CHAPTER THIRTEEN

EXPLOITING MARKET-FOCUSED INNOVATIONS

IT WAS BLOWING a gale as the ship approached England, but the young man who sat hunched in thought in his cabin scarcely noticed. Four years at sea—all unpaid—on a voyage around the world, he thought, and it hadn’t been easy. Several moments of anxiety, even panic, had occurred. All these had been eclipsed, though, by the wonders he had seen and documented. Now he needed to make some sense of them.

As Charles Darwin collected his thoughts and his specimens on his last few days aboard the Beagle, he reflected on the sights he had seen on the Galapagos islands off the northwest coast of South America. Most amazing had been the finches, all obviously descended from one family, but each island having one or more distinct variants, adapted to suit a particular environment. What did this mean? How did these variants occur? Thinking that through would take time. What Darwin realized already was that animals could adapt to a new environment, given time.

We are all aware of Darwin’s Theory of Evolution, and the basic argument of survival of the fittest. Companies, too, survive by adapting, and one way of adapting is to produce variants of original products.

When Sony introduced the first Walkman to rapturous acclaim in Japan, nobody was aware that over forty variants of the original product would be produced and purchased in large volumes. Daimler-Chrysler has been able to combine two successful innovations in its recent past—the minivan and retro styling—and produce a hot-selling passenger/cargo carrier, the PT Cruiser. Swatch watches continue to sell in impressive numbers worldwide, years after it was confidently predicted the product would have a short product life.

The fact that a company can complete the first three clusters of innovative activities in the Innovation Management Model ought to mean it can successfully complete the fourth cluster—exploiting the innovation. The examples given above indicate that it can be done, and done consistently. Why, though, are so few companies able to do this on a regular basis? Why is it that a dynamic innovative system can fail at the final hurdle?

WHAT IS EXPLOITATION?

OF COURSE, EXPLOITING innovations doesn’t necessarily involve follow-on products, and success need not be measured in market share or financial terms. The focus of exploitation can be one (or a couple) of the means listed in Figure 13-1.

Let’s look at these possible focuses.

EXPLOITING MARKETS

Exploiting markets can take one of two forms: (1) expanding current markets, or (2) moving into new markets. One of the most interesting facts of innovative life is that quite often there are uses for an innovative product or process that the innovators did not appreciate. Johnson & Johnson’s Baby Shampoo was developed as a nonirritating shampoo for use with the fine hair and sensitive eyes of babies and small children. However, an even larger market was discovered accidentally when some teenagers began using the shampoo on a daily basis, because the daily use of traditional shampoos damaged hair. Johnson & Johnson was quick to capitalize on the discovery and developed a very successful marketing campaign promoting the daily use of the Baby Shampoo with teenagers.

FIGURE 13-1.POSSIBLE FOCUSES OF EXPLOITATION.

Markets

Current

New

Products

Current

Follow-on

Innovations

New

Competitors

Corporate

Capabilities

Sell innovations

Sell the company

And innovation is not limited to physical products. Consultants quickly took that ubiquitous management innovation, TQM (total quality management), from the factory floor to the office, from manufacturing to service settings, and from for-profit to not-for-profit and government institutions. Similarly, inventory management processes developed for large job-shop applications were installed in repetitive manufacturing facilities and also used for distribution planning downstream of all manufacturing operations.

One of the oldest forms of market extension is syndication. Practiced first in newspapers as a way of providing news services that local newspapers could not provide, syndication now involves film and television productions. Movies are now expected to generate greater revenues from sales to non-English–speaking countries and from North American video rentals and sales than at the box office. This requires a new player in the value chain, the syndicator. Syndicators buy information from providers and bundle packets together in ways customers might want. Providers usually do not have the ability to reach new markets, and customers do not have the ability to find new sources easily. The most ubiquitous syndicator these days is our local cable company, buying programs and feeds from a variety of sources and putting together a number of alternative programming packages.

The ability to exploit new market opportunities requires companies either to envision the new markets themselves or to listen to interested people and organizations beyond the expected market. Both approaches require open minds and an ability to quickly follow up the perceived opportunity with solid market research. They may also require a willingness to adapt the organization to take advantage of new opportunities that prove to be strategically suitable.

