Five ways to crack the opponent's innovation

Over the past decade, European aviation giants such as British Airways and KLM Royal Dutch Airlines have been challenged by rising stars. Some emerging airlines (such as easyJet and Ryanair), instead of going the full-service route of the big airlines, have adopted a low-cost, point-to-point, basic-only strategy, which has resulted in a large number of European travelers. be successful. It wasn't long before these companies grabbed a large chunk of the market, and established European airlines had to find ways to cope.

Meanwhile, Unilever is fretting over one of the biggest threats to the industry, low-priced distributor private labels, and Barnes & Noble is considering how Respond flexibly to the challenges of online book sales and Amazon.com.

In industry after industry, the once-mighty companies, once successful for their seemingly unassailable strategic positions, are now frequently challenged by no-ones who make bold strategic innovations. To this end, leading companies from all walks of life are thinking about the same question: Should we respond to these disruptive strategic innovations? If so, which strategy should be adopted?

Disruptive strategic innovation

Strategic innovation is doing an existing business in a completely different way. Amazon.com does book retailing differently than Barnes & Noble. Likewise, Charles Schwab, easyJet and Dell conduct their businesses differently than Merrill Lynch, British Airways and IBM, respectively.

Strategic innovation is the innovation of business models that leads to changes in the way business is conducted. Disruptive strategic innovation is a special form of strategic innovation. This new way of business behavior is not only different from the traditional way, but also conflicts with the traditional way. Such as online banking, low-cost airlines, direct insurance sales, online securities brokerage, online news releases, home delivery of groceries, etc.

There are some common characteristics of all kinds of disruptive strategic innovations. First, they emphasize different product or service characteristics than traditional business models. For example, the selling point of traditional brokerage companies is to provide customers with research reports and investment advice, while online securities brokerage companies attract customers with low commissions and fast trade execution. As a result, innovators are attractive to new customer segments.

Second, strategic innovation businesses are always small and low-margin in the beginning. This is also the main reason why big companies are reluctant to get involved easily or make long-term investments. Innovation can only be small and unattractive until it starts to grow.

Third, various strategic innovation businesses have begun to grow and have captured a large share of the existing market. After a period of improvement, the new business can not only compete with the old features emphasized by large enterprises, but also far outperform in the new features. The growth of new businesses inevitably attracts the attention of large corporations. Soon large corporations could no longer turn a blind eye to new business models and had to figure out how to respond.

At this stage, large companies face an unavoidable fact: the new business model conflicts with the existing way of doing business. This is because the key elements of success for the new business model are quite different, and companies must redesign their operations accordingly and adopt new corporate cultures and business processes. If British Airways is to compete effectively with easyJet, it will have to assess the lower end of the market and redesign its operations and processes to suit that market. However, due to the different focus of the old and new business models, they will have a positive conflict. Therefore, British Airways cannot simply copy easyJet's model for online ticketing because its existing distributors, the travel agencies, would not agree to do so.

There are five strategies a company can flexibly adopt when responding to a competitor's disruptive strategic innovation: focus on traditional business and increase investment, ignore strategic innovation, respond to innovation with innovation, absorb innovation and engage in both old and new businesses, Fully embrace innovation and carry it forward.

Focus on Tradition

When strategic innovation occurs, new business methods often grow rapidly and control a certain market share, but cannot completely replace traditional business methods. For example, online banking and online brokerage have grown rapidly in the past five years, but have captured only 10% to 20% of the market at best. Likewise, low-cost, basic-service airlines have grown at an alarming rate since 1995, but have captured less than 20 percent of the market. In one industry after another, new business models can reach considerable scale, but they never completely replace the old ones, and no one expects 100% market share through innovation.

Once you know that the new way is no better than the old way, and that it won't rule the world, established companies have a variety of options. Mature companies do not necessarily have to embrace innovation. In response, it can make its traditional business model more attractive and competitive. This approach does not sound new, but for most established companies, the way they usually express the problem is: "Should we be in the innovative business? If so, how to do both?" In response to disruptive innovations, they can reject new business models and continue to invest in their existing businesses.

That's what Gillette did when it faced the challenge of disposable razors. Like all disruptive innovations, the single-use shaver came to market emphasizing what differentiated the product: low price, ease of use, not Gillette's snug-to-face shave. As a result, new products grew rapidly and captured a large market. How did Gillette respond to this challenge?

