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Patterns of strategy innovation
Pergamon
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European Management Journal Vol. 19, No. 4, pp. 424–429, 2001 2001 Elsevier Science Ltd. All rights reserved Printed in Great Britain S0263-2373(01)00045-7 0263-2373/01 $20.00 + 0.00
Patterns of Strategy Innovation DAVID CHOI, DiamondCluster International and Harvard Business School LIISA VALIKANGAS, Strategos Institute, California The authors examine nearly 200 corporate strategies which promised innovation at the level of the business model, and which were successful. They distill ten essential ‘innovation themes’ which provide basic elements for a fresh perspective on strategy. In particular, the themes can be used in two ways to devise a business strategy. Corporate examples are given of each innovation theme. 2001 Elsevier Science Ltd. All rights reserved. Keywords: Strategy innovation, Management theories, Strategy paradigms, Innovation themes
Introduction In today’s world of over-hyped fads, celebrity CEOs, and ‘New Economy’ business periodicals, new management theories pop up all the time. The profusion serves to confuse or cloud CEOs’ perception of management thinking: what, ultimately, is valuable? Rather than concoct a new theory of strategy innovation, we decided to systematically examine the strategies that have worked. What made them successful, and what did they have in common? How can these findings stimulate new strategy innovations? We examined nearly 200 strategies that departed from industry norms over the last two decades, i.e., they were new, different, and promised to change the rules. We were primarily interested in innovations at the business model level; thus, many impressive product or marketing strategies were not considered in the analysis. In this way, we distilled 10 essential ‘innovation themes’ — they are basic elements for a fresh perspective on strategy. Some of these innovation themes have been around for centuries, e.g., consolidation and universalization, while others, such as going virtual or immediacy are of more recent vintage. To our surprise, many of the same innovation themes appeared in different industries, though in slightly mutated forms. Furthermore, we found that 424
innovation themes, in general, have history, and a predictable trend or direction.
Patterns and Trends The 10 dominant innovation themes are listed in the first column of Table 1. Each of them requires a significant shift in perspective or paradigm, as shown in column 2. Also listed are firms illustrating that strategy. Note that many of these innovation themes are not necessarily new to the business world. For example, experiencing — the idea of marketing and delivering a total experience, rather than just a product’s functionality — has been widely accepted and discussed in The Experience Economy and other books. Other gurus and books extol mass-customization. Innovation themes fall into three major patterns: Same theme, different industry. Some themes replicate across different industries over time. What works in one industry wins attention in another industry. For example, Dell has built competitive advantage with its ‘built-to-order’ production model. Covisint, the online exchange developed by GM, Ford, and other manufacturers, is considering this idea. In fact, some auto executives have said that their eventual aim is to forge a Dell-like model. Their vision is that the efficiency created by the exchange will allow customers to order and receive customized vehicles within a few weeks. The growth curve of a strategy. Strategy concepts generally follow a predictable evolutionary direction, as depicted in column 2 of Table 1. Consider immediacy, the strategy of providing immediate access to or delivery of products and services. Examples include CNN for news, Federal Express for mail delivery, and Kozmo.com’s one-hour delivery service for videos in some metro areas. Innovative firms can use speed as a form of competitive differentiation, European Management Journal Vol. 19, No. 4, pp. 424–429, August 2001
PATTERNS OF STRATEGY INNOVATION
Table 1
Innovation Themes and Strategy Paradigm Shifts
Innovation themes
Strategy paradigm shifts
Convergence
Discrete→Converged
Experience
Product→Experience
Immediacy Mass-customization
There and then→Here and now Mass→Individual
Universalization
Elite→Universal
Providing solutions
Component→Solution
De-verticalization
Vertical→Horizontal
Consolidation
Fragmented→Consolidated
Disintermediation
Intermediated →Disintermediated Physical→Virtual
Going virtual