This willingness to adapt or reshape the organization structure may also be important to companies intent on introducing new innovations into, or supporting, their traditional markets. Chrysler reorganized when their minivan became wildly popular in North America in the 1980s, reshaping itself so that one division looked after the passenger vans. Incidentally, the popularity of the minivan was due not only to its design but also to an innovative way of reducing the cost to the customer. Station wagons, built by Chrysler and the other North American manufacturers, were and are classified as automobiles by the federal government, and are required to meet all automobile safety and administrative requirements set by national agencies. Chrysler’s innovation was to have the minivan classified as a truck, which allowed the company to build the vehicle without automobile-specific safety features (for example, collision protection in the doors). The lowered manufacturing cost that resulted from the less stringent manufacturing requirements, and the lower taxes on trucks, allowed Chrysler to sell the minivans for thousands of dollars less than the perceived competition. Astute marketing to complement the new vehicle, aimed primarily at households with young families, cemented the minivan as an acceptable second family vehicle.

Chrysler was not the first automobile manufacturer to sell fully enclosed, passenger-carrying trucks in North America. Japanese auto manufacturers were able to convince U.S. regulators to allow their vans (for example, the Toyota Previa) into the United States as trucks. This move allowed the Japanese to bypass the quotas on automobiles they were allowed to bring into the country. Chrysler’s management quickly saw the fuller potential of the approval and brilliantly exploited the opportunity.

This was not the only opportunity realized by others, but exploited by Chrysler. Ford engineers suggested that Ford install a driver’s-side sliding passenger door on its minivan. Ford’s senior management demurred for safety reasons, but Chrysler took the concept and used it to competitive advantage. In 1999, Opel’s management (Opel is GM’s German subsidiary) suggested to GM’s corporate board that a van designed for European driving conditions be built in North America for North American markets. GM’s board turned down the suggestion. Daimler-Chrysler, however, took advantage of the opportunity and introduced the PT Cruiser, another successful extension of the minivan line.

So companies intent on exploiting market opportunities must not only be aware of the opportunities. They also must be quick to assess and then act on the opportunities as they appear. Neither Ford nor GM investigated the suggestions that came from within their companies. Had they done so with open minds, it is likely that Ford and GM would have seriously considered the introductions. But there is no guarantee they would have acted on them. Neither Ford nor GM appears positioned to be an innovative company. Both seem content to allow others to introduce new ideas, and then the “Big Two” see what is successful and copy the idea. Given stable markets and accepted ways of operating in their industry, this notion of the big players following the innovation lead of the smaller players might make some sense. This does not seem to be appropriate in the current of the global automobile industry, as the global and North American market shares of both Ford and GM indicate.

EXPLOITING PRODUCTS

A favorite means of exploiting product opportunity is to develop follow-on products. This makes good sense, if the initial product is a success in the marketplace. Given a satisfactory market size and customer base, and postexperience feedback from customers about the first-generation product, the design of the next-generation product ought to be relatively simple. In addition, costs ought to be easier to predict—and control—in subsequent product offerings.

There are, though, a great many follow-on products that fail miserably—too many, in fact. Why do these products fail? We believe there are three basic reasons: (1) the arrogance of pride, (2) a loss of focus, and (3) drift away from the strategic target market segment. Let’s examine each of them.

The Arrogance of Pride

Many products fail in the marketplace, as we all know. For each product that fails, at least one senior manager’s judgment can be called into question, and a great deal of corporate cash seemingly wasted. It is very easy, and very tempting, for senior management (or anyone with a great deal to lose) to argue that the innovation was appropriate for the marketplace, but poor work in development or marketing, or poor timing into the market, was the reason for the failure. The road to hell is paved with good intentions, it is said. Well, the road back is littered with postlaunch reports and analyses that point out that the failure was inevitable, given suitable scapegoats inside the company and intransigence outside the company.

Under these circumstances, it is a natural human tendency to reinforce failure by trying to force a “new and improved” product on a resisting market, without trying to understand why the innovation failed. That is why Ford’s Edsel story is so inspiring. As we said in Chapter 11, Ford acknowledged that it did not do a good enough job of understanding its customers, and it spent a great deal of time revisiting and questioning its assumptions. The result was the successful launch of the four-door Thunderbird, followed by the spectacular Mustang.

