prefer the adventure of moving with the current of business over clinging and dying of boredom. Letting go, they embark on a voyage into an unknown future where they are often tumbled and smashed into unknown obstacles. For some it is too much and they stop and cling again. But for those who refuse to hold on, they soar with the currents appearing to magically fly above those who try to resist the current of change.
Which kind of company will you create? One that uses its energy and resources to hold back the currents of change, or one that risks the currents of change to create new value in business? This is the challenge of innovation. The best strategies always hinge on some form of innovation.
What is so Great about Innovation?
A dictionary defines "innovation" as the introduction of something new or different. According to the eminent strategy professor, James Bryan Quinn, "Innovation is the first reduction to practice of an idea in a culture." Without innovation, all we can do is try to optimize what we have, but in a world where competitors are constantly upping the ante, this is not sufficient. Innovation is the thing that gets you ahead of the pack, rather than chasing your rivals. It is the source of mutation in the DNA of a company that is essential to survival in a changing environment.
Innovation can take on many forms. Most often people think of product innovation - the new idea that gives your offering an advantage over a rival's. This is a good start, but it is a rather narrow use of a powerful concept. What are new processes you can use to transform the very way in which value is created in your industry? Amazon.com latched on to the internet as a whole new concept of retail selling. Are there services you could offer which would be innovations in your industry? General Electric strives to wrap services around every physical product it sells. And at the highest level, can you invent and deploy a strategy that changes the rules of the game for your business? Wal-Mart has redefined customer service and relentlessly driven down costs to build a company with "everyday low prices" that has rocketed to the top of the Fortune 500 while rivals Sears and K-mart struggle to shore up their strategies which brought them success in the 1970's.
Innovation is at the heart of value creation. In each case, someone or some group of people imagined a company different from the status quo. A new idea was translated into a product, service, concept or strategy that could be brought into practice to create new value for the company. Not all innovations are successful. While any particular innovation may succeed or fail, any company that wants to be successful must be working on some kind of innovation to build a sustainable advantage.
If Innovation is so Great why doesn't Everyone do it?
Well, there are a small number of companies that either don't understand the need to innovate or don't care to try. But among those trying to get ahead, there seem to be two common reasons companies fail to innovate.
The first reason is that they are successful. Mankind's instinct is not to rock the boat when you have a good thing going. When a company does innovate, they are proud of their success. They want to capture full advantage of the good times and try to control the environment to extend their winning streak. Rather than investing in the next innovation, they get trapped into preserving the advantage of their last innovation.
In the 1970's IBM developed the most successful business model for building and selling large powerful computers to corporations. Success made the "mainframe" division of IBM very powerful, and they used this power to try to preserve their dominance in the market. Rather than forging ahead with daring new products built from the latest technology, the IBM mainframe group became conservative, slowly adding emerging technology onto their existing platform. Digital Equipment Corporation had no existing platform. They were able to start from scratch and design the best possible computer. From this innovative quest the "mini computer" emerged and DEC rode to prominence on this product during the 1980's. But like IBM, DEC allowed its success to slip into arrogance as they reveled in the innovation, which brought them success and turned a blind eye to the ongoing march of technology into the PC market. Tasks that once needed a mini-computer migrated to the PC and HP, Compaq, Dell and others took share from DEC. In time, DEC was so weak that they were unable to bring their innovations to market and Compaq acquired them.
The second reason companies don't innovate is, like DEC in the later years, they get caught in a competitive squeeze. It often begins with a sudden competitive attack on a market. A rival innovates and introduces a product of greater value, but prices it equal to the incumbent, or they bring a product of similar value, but offer it at a much lower price point. In either case the quickest and most common response is a price cut on existing product to preserve market share and cash flow.
Any arbitrary price cut has to be followed with cost reduction, to get profitability back to acceptable levels. All too often, this means downsizing and reining in investment, both of which take resources away from innovation efforts. Companies get fixated on improving ROI by managing the denominator (investment) rather than pushing the innovation driven numerator of the equation. This leaves a company less able to innovate and more susceptible to the next competitive squeeze. Before long they can find themselves on a downward spiral like the American automakers or Pan Am Airlines in the 1980's. AT&T failed to prevail against rivals in the early 1990's and found itself squeezed and had to resort to breaking up the company to improve its ROI when it was unable to deliver a breakthrough innovation toward the end of the decade.
What does it take to be Innovative?
An innovator is never satisfied. There is always something better around the corner, and he is determined to break from the pack and find it. An innovator seeks not only to beat the competition, but also to better his own inventions. In company terms, an innovative company needs to try to put itself out of business (with new ideas) before someone else does it to them.
Suppose you were in the port-a-potty business. It is not a business that most people want to stick their nose in. I don't recall ever meeting someone who was really satisfied with their experience using a port-a-potty, so it would seem there is plenty of demand for a breakthrough innovation. So far the industry leaders seem to have made improvements that help them lower their costs-easy to clean plastic, rugged commercial design. But other than more powerful deodorizers, there has not been much innovation to improve the consumer's experience.