Gillette didn't completely ignore the new business model, but it chose to focus its resources on its legacy business to strengthen its competitive advantage over the new business model. It also produces disposable razors, but only as a means of defense; on the other hand, it concentrates its energy and resources on its main business, developing two new products: Sensor and Mach3. The reinvention of the traditional business culminated in the decline of the disposable razor market from its peak in the 1970s. Although Gillette decided to produce disposable razors, it did not affect the company's main business.

Companies do not adopt disruptive strategic innovations because they want to focus on existing businesses, often to continue capitalizing on large investments already made. Edward Jones, one of the top firms in the U.S. retail brokerage industry, decided not to embrace disruptive innovations when online brokerages encroached on its market in the 1990s. "We think online trading is for speculators and hipsters," said its chief operating officer, Doug Hill. "We're not in the entertainment business; we're in the business of 'calm'."

Focused on delivering value to target customers, Edward Jones & Company has invested in its locations throughout the United States to enhance its signature personalized, face-to-face service. The firm adheres to a "one broker for one location" strategy, the opposite of the practice of nearly every major U.S. securities firm.

Edward Jones' response speaks volumes: New business models are not always destined to win. In fact, if done right, established companies can slow down or even destroy new business models.

Ignore it

Compared with the traditional business methods in an industry, the new business methods target different customer groups, have different value demands and require different skills. In fact, the new way of doing business is so different from the way established businesses operate that it can be seen as a completely different business. For example, is online brokerage similar to traditional brokerage or is it an entirely new industry? A mature company that adopts a disruptive strategic innovation that appears to be aimed at an existing business is actually diversifying into an unrelated market. The results could be disastrous.

That's why Hartford Life has decided not to conduct direct sales of life and health insurance over the phone or the Internet. The company believes that the direct selling method is mainly suitable for simple products aimed at the low-end market. "Our products and sales channels are not targeting this market, and we do not see direct selling as a threat or an opportunity," said one senior executive. "Our target market is 5 percent of the U.S. population. Affluent people, clients with personal net worth of more than 2 million US dollars. These clients have very complex financial problems and need professional advisors to help them identify problems and provide solutions. Life insurance agents or brokers are in the client's lawyers or accountants. Cooperate and provide this consulting service to customers. They usually consider consulting services as a part of the sales process. Lower income people do not have such complex financial problems, and direct selling is more suitable for them."

This example further Emphasis: Even if innovation occurs in the industry in which a mature company operates, its market will not necessarily be affected. This means that established companies must carefully assess whether a new business model is relevant to their existing way of doing business before deciding to embrace disruptive innovation.

A common mistake made by established companies is to believe that disruptive innovations will create new markets within the industry, where entry is easy, and where new businesses can grow rapidly. But if they do enter this market, they may face another situation. Better to ignore innovation—new business may seem tempting, but it's not about us.

The second coping strategy is both similar and different from the first. In the first strategy, established companies see innovation as a threat to their business. As a result, they invest more in existing businesses, making them more attractive to customers than new ones. In the second strategy, established firms do not see innovation as a threat. They continue to do their business the same way as if the innovation never happened.

Fighting back

Mature enterprises have a set of business models---emphasizing specific product features and targeting specific target customers. Disruptive innovation companies challenge with a different set of business models. Their success is based on new, non-traditional product or service features that continually attract new customers. Over time, innovators can also do well with product features that traditional customers value, and thus begin to attract the segment of customers who were previously very loyal to established companies. How should mature companies respond? Why not develop a third business model that competes with innovators by emphasizing completely different product characteristics?

For example, the Swiss dominated the global watch industry decades ago, selling on Swiss craftsmanship and the precision of mechanical movements. When the likes of Seiko and Timex brought cheap quartz watches to the market with other functions, the Swiss watch monopoly evaporated overnight. As with all disruptive innovations, the innovators did not intend to compete with established companies (Swiss watch industry) on product characteristics (movement quality and time accuracy) emphasized by established companies (Swiss watch industry), but focused on different product characteristics - - Price, styling and functionality.

The response of the Swiss watch industry is a lesson for all companies facing similar problems. Instead of accepting the disruptive innovator's business model, the Swiss watch industry launched a new Swatch. The new watch is not meant to outperform a Seiko or Timex in price or performance, it emphasizes a very different product attribute: fashion. The Swiss watch industry responded to disruptive innovations not by embracing its business model, but by doing its own thing. Since its introduction in 1983, Swatch has become the world's best-selling watch, with 100 million sold in more than 30 countries.

Companies fighting disruptive innovators with innovation also include Sony (mobile phone business), Apple Computer (personal computer business) and British Airways. For example, when faced with the challenge of easyJet and Ryanair, British Airways responded by emphasizing the comfort and luxury of the services it offers: installing flat-flat seats on planes, in airports around the world Luxury business lounge. Likewise, Apple and Sony have responded to the incursion of low-priced products in their respective industries with fashion and design as their product features—the Apple iMac computer is a prime example.