The first lesson is: If at first you don’t succeed, accept the fact that the market is telling you something, and find out what the market is really saying. Pride comes before a fall; humility may come before a windfall.

A Loss of Focus

Confess it: We’ve all tried using chopsticks at least once. All of us are clumsy at the beginning, and most people give up after their first attempt. Perseverance pays off ultimately, though, and the occasional user can confidently pick up and eat a peanut. Then comes the challenge of picking up two peanuts at once and popping them in your mouth and the realization that very skillful users of chopsticks can pick up and pop three peanuts in their mouth at once. Nobody takes lightly the challenge of picking up two, then three, peanuts; even for skilled users, concentration and focus are required. Holding an intense conversation or reading a book at the same time as you attempt to pick up the peanuts is out of the question. Three peanuts seem to be a limit.

The same is true for follow-on products. Managing the overall introduction and follow-through on an initial product is difficult enough. The greater the number of derivatives, new generations, and product extensions that are introduced and maintained in the marketplace concurrently, the easier it is to lose focus on what is critical—identifying and capitalizing on successful products, and capitalizing on synergies that are proven to exist. GM launched Saturn as one model of passenger car; as of early 2001, there were at least five variants on the market. Every variant competes against at least one other variant in its own particular market segment. And nobody knows which is the most appropriate variant or the most appropriate strategic target market.

And we’ve all seen jugglers—and tried to emulate them. Most jugglers use five or six dynamically similar objects (nobody successfully juggles paper plates, eggs, and silk scarves at the same time). So why should we expect companies to successfully manage product variants that have vastly different internal and/or market dynamics from the original product? The answer is, of course, that they can, provided they restructure to keep the different dynamics separate. Not understanding the sometimes subtle dynamic differences can lead to a loss of focus in manufacturing or marketing spheres, with disastrous consequences for the company.

The second lesson is: Don’t assume that manufacturing and marketing can automatically and effectively handle the follow-on products without either restructuring or providing additional resources. Failure to support the overall performance of the manufacture and marketing of the follow-on products can easily lead to a collapse of a category’s profitability.

Drift Away from the Strategic Target Market Segment

Drift is not loss of focus. Rather, it is the incremental, unplanned, and unrecognized movement of the crosshairs of the marketing rifle’s sights away from the strategic target. Why does this happen? Perhaps a large potential customer is intrigued by a product and suggests that modification of the product will win its business for the new product, which will take the company into uncharted market waters. Smaller companies are particularly vulnerable to the magnet of the annuity-providing large customer. More often than not, the first successful product succeeded on its own technological merits, not because it was developed strategically.

This is the history of the software industry. Technology-focused software developers produced a product that attracts a following, and were then seduced by dreams of perpetual profits if they only modified the product to suit the professed needs of a large potential customer. Of course, the market the developers strive for doesn’t exist, and they lose the original market as well because they cannot support both markets at the same time. So we might call this drift by seduction. The drift to a new promise does not allow the company to observe and chart the drift or trend in the needs and expectations of customers in the original market—and sooner rather than later, the company will lose its market share and its market.

The third lesson is: Companies that fail to have a strategic imperative behind their innovations can easily drift onto the shoals around the market segment they first serve, then ignore. If you don’t know where you’re going, any road will get you there, as the Cheshire cat said to Alice. If you don’t know why you’re going there, though, then why did you set off in the first place?

EXPLOITING INNOVATIONS

Exploiting innovations can take the form of exploiting new innovations and exploiting competitors’ innovations.

Exploiting New Innovations

We stressed earlier in this book the need for balanced development of the several capabilities required for being an effectively innovating company. These capabilities are also essential for taking advantage of opportunities that become apparent after the market innovation is launched. In many instances, users of the innovative product, process, or service recognize new opportunities.

The Japanese just-in-time manufacturing philosophy was developed by Toyota as the philosophy within which the Toyota Production System (TPS) was developed. A critical requirement for successful operation of the TPS was certainty of demand, and Toyota was reorganized so that Toyota Motor Manufacturing was separate from and independent of Toyota Motor Company, the marketing arm of the organization. Toyota Motor Manufacturing had only one customer, the marketing arm, which gave organization orders rather than sketchy forecasts to the manufacturing group. Firm orders and a realistic build schedule allowed Toyota Motor Manufacturing to achieve its quality and cost targets.

