Wednesday, February 14, 2007

Strategic Planning: The Easy Way to Innovate is - the Hard Way!

People, quite naturally, prefer to do easy things. Easy things are — well, easy. It often seems, when we look at our businesses, that the more things we can make easy, the more profitable the company will be. To a point, this is true. If you are putting more effort than you need to into creating your product or service, the time and effort involved may well be coming right out of your bottom line. Recognizing this, most managers will put plenty of effort into taking effort out of your processes.

But wait — there's a catch. Management is not just about minimizing cost — it's also about maximizing value. Some of the effort involved in your business creates tremendous value for your customers, and chances are you aren't even sure where the greatest value lies.

When companies set out to innovate strategically, they often rush off in the same direction as everyone else. In many industries — especially high-tech industries — this causes markets to mature very quickly as unique specialty items that took tremendous R&D investment become "me-too" commodities. If the innovation is a compelling one that creates real, preferred value for the customer, this commoditization is almost inevitable. The only place this is unlikely to occur is when your competitors — for whatever reason — do not copy your valuable idea.

Let's look at an example of this. For the past several years, AMD and Intel have been slugging it out over the microprocessor market. Intel, with deep pockets and first-mover advantage, decided to define the game in terms of core microprocessor clock speed. This is why, when you buy a computer, you are told that a 2.8 Ghz CPU is better than a 1.5 Ghz CPU. Superficially, this is absolutely true — the faster clock speed on the CPU makes it process program instructions faster. For some time, AMD made the mistake of playing the game as defined by their competitor (almost always a bad move). Recently, however, AMD has departed from classifying their products by clock speed (which is what Intel still does). AMD now wants users to evaluate their products by effective speed rather than clock speed — and, of course, they have helped to create the means for customers to measure effective speed. This is an interesting twist in the history of CPU innovation, because today, AMD chips with slower clock speeds are being pitched against Intel chips based upon testing that is purported to depict the real-life speed of a computer using that chip. There is tremendous debate about the testing of system speeds in the technical press today, which means — to some extent — AMD has moved the game of innovation into the realm of measured effectiveness for the customer, and away from CPU clock speed. Customers, of course, will benefit from this move towards real-world comparisons and away from slavish pursuit of the gigahertz — and AMD is hoping that it has the know-how to keep up with Intel in the redefined race. For us, the most interesting part of this is that we are seeing two excellent competitors investing heavily in markedly different paths of innovation for the very same product.

The concept that competitors might not copy something that is strategically valuable seems absurd on its face. After all, why wouldn't you copy a product that enables a competitor to gain valuable market share, often at higher margins? There are three main reasons why competitors do not copy innovations:

  1. They are unable to copy the innovation
  2. They choose not to copy the innovation
  3. They are prevented from copying the innovation

There is one other situation that occurs frequently, and that is:

  1. The competitor copies the innovation weakly because they fail to focus

If your company is seeking ways to innovate, each of these reasons may offer ways to avoid competition and earn a substantial return on your innovations. By understanding each of these, you may be able to identify useful types of innovation that will give you a leg up in the marketplace.

First — and this is one of the best — competitors sometimes are simply unable to copy a new product or service. The reason this is a very good situation should be clear — if you do something valuable for your customers that your competition cannot copy, you have created something that looks an awful lot like a strategic competency, which we all know is practically a license to print money. Unfortunately, this situation is less common than we would like to think. Additionally, we may embark upon a project expecting that our competitors will be unable to copy us only to find out, much to our disappointment, that this is not true. The worst thing about such a disappointment is that it is likely to turn up only after we have spent strategically significant amounts of time and money. However, if you want to avoid this disappointment, there is a key choice you must tend towards in your strategic decision-making: you need to focus your efforts on the hard stuff. The reason that difficulty becomes strategically attractive here is that it increases the likelihood that our competitors, in fact, cannot copy our innovations.

What are the things that will make a competitor completely unable to copy an innovation? In general, these will be technical issues — issues of know-how and capability, quite distinct from intellectual property issues, which are properly dealt with below. Let's take a look at issues that will completely prevent competitors from pursuing an innovation:

  1. The competitor does not understand the innovation
  2. The competitor does not have the correct equipment or people
  3. The competitor cannot afford the investment
  4. There is a trick to the innovation that the competitor cannot copy

The first three of these can be related to the others, and — to some extent — they all boil down to resources. With deep pockets, most deficiencies in capability can be eliminated. This is not always the case with the first issue, however — if you don't understand the innovation, you may end up investing in equipment and people that are inappropriate for success with the innovation. It is possible, however, for an intelligent competitor to invest in (1) — understanding, so this is not insurmountable. It is also possible for a competitor to correct (2), by spending to get the right people and the right equipment. The last two issues may be insurmountable. If investment is required, and a competitor cannot get the required capital, that competitor is, for most purposes, shut out of the market.