Two Fronts

The fourth option is to incorporate disruptive innovations, provided a careful cost/benefit analysis is performed. But even if established companies have to admit that disruptive innovation won't be a flash in the pan, and are ready to figure out how to adopt it, the problems are gone. The new question is: "How do I embrace innovation for my own use?" Entrepreneurs like The Body Shop and Dell are grabbing new strategic positions, but established companies already have a business model. If a mature company decides to embrace strategic innovation, it must find effective ways to run two different and even conflicting businesses at the same time.

Research shows that management views on the dangers of fighting on two fronts vary widely, with some companies seeing a potential conflict between the two businesses as a significant threat to their existing business, while others are less nervous. As a result, companies that see potential conflict as a major danger decide not to embrace innovation, while those that embrace innovation see conflict as manageable.

Most companies that decide to embrace disruptive innovation enter a new field by forming a separate business unit under the parent company's umbrella. Some do that from the start, others spin off new businesses later. A small number of companies are still engaged in new business with existing organizational structures and divisions. Of the companies that set up separate units, a large proportion of the new ventures were given different names, new CEOs or division managers were appointed, and they were promoted mainly from within the company.

In general, the products or services offered in new businesses differ in target customer base, degree of personalization, price, and overall characteristics compared to traditional businesses. Most new business units share back-end support with the parent company when offering new products and services to customers.

It is very popular to embrace disruptive innovations by forming separate organizational units. Graham Picken, founder of Britain's most successful telephone bank in the late 1980s, First Direct, a branch of Midland Bank in the 1980s, said: Get to the bottom of it: "The question is not whether there are conflicts between traditional retail banking and phone banking. There are conflicts, and they are serious. The key is how effectively companies manage these conflicts, which will ultimately determine whether the company can Success on two fronts. First Direct was established as an independent bank with the right to set its own business processes, organizational structure, incentives and controls, and create its own unique culture."

Picken said, The new bank is to provide new value to a new customer segment to differentiate itself from the rest of Milan's business. The Bank of Milan's desire to create an organization that has nothing to do with traditional banking is reflected in its intention to omit the word "bank" when naming its new business unit.

In fact, it is not enough to simply create a new independent business unit. New business units must be empowered to decide what is right for them to operate. The more decision-making autonomy the new business unit has, the more effective the company will be at fighting on two fronts.

Full Acceptance

The final option for established companies is to abandon their existing business models and embrace disruptive innovation wholeheartedly. In this case, what needs to be done is not only to imitate innovation, but also to upgrade and nurture it into a large-scale market.

Take an example of an online brokerage business. Few people know that the first online brokerage was not Schwab or E*Trade, but Net Invest-tor, a 1995 joint venture between two Chicago firms, Howe Barnes Investment and Security APL. Six years later, the success of Charles Schwab makes the joint venture dwarfed by comparison. Although Charles Schwab didn't create an online brokerage business in the first place, it was the one that upgraded and developed the business into a large-scale market.

Mature companies should keep in mind that innovation requires two entirely different tasks—generating new ideas on a technology, strategy or product and creating a market from new ideas. For an innovation to be successful, both elements must be present, but that does not mean that both must be done by the same company. One company might come up with an entirely new business model, and another might embrace the idea and put it into practice.

In fact, bringing new ideas to life requires completely different skills and abilities than coming up with them. In this regard, mature companies have a competitive advantage over market first movers. They have the skills and the ability to take a disruptive innovation from another company and nurture it into a market for scale.

Established companies are often slow, and for good reason. Taking new ideas and making them into a big market requires the right skills and capabilities, which is no mean feat. Most investment projects have a lot of sunk costs, so think twice. Established companies are better at making large-scale investments to produce high-quality products at lower costs. In addition, it is only when well-known companies are involved that one can be sure that the market will move in a new direction and will be profitable.

Each enterprise needs to take targeted strategies according to the special situation it faces. Knowing that new business models are no better than existing ones, and knowing that established companies have a variety of options, can do more with less.

The original text is reproduced with permission from the Winter 2003 issue of the MIT Sloan Management Review, MIT Registered Copyright 2003. Published by Tribune Media Services International. Translated by Gong Hao.

Constinos D. Charitou holds a PhD from London Business School and is currently working in the private sector. Constantinos C. Markides is the Robert P. Bauman Professor of Strategic Leadership at the London Business School.

Five ways to crack the opponent's innovation

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