That Toyota and the other Japanese automobile manufacturers were able to win the marketing wars in the United States and redefine auto quality in the minds of North American consumers is ancient history. However, Toyota quickly realized that a successful marketing campaign and excellent products were not sufficient. Its next innovation was to revolutionize the car dealership in North America, for Toyota discovered that North Americans felt the traditional dealerships were necessary evils, plagued by shady sales practices and low service quality for repairs and maintenance. Toyota helped establish independent dealers and insisted on training all personnel to ensure that every person in the dealership was customer-focused and capable of performing their function. Backed by all the necessary equipment to support the vehicles, Toyota dealerships became the envy of the industry, and themselves became a principal reason for individual consumers becoming first-time customers of Toyota cars.

Honda and Toyota have both been successful with developing new products for new (for them) market segments. Both have successfully launched vehicles for the luxury segment of the global car market (Acura and Lexus, respectively). In both cases, the companies have further reorganized their marketing divisions, with the luxury vehicles being distributed through dealers separate from the mass-market vehicles. However, both Honda and Toyota have resisted reshaping their manufacturing, focusing instead on learning how to manufacture mass-market and luxury vehicles on the same assembly lines.

Exploiting Competitors’ Innovations

For many companies, it is exploiting the initial innovations of others that drives competitive success, and there is nothing wrong with being a successful follower or niche market player in an industry. Some companies are even capable of improving a fundamental technology so much that they become market leaders in their industry, forcing the initial innovators and early imitators to follow the new leaders at a distance.

A prime example comes from the steel industry. Continuous casting of slab steel was developed initially in Austria, with early followers coming from Germany and the United States. Japanese manufacturers, though, concentrated on developing the next generation of casters, in concert with Asian steelmakers. As a consequence, the bulk of the world’s continuous casting equipment for slabs is now Japanese, with very little from Europe or elsewhere. Nucor, a U.S. steelmaker using electric arc furnaces, has developed the technology to thin-cast steel in sheets only 3 inches thick (compared with the 9-inch thick slab from slab casters). Where this technology finishes up is currently in question, but a likely scenario is, once again, Japanese-controlled.

Early followers need to be able to identify areas of concern with the initial technology and be able to work rapidly to make improvements. These improvements need not be with the physical innovation. As previously stated, the market-focused innovation consists of the total package of physical and nonphysical attributes of the innovation, and any one of these can be found wanting in the initial innovation. Many early followers in fact identify and improve on the intangible offerings in the innovation, especially if they are aware of areas in which the developer of the initial innovation has underdeveloped capabilities. Xerox, for example, developed (and still develops) remarkable innovations at its Palo Alto Research Center (PARC), but it has never developed the capability for successfully transferring PARC innovations into salable products. Many European companies used to have inadequate marketing capabilities, arguing that good engineering would sell itself. A major North American paper products manufacturer used to have excellent product development and marketing capabilities, but it also had poor product manufacturing management and control systems. The list goes on. Identifying weaknesses in market leaders, especially where these companies are product innovators, is one key strategic lever followers can have.

Niche players generally focus on market segments that the market leaders find difficult to profitably exploit. Xerox copiers used not to be installed in small companies because Xerox designed products for what it saw as the only profitable market segment—high-volume paper-consuming companies. Japanese copier manufacturers entered the marketplace and showed Xerox there were other profitable segments. In another example, the Watch Company, a Vancouver, British Columbia–based watch retailer, successfully exploits a market segment left untouched by other watch retailers. The company operates franchises that sell watches and batteries from carts in shopping malls. All watches are sold at the same low price, which includes a second battery. The company is highly profitable, and nobody appears interested in competing with it.

However, niche markets are apt to be absorbed into the larger marketplace, and this is particularly true as the technology revolution gathers steam. Innovations in manufacturing technology make it feasible for mass-market producers to now cost-effectively manufacture products for niche market segments. Until these companies have complementary capabilities reasonably well developed, though, the threat they pose to niche marketers remains a distant prospect.

