p business culture constantinos markides Constantinos Markides, London Business School “Strategic innovation means developing something new, something big.” 50 think: act
constantinos markides business culture f Why Professor Porter is wrong Pure academic theory claims that established companies do not stand a chance when it comes to integrating disruptive innovations into proven business models. Think again. In fact, the old and the new can be combined—and can even deliver a great degree of success. : It takes a lot of searching to find big, established corporate groups that are dealing seriously with disruptive, strategic innovations. Research suggests that the majority of strategic innovations are introduced by market newcomers. Market leaders’ responses are often unsuccessful. Established companies have no problem excelling in product or technological innovation. Why then do they have such a tough time with strategic innovation? First of all, what is strategic innovation? My definition is that a strategic innovation is the discovery of a new strategic position that permits a company to develop not SWEEPING INNOVATIONS USUALLY START OUT AS SMALL AND LOW-MARGIN BUSINESSES only something new but also something big—something that will allow it to gain a significant share of a market segment. A few years ago, the PC business had its traditional players like IBM, Compaq and HP. Then, out of the blue, Dell came along and started selling its computers directly and not through distributors. And everyone looked at it and said, “Wow, what an innovative company!” Now, we can argue whether Dell’s positioning actually was something new. There is no precise answer to that. The only important thing is that Dell had a niche, broke rules and played the game in a fundamentally different way from everyone else. Strategic innovation happens in the absence of technological innovation; it is different from technological innovation. Strategic innovators do not discover a new product or a new technology; they just find new ways of playing the game in the existing market (see diagram p. 53 for how companies find these new approaches). Exactly what marks out strategic innovation and how it manifests itself are things social scientists still do not know. According to the prevailing view, certain characteristics of strategic innovations make them particularly unattractive to established companies. First, strategic innovators tend to emphasize different product or service attributes from those emphasized by traditional competitors. Disruptive innovations target new markets, new applications, new products and new customer groups. Products from innovators do not appeal to customers who value mainstream offerings. These customers are not prepared to use disruptive innovations—not to begin with, at least. For this reason, established companies that want to keep their customers happy initially see no point in investing in these innovations. Second, all revolutionary innovations start out as small and low-margin businesses. That is why these innovations rarely emanate from established companies. It is generally an entrepreneur or new market entrant who introduces these disruptive innovations in an existing market. Third, it does not take long for serious competitors to emerge. This emergence always follows a similar pattern: Once the disruptive innovations become established in their new markets, a series of improvements over time raises the performance of the new products or services along the dimensions that mainstream customers value. In fact, this process advances at such a rapid pace that the developers of a disruptive innovation soon gain a firm foothold. Inevitably, the growth of the disruptive innovation attracts the attention THERE COMES A POINT AT WHICH ESTABLISHED PLAYERS CAN NO LONGER AFFORD TO IGNORE THE NEW WAY OF DOING BUSINESS of established players. As growing numbers of customers come to embrace the strategic innovation, the new business receives increasing attention from both the media and the established players. There comes a point at which established players can no longer afford to ignore the new way of doing business. At this stage of deciding how to respond, established firms have to confront the changed market situation. Reacting to strategic innovations requires a different combination of tailored activities on the part of the firm. These new activities are incompatible with the company’s existing set of activities, since the two ways of doing business are mutually damaging. The academic elite, including the Harvard professor Michael Porter, traditionally concludes—incorrectly from my point of view—that a company should not try to be in two places at the same time. Anyone who goes ahead and does it anyway is doomed to failure. Companies would have huge additional costs to bear, running the risk of jeopardizing the existing business. Porter mentions Continental Airlines as an example. Continental was being put under think: act 51
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