The fourth issue — the clever trick — is the dream of most entrepreneurs. If there is a clever trick involved, you can maintain a monopoly on the innovation almost indefinitely, or at least until your competitors figure out a way to steal the secret from you. A good example of this was the formula for gunpowder, which was a closely guarded secret for the first decade or so of its use in Europe. Everyone could tell that charcoal and sulfur were involved, but the use of saltpeter, and its proportion in the mix was a secret that took years to leak out, effectively giving the monks who discovered it a monopoly on its manufacture. Thus, while Roger Bacon is credited with the European innovation in the 13th century, the first European use of guns in warfare was not noted until nearly 100 years later.

The second reason why competitors may not copy us is that they choose not to copy. Why would this happen? Basically, competitors are likely to decide against copying good ideas when they think that either (1) the cost is too high, (2) the payoff is too small or (3) they just don't like the idea. Historically, many companies have used high cost as a barrier to entry, and this can work very well if you have deep pockets and your competitors do not. Small perceived payoffs can be just as good a barrier to entry, but it requires that you know something that your competitors don't. And dislike for an idea can also be a powerful barrier to entry. Let's examine how a competitor might reach the conclusion that they should not copy an idea.

First, the cost being too high: naturally, the cost might actually be too high, but this is one we don't want to use, because it would hurt us, too. Much preferred would be that the competitor's perceived cost is too high, while our actual cost is not. There are two key ways to hit this mark: one, choose innovation projects that appear to be expensive at first — and turn out not to be, or two, choose projects where you have some actual cost advantage in the innovation process. Both of these options require that you know a great deal about your product, service or processes — companies that are just dabbling will not likely succeed in either. In addition, the case where there is a real cost barrier to entry can be quite powerful if you have deep pockets and your competitors do not.

The second reason a competitor might decide not to copy your strategic innovation is that they perceive the payoff as being too low. If the actual payoff is low, this is not a very good situation to get into. In some cases, however, the perceived payoff may be much lower than the actual payoff. Some industries are perceived as dull and unrewarding. If you can gain entry into such a business, the perception of low payoff will help you almost as much as if it was real.

You will also find some cases where the low payoff is a reality for the second player in a market. This is often true with simple innovations that create strong brand preference. For example, Domino's Pizza gained tremendous leverage from being the first nationwide pizza chain to advertise delivery. The players that followed them had all of the expense of building a delivery capability, but none of the brand preference that Domino's generated during the years when "Domino's Pizza Delivers" was a distinction.

The final reason a competitor may decide against copying you is one of my favorites. Sometimes, a competitor just doesn't like the direction you are going. The beauty of this is that your competitors effectively leave you with a monopoly by making this choice. This can come about because people have had bad experiences with some kinds of business, or simply because of a gut reaction. For example, after the collapse of the bubble in 2001, many people assumed that all internet business was inherently unprofitable. This has created an opening for innovators who have developed new models of profitability for internet companies who would have been crowded out during the boom years of heavy internet investing.

The third reason why competitors may not copy us is that they are prevented from copying by someone else. Usually, this is a legal situation (as in the case of a technology covered by patents), but it may be driven by other forces as well. While many companies rely on this tactic in support of their strategic dominance, it has one major flaw: the prevention that makes this tactic effective is outside of your control, and may only be temporary in nature. The very best use for this tactic is to give you a head start on the next innovation, since — at some point — it may be possible to get so far ahead of your competition that they effectively give up on the direction you have taken. Some of the more interesting examples of this kind of prevention lie outside of the classic cases, where there is legal protection of intellectual property. These often occur because of pressure — real or imagined — brought to bear by customers of your competitors. For example, you may sell your products through distributors who are adamantly opposed to direct sales by their suppliers. In such a case, an innovator who starts selling directly to customers ends up taking a risk that competing companies are unwilling to take — the risk of cutting off the distribution channel that makes up most of their sales. In this situation, it is the customer who is preventing the copying — but the results are nearly the same as if you had a patent on direct sales.

So, what can we do to take advantage of understanding the difficulties of copying innovations? Simply put, we must throw as many of these obstacles in the way of our competitors as we can. The chart below is a basic outline of ways to take advantage of these ideas.

Innovation is a great way to differentiate your company and attain higher than average profitability in your business. Too many companies get on an innovation treadmill by improving their offerings in predictable, copyable ways. With a little care, you can innovate strategically, and truly put your company in a position that yields long-term advantage in the marketplace.

Robert Bradford is President of Center for Simplified Strategic Planning, Inc. He can be reached via e-mail at

Center for Simplified Strategic Planning has prepared a new book Elements of Innovation: How to Achieve Innovation in Mid-Sizeand Smaller Companies how to handle the issues of innovation. This is the perfect book for you if you want to:

  1. Increase the "innovation quotient" of your management team
  2. Stimulate creative thinking
  3. Create a company culture that fosters innovation
  4. Get more employees searching for new ways to create value
  5. Get a measurable return on you innovation investment
  6. Inject innovation in to your strategic planning
  7. Establish an ongoing process for commercializing ideas
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