EXPLOITING ON THE CORPORATE LEVEL

There are three possibilities here: (1) exploiting new capabilities, (2) selling off the innovations, and (3) selling off the company.

Exploiting New Capabilities

Companies organize around products, markets, processes, technologies, region, or stage in the product life cycle. It is natural for companies to then think about exploiting what they organize about. But few companies think about exploiting capabilities, and they miss opportunities for exploitation in a number of areas at once.

It has been suggested that capabilities consist of four elements:

1.Knowledge and skills

2.Managerial systems

3.Physical systems

4.Values¹

More important than these essential elements, though, is a fundamental understanding of some basic process or activity.

Daewoo Shipbuilding and Heavy Machinery builds ships, including some of the world’s largest crude oil tankers. The company builds these vessels in much less time than its competitors, at lower cost, on time, and to the highest technical performance levels. Daewoo has excellent managerial systems, and its scheduling system is impressive. It also has impressive physical systems, including the world’s heaviest capacity gantry crane and huge dry docks. Labor relations are the best in the industry in Korea and among the best globally.

None of these attributes, though, explains Daewoo’s performance. The key is that Daewoo understands the arc welding of large pieces—not just how to weld two pieces of metal together, but how to do it perfectly, consistently, cleanly, and on time. Even that is not enough. Daewoo engineers, scientists, and designers know how large pieces of steel act, change shape, distort, and change their crystalline structure when they are welded. It is this fundamental understanding of how the metal acts that allows Daewoo’s designers to predict exactly how a welded structure will act, and precisely what changes in shape will occur as a result of the welding.

This understanding allowed Daewoo to fundamentally change the process by which large ships are built. Propeller shafts are inserted into the vessel after the vessel has been built; other shipbuilders must place the propeller shafts in their bearings not long after the hull has been laid. Daewoo is also able to build the vessel as very large modules and then put the modules together like a large, expensive, and impressive Lego set. There is no need for “just in case” welding or extra internal bracing; this gives weight and volume savings and increases the vessel’s cargo-carrying capacity.

Understanding welding thus allowed Daewoo to make improvements in three aspects of shipbuilding. It also allows Daewoo to design and build other large structures in which accuracy in welding allows changes to be made in the construction process. Until someone else gains Daewoo’s understanding (which will take a long time to develop), Daewoo stands to reap the benefits.

Selling Off the Innovation

Most companies that innovate want to retain the product and grow with it. Sometimes, though, the innovation doesn’t fit with where the company wants to go, or the costs of getting there may be too onerous. Selling off the innovation might then make sense, and companies should always be open to the thought that they might make more from getting out of an innovation early rather than staying in. This is particularly true if the company is good at working in the early stages of an innovation, but is not particularly good at managing the rapid growth stage of the product life cycle.

It doesn’t take long to find a company that is good at taking someone else’s development and growing it to maturity, especially in a global economy. Fewer companies are capable of innovating effectively than are capable of solid stewardship. And it is generally a seller’s market. Not for ideas—for proven innovations.

The issue is whether to sell the innovation or license it. Licensing can be attractive, but the conditions have to be appropriate. In all likelihood, the decision is up to you and your lawyers, but there are a few rules of rules of thumb. If you are the small potato, sell; arguments over licenses are generally won by the person with the greatest financial muscle. This holds true in thinking about joint ventures.

Sell as well if the person interested in the innovation resides in and wants the innovation for a country in which you wouldn’t want to set up shop in the first place. And get the money up front, in U.S. dollars, and into your bank before anything is handed over. If you won’t get a fair hearing from local courts, why do you think a licensee would play by the rules?

Finally, sell if counterfeiting is a local pastime. Rampant counterfeiting is a good indicator of local business and legal practice.

Selling Off the Company

One way to exploit an innovation is to sell the company. This has been a pattern in the software industry for years, and there is lots of evidence that many dot-coms were set up simply to be sold. That they were purchased doesn’t say a lot for the buyers, but many companies know they are “one-trick ponies.” If you are small, have had one excellent idea that has been brought to market, and don’t have a clue about why the process worked and where the next idea is going to come from, sell. Be aware, of course, that the purchaser probably thinks there is something else coming out of the company. The purchaser is also buying particular people. If you know you aren’t that person, polish your resume. And sell before the real knowledge assets in your company find out that the company is likely to be sold to some large organization with lots of funds and a dearth of ideas. If key people leave before the deal is signed, it will likely fall through. Then you will be worse off than when you started.