Examples American Express, General Motors, Monsanto, LVMH Moet Hennessy Louis Vuitton Harley Davidson, Barnes and Noble, Swatch, Restoration Hardware, Trader Joe’s Stadtlanders, Dell, CNN, U of Phoenix, First Direct, Broadcast.com, Kozmo.com Levi’s, Dell, Personalized-Medicine, Reflect.com, Customatix
Ralph Lauren,, Microsoft, HP laser printer, Liberty Financial, iMac, Datek IBM, Home Depot, Bloomberg, Oscar Meyer ‘Lunchables’
IBM PC, Solectron, Magna International, Trintech, Handspring, MasterCard CarMax, AutoNation, Jiffy Lube, Enron, Manpower, Blockbuster, HMOs, Cisco, Tyco MP3.com,, Wal-Mart, travelocity.com, Ikea, OnlineOriginals, Intuit Charles Schwab, First Direct, Amazon.com, Mail-Order Drugs, E-Books, Ask Jeeves, Mapquest.com
especially when they deploy the Internet and wireless technologies. Note that innovations often occur by moving strategy along its predictable direction. Consider universalization, the strategy of making expensive or complex products accessible to more people through dramatic changes in price or usability. AOL universalized Internet access with its ubiquitous sign-up now CD ROMs, plus the service’s simple-to understand user interface. Netzero, already one of the largest ISPs with 5 million users, is moving to the next level of universalization by distributing free, advertising based Internet access to consumers, although its future remains uncertain. Everything old is new again. Few innovation themes are radically new, that is, many core ideas date back decades or centuries. Consider again universalization: One of the most widely reported examples is the Ford assembly line, which had such a profound effect on the manufacturing process that the cars became affordable to the plant workers. Going virtual the process of digitizing products and services (or some part of them), is not dramatically new, either. Before Charles Schwab went online, most of its transactions were conducted over the phone — a ‘virtual’ apparatus before the term existed. Wells Fargo Bank claims to have been the first ‘online’ bank, when it completed an ‘electronic transaction’ over the telegraph in 1864. Fads usually do not have patterns of success, innovation themes in a good strategy probably do. This European Management Journal Vol. 19, No. 4, pp. 424–429, August 2001
insight implies that CEOs shouldn’t worry about fads, but rather should discern if fads contain a core, lasting business principles. What seems like a passing fad might warrant a second look if it takes a timetested theme in a new direction. Once you’ve stripped away the tinsel of the hot new idea, you can consider whether the strategic theme makes sense for your company.
Applying the Patterns These themes can be used in two ways to devise a business strategy. ❖ See what works elsewhere, then do it. Survey all interesting business models in other industries and see which, if any, can be applied in your industry. Start with the list of 10 in Table 1. See which ones your company uses — and consider why some haven’t been deployed by your firm or industry. If untried innovation themes make sense, then think hard and creatively about how they could be applied. ❖ Take an innovation theme to the next level. The idea here is to get ahead on the innovation theme’s evolution curve. Consider how you can make a product or service even more universal, virtual, or immediate and see if the scenario, however implausible at first, makes sense. Don’t assume you have reached the end of the line with a theme. Based on historical evidence, it is much more likely that your imagination will run dry before 425
PATTERNS OF STRATEGY INNOVATION
the theme does (don’t be like the 19th century bureaucrats who wanted to close the Patent Office because they were sure everything had been invented). Here’s how the process might work: Imagine that you are a golf instructor or owner of a golf instruction school. Traditionally, instructors drew on their personal skills and experiences (and eyesight) to detect faults in their students’ swing. The instruction flowed from the instructor’s opinion or theory about the golf swing. Can virtualization using new technologies augment the instructor and give students a more objective view of their swing? Entrepreneurs have turned to the virtualization theme — already proven in architecture and engineering — to enhance the instruction process. The instruction school GolfTec, for example, uses a threedimensional motion analysis computer to measure the body movements during the golf swing. It compares a student’s swing to those of over 150 touring professionals. By detecting faults, the approach can