issue 1 - Roland Berger

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