WHAT DOES IT TAKE
TO EXPLOIT SUCCESS?

WE DISCUSSED DEVELOPING the capability to innovate in Chapter 6. In order to innovate, we have to develop or have access to a wide range of different capabilities. While we tend to think of these capabilities being required for developing and producing the innovation, if we don’t develop the capabilities necessary to exploit the innovation, then our system will fail. It will fail in the short run because we don’t generate revenues from the innovation, and losing money jeopardizes the company’s future. But we compromise the company’s future also by not being able to find out from the market what it likes and doesn’t like about our innovations so that we can modify our offerings as tastes change. So we need to think about what it takes to exploit success—what capabilities we need to develop.

FINANCIAL RESOURCES

First and foremost we need resources, particularly financial resources. We mentioned in Chapter 12 that a successful innovation requires more investment almost immediately, because the cash required to meet a growing market demand will rarely be generated by sales. If we are going to exploit the innovation by developing follow-on products or derivatives, each will need to be treated as a new innovation project. This requires the whole process to be gone through again, with its attendant cost and other resource implications.

Bonne Bell of Lakewood, Ohio, the manufacturer of Lip Smackers, in 1996 hired retired workers to staff an entire production department. Using older, slower equipment than was being used in other departments, the company found that retired workers (some as old as ninety) could perform more than adequately. In order to exploit the underutilized capacity of the senior workforce, Bonne Bell is looking to physically expand the senior department in 2001 and to purchase newer and faster equipment that will keep up with the workforce. A company looking to exploit even a comparatively modest innovation requires access to cash.

DISTRIBUTION CAPABILITY

Especially straight after the launch, a company should have access to distribution capacity and inventories to be able to exploit a runaway success. Having good order-taking capabilities is also crucial; if we’ve got it and can move it, it doesn’t matter if customers can’t order it. The successful Internet marketing companies witnessed demand growth and demand spikes many times greater than anticipated. The rule of thumb now is to be able to provide 1,000 times the order-taking and distribution capability than is seen as the optimistic demand scenario.

MANAGEMENT CAPABILITY

Any business that has only one product and then wants to develop derivative products finds itself in a new game. That game is managing not just one innovation but a portfolio of innovation projects. These new management challenges will be greatest at Systems III and IV in the Innovation Management Model. System IV managers need to deal with a much more complex strategic environment and now have to think about more complex internal and external conditions as they make decisions about future product offerings. System III managers now start managing development portfolios and make resource allocation decisions across an increasingly diverse range of products.

This increase in the complexity of innovation management often requires a new breed of manager being brought into the company. Often, the threat of challenge to the corporate culture is enough to make good people leave, so the decision to invest in new management should not be taken lightly.

Given follow-on products, there will also be a need to be able to produce and market products at different stages of the product life cycle. This will likely require a more complex organization, but it certainly places different pressures on managers. Managers trying to manage products in both growth and maturity stages of the product life cycle are likely not to manage either well. More managers may be the order of the day.

ORGANIZATION STRUCTURE

Growth brings with it the need for a change in organization structure, and new challenges. When the company has more than one site, it is reasonable to ask what the role of each site is in the innovation process. The focus around which the corporation organizes its operations helps dictate that decision. Equally important, though, is the charter given to each operating entity. The charter determines both the structural and infrastructural characteristics of the operating entity, and this in turn limits what the entity can reasonably do.

This raises the question: Is it possible to move projects around multisite organizations? The answer is yes, and we can use information technologies now to distribute the project team across the organization. This works well when the innovation is “virtual.” As soon as physical elements start to appear, however, the bulk of the project team needs to be near the innovation. Even with new information technologies, it is not possible to capture all the information and knowledge required for furthering the innovation if the innovation is moved without the key people in attendance.