quicken the learning process — it boasts a 31 per cent improvement in its customer’s handicap. GolfTec’s learning system eliminates guesswork in enhancing customers’ skills and lowering their handicaps. By importing an innovation theme, GolfTec gained a competitive advantage in its industry as reflected in a 70 per cent jump in revenue to $3 M in revenue in year 2000, still small but far more successful than your average golf instruction shop. In 1999, the firm offered 27,647 lessons at its nine store locations in four different states. GolfTec just got another boost when Denver’s most widely quoted telecommunications analyst, Ted Henderson left his position as managing director of institutional research at Denver’s Janco Partners to become its CEO. Henderson expects the firm to open four to six new stores before the end of the year 2000. Or suppose you were a long distance phone carrier, stymied in efforts to expand into the local phone market. Furthermore, you are paying local phone companies some $15 billion of access fees for completing the last mile in a long distance call. Might not dis-intermediation of the local phone companies sound promising? A strategy might be to distribute free cell phones and offer unlimited wireless local calls for a fixed price — one that matches the usual local call rates. In fact, AT&T is trying just this approach. In a suburbanDallas test, AT&T has experimented with offering free phones and unlimited wireless local calls (in a larger area than usual local calls) for a fixed fee per month. Another dis-intermediation strategy for AT&T would be to utilize its cable infrastructure to offer local telephone service. As of September 2000, the carrier started offering five months of free local cable telephone service in 10 markets (including 426
Dallas, Chicago, San Francisco, Seattle, and St. Louis) in an all-out effort to grab subscribers. If either idea works, it could shove aside the regional Bell companies and endanger their revenues from AT&T. Mutual fund companies face tough competition as funds multiply. The customer market appears saturated by the universal acceptance of funds; yet, can the universalization theme be pushed even more? How about selling mutual funds to children — a largely unexplored market? Liberty Financial Companies has done that since 1994. Today, Liberty Financial’s Stein Roe Young Investor Fund has assets of $725 million. Its average investor is 9 years old. Among the marketing materials are a quarterly coloring book and a money bingo game geared to teach children ages three to five about saving and investing. Conclusion. Thinking about the big themes sheds new light into strategic thinking. It provides a new level of analysis that goes beneath the surface of strategy to dig out timeless patterns of innovation.
The Innovation Themes in Detail and with Examples Convergence: Discrete→Converged: Revolutionary firms have not only radically changed the valueadded structure within industries but also blurred the boundaries between industries by converging value propositions, technologies, and markets. Deregulation, the ubiquity of information, and new customer demands let innovators transcend an industry’s boundaries. For example, Monsanto has transformed itself from a chemical concern to a life sciences company, now competing with top pharmaceutical firms. Louis Vuitton Moet Hennessy, the world’s leading luxury brands group, has been making aggressive investments in 20 European Internet companies, including Datek Online Holdings, Europ@Web, iCollector, 1800Flowers.com and PlanetRx. Netscape failed to reach its potential by defining its business too narrowly. Peter Currie, ex-CFO, said, ‘We believed that we were in the browser business, not content business.’ Netscape missed out on being the dominant portal on the Internet by not expanding its Netcenter, a popular website with a captive audience it had ever since the firm’s inception. The biggest beneficiary was a fledgling company called Yahoo, which was even given an advertising space on Netscape’s homepage. Only recently did Netscape decide to enter the content business — many ‘Internet years’ behind Yahoo and many other portals. Experiencing: Product→Experience: Goods and services fulfill needs beyond their specific functionality. Leading brands such as Nike, Gatorade, Swatch, Harley-Davidson, and Starbucks also offer emotional European Management Journal Vol. 19, No. 4, pp. 424–429, August 2001
PATTERNS OF STRATEGY INNOVATION
benefits by connecting with buyers’ psychological needs for community and identity. Founded in 1980, home furnishing retailer