So how would you innovate to try to put the industry leaders out of business??
Well Potty Palooza asked and answered the question with a determination to change the basis of competition in the industry. Their approach, install 27 private bathrooms with modern porcelain flush toilets, running water, air conditioning and luxury hardwood floors in an 18-wheeler trailer. Not only do they provide the basic facilities, but also each of their trailers has a full time attendant to periodically clean and stock the rest rooms. Will it work? I don't know, but it is the type of redefinition of an industry that has the possibility of being a transformational breakthrough. Rather than following the leaders with incremental improvements, they have attempted to fundamentally change the rules of the game and set a new basis for competition in their industry. They are engaged in the imagination game, not the imitation game. What about you? How will you change the rules of your industry?
Increase your Innovation Quotient (IQ)
Okay, so you get the idea... when we speak of innovation we are talking about introducing significant new ideas that redefine the basis of competition. But how does a mid-size or smaller company do that? You can't afford a think tank like Bell Labs.
The good news is that innovation is not dependent on dollars. Sure some money will help bring things to market, but the fundamental building blocks of innovation are IDEAS, KNOWLEDGE and A PROCESS for translating these into tangible services and products in the market. Every person in your company has the ability to contribute regardless of function, title or salary, IF you establish a culture and an environment to encourage innovation.
Once you have a suitable environment, you need to fill it with creative and qualified people. The most innovative companies like 3M and Microsoft often interview 100 qualified candidates to find the one that will fit with the culture and become a contributor to their value creation process. In addition to the people and the environment, you need to organize for the type of innovation you are trying to encourage. Incremental innovation has a 1-2 year time horizon and is often driven by strong egos, bonus compensation and a small quick acting team. Where as breakthrough innovations have a 7-20 year time horizon and are best facilitated by creating a stable large team that is a collegial peer group who respect each other and will stay together over the duration of the program. In all cases, innovation comes from the coupling of a breakthrough idea with a disciplined process to refine and improve the idea to make it commercially viable.
To inspire innovation in your business, there are three types of knowledge you want to encourage and capture:
- Know What....cognitive knowledge
- Know How.....advanced skills
- Know Why.....systems understanding
These are the raw materials of innovation. By the way, they are also the building blocks of your strategic competencies. The best companies develop and institutionalize knowledge in the company. So if you have been developing strategic competencies, you should be well on your way to having the elements of an innovation.
But these are just the raw materials. The real genius of innovation comes when someone dips into this collection of ideas with a net and draws a select group together for a particular purpose. At Canon they drew together their knowledge of optics, electromechanical systems and mass production to launch the innovative personal photocopier when Xerox and its competitors were still thinking the market was about big, high speed, fully featured machines.
The inspiration for innovation happens in an instant. It is impossible to predict the exact moment or elements required for genius to strike. There are, however, some common places to look for inspiration. You should examine:
- needs/demands of market place (customers provide some of the best ideas)
- value chain analysis (define linkages and where value is created)
- figures of merit (define what it takes to win)
- theoretical limits, bounds
- trends (extrapolation of pacing parameters)
- models (interaction of a number of factors)
- attack ourselves (define how we could beat our best today)
But inspiration is just the start. Good companies have a disciplined process to transform the genius of a moment into a refined product or service that is ready for the market. This often requires several rounds of development with creative inputs at each stage. The culture of the company has to not only support the free thinking geniuses that seed the innovation process with ideas, but also the more linear development folks who reduce the idea into practice. The best companies find ways to link their innovation process with their strategy process so the two define and support a single vision for the organization. They also find ways to measure innovation so they can objectively monitor their progress and strive for ever higher performance.
Keep Yourself in Business
The best way to keep yourself in business is to try to put yourself out of business. If you are always on edge, never complacent, then you will challenge your team for continuous improvement. Innovation requires vision, inspiration and the patience to support a relatively long time horizon. You can encourage it by creating a productive environment and organizational structure that you fill with the best people.
Change is a constant in business. We need to continually change and evolve if we are to survive. Static barriers don't keep out the barbarians who want our business. Winners embrace change and create moving barriers that keep their rivals off balance. True barriers to entry are created not by one thing, but by the RATE at which you innovate and keep your competitors struggling to catch up.
Winners learn to play the imagination game that leads to innovation. They learn to have their cake, and eat it before someone else does. Winners assume that others are trying to take their customers at every turn and that their very survival is at stake. They figure out time and time again how to put themselves out of business before their rivals do. That is the challenge of not just a strategy, but a renewable and sustainable strategic basis for a successful business.
Copyright Center for Simplified Strategic Planning, Inc., Southport, CT, 2003.
Reprinted with permission of Center for Simplified Strategic Planning, Inc.
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