Given different charters for different operating entities, it is reasonable that the physical entity would move within the organization. This is particularly true of complex products, such as automobiles. The project team management should move with the project. An important issue is what happens to the project team when the project has been launched. Most of the people involved in the project will go back to their “homes” within the organization and be given new tasks. Scientists and engineers in the R&D department, for example, may be working on more than one project at any time; they will take up where they left off. Reallocating members of the project management team can be more tricky. In some instances, it may be appropriate to have the project team leader take over management of the product at launch and remain with the product for several years after launch. This is appropriate where the product is an expensive one sold in large volumes. Automobiles are a good example. Honda, for instance, has used this practice successfully with its new car launches.

In Chapter 7 we discussed Elliott Jaques’s principle of accountability time horizons as the key to requisite organization design. As long as we keep this in mind as we develop new organizations, we should have few problems with the design. Staffing and implementing are, of course, different issues, but they are minor in the long run compared to having a poor design with its attendant pathologies.

TIME

The innovation process is deliberate and is very hard work. This holds true for new ideas as well as derivatives. Although we can expect to reduce the elapsed time to develop a derivative product, the greater the difference between the original innovation and the planned derivative, the longer we should expect the derivative development to take. Rushing a derivative to market can, therefore, be harmful to corporate health.

“Everybody” knows that being first to market is risky. We are all cautioned against using “bleeding edge” technology and against creating markets for others to usurp. What we are told is that rapid followers reap the greatest rewards. But we aren’t told that rapid is relative; in some industries, the current market leader didn’t enter the industry until over twenty years after a significant innovation occurred. So a mad rush by the market leader and really close followers to get new and improved models into the market might be missing the point. It is better to take the time and position the derivative product accurately, rather than confuse the marketplace.

MARKET AND COMPETITOR INTELLIGENCE

If we don’t know why an innovation is a success, then we had better not try to exploit the success. So we had better gather very good market intelligence, and about more than unit and dollar sales. We need to know who is buying, who is using, why the product was purchased, and exactly how the product is being used. This can be a daunting task, but it must be done. Most products, after all, are “experience” goods—that is, we need to experience them to understand if we are comfortable with them, and by using them we learn what they can really do and what they can’t do.

We can always try to ask users about the products, and we will get a lot of thoughtful answers. Unfortunately, the answers won’t be reliable or particularly useful, because users generally forget the small things that irritate them—which are often where the next innovation takes place. It is best to follow people around who are using the product. Only then can the real interactions be observed.

Doing this for competitors’ innovations is just as important as doing it for our own. We ought to be able to learn at least as much as the developer from observing users actually using the innovation, and we’ll learn even more if we find out why the user does certain things. Understanding the user’s relationship with the innovation is fundamental to making meaningful derivatives.

Competitor intelligence is important: We have to know who our competitors are and what their strengths and weaknesses are. But there are three things to keep in mind. First, if we understand ourselves, we know a good deal about our competitors. Second, the competition that will blow us out of the water probably isn’t on the horizon yet, so we should look farther than today’s competitors. Third, if we have two dollars for intelligence gathering, we will always be better advised to invest it in understanding customers, not competitors. The only value in understanding competitors is in gathering another understanding of customers.

A SERVICE AND VALUE FOCUS

We haven’t differentiated in this book between product and service innovations. An innovation is an innovation, so to speak. But we do need to acknowledge a trend that occurs with most major innovations, be they industrial or consumer market-focused. To do this, we need to think about exactly what a product is. Figure 13-2 illustrates the three-part concept of a product.

The central portion is the core product (or service). It is what everybody in the industry and the marketplace recognizes as being the essential elements of the product, and which no developer challenges without difficulty. No aircraft manufacturer would dream of building a jet aircraft without having a pressurized cabin, for example. Everybody knows what the basic elements are, and nobody competes on the basis of supplying the basics. Competition takes place in the other two sets of elements.

FIGURE 13-2.THE THREE-PART CONCEPT OF A PRODUCT.

One of these two sets is all the ancillary tangible elements of the product, those pieces of hardware (and associated software) necessary to make the product perform as required by the marketplace. We make choices about what tangible elements we add, and we differentiate ourselves from our competitors by the choices we make. The other set is all the ancillary intangible elements around the product. Again, we differentiate ourselves from our competitors by the choices we make.

Early in the life cycle of the innovation, the core product is extremely small. We only need to think of the amazing horseless carriages that were in vogue in the late 19th century and compare that wide range of designs to the limited variability among mass-market cars today. As the product matures, its core product grows larger as our consensus on what is part of the car increases. Air bags, seat belts, antilock braking systems—which automaker today places full-page ads in the newspaper extolling the virtue of any of these products? In general, early derivative innovations focus on tangible elements, offering choices that the market either accepts or rejects. Those competitors who read the market incorrectly exit the market.

As the dominant design becomes increasingly established, the focus starts shifting to the intangible elements. In the auto industry, developments such as purchase financing, warranties, service and repair facilities, emergency roadside service, and the like have become common. It is in meeting customers’ expectations about how they interact with their car and its manufacturer over the vehicle’s whole life that the automakers face their greatest challenge, and it is in intangibles—services—that innovations will take place.

This appears to be true for all industries and all major innovations. Thinking early about the ancillary services that will make it easier for customers to purchase, own, and use a product will likely reap big rewards to the service innovator. Having a service focus, or a focus on services, is therefore an important precondition for being able to exploit an innovation.

And it is in service innovation that sustainable competitive advantage can be found. Japanese automakers have changed the face of the North American automobile markets through their attention to vehicle serviceability and vehicle servicing. Singapore Airlines has had a service quality advantage over all other airlines for over twenty years—and counting. Unconditional service guarantees are powerful signals of quality in insurance, pest control, and courier services. It is no coincidence that the guarantees are offered only by the market segment leaders.

How do we find out what service needs the marketplace has? We can ask customers, and we should. We can observe them using the product or service, and we should do that, too. But most important of all, we should involve the customers and users in experiments. Why so? Well, as it turns out (to nobody’s great surprise), people can tell us only about what they know, and they can demonstrate only what they can do. They cannot tell us really what is missing from a product or service, and they can’t tell us what they would do if we added a thringle widget to the thingummy. We have to devise experiments to test how users feel about new services. Then, if the results are overwhelmingly in favor of the new services, we have to figure out how to integrate them effectively into our service performance.

Yes, it is difficult, and yes, it can be done. Singapore Airlines does it, and Saturn does it. Yes, adding new services costs money. But adding extra services that the marketplace values reaps bigger rewards than it costs. Service innovations generally take less time and money to develop and implement than do product innovations. And service innovations are not copied by competitors nearly as quickly as product innovations. Why not? We think it is because the service innovators really focus on adding value to the customers. Everyone else sees the innovation as unjustifiable expense, not as an opportunity.

As of early 2001, the world’s airlines are rapidly consolidating. Times are tough, and airlines are cutting routes, cutting people, squeezing suppliers, and reducing passenger services and service levels. What better time to make a mark by actually improving service in a way that passengers value? Which is why Singapore Airlines is working even harder now to decide what the next service innovation should be.

In all of this, don’t forget one critical class of customer: internal customers. If the innovation is to be introduced internally, the internal customers need to be convinced that the innovation is in their interests. Sometimes we don’t recognize certain internal groups as customers but, as long as the innovation affects them in some way, they are customers. Treat them as such, sell them on the benefits of the innovation to them, and the chances of successful implementation and exploitation increase tremendously.

SUMMARY

•Exploiting innovation takes a number of forms and is not limited to selling products. Sometimes we might want to exploit the innovation by selling the innovation itself or possibly some or all of the company.

•Financial resources are essential if we are going to exploit success. Successful innovations always require more investment than failed innovations.

•Exploitation generally requires a good distribution system, backed up by good order-taking capability.

•New management capabilities may be required. This is most likely for a small business that experiences great success. New managers may put pressure on the corporate culture and may force out good people. Be prepared.

•The organization structure may need to change. Provided we keep in mind the principles of design mentioned in Chapter 7 and develop hierarchies based on accountability time horizons, this should not be a major issue.

•It takes time to exploit an innovation, and it is hard work. Rushing derivatives to market is risky.

•We need good market and competitor intelligence. Given stretched resources, gain market intelligence ahead of competitor intelligence.

•We must have a service and value focus, and we must give customers what they want—and let them know what we have. This is particularly true for internal customers, the people who will kill an innovation if they aren’t sold on its benefit to them.

NOTE

1. Dorothy Leonard-Barton, “How to Integrate Work and Deepen Expertise,” Harvard Business Review, September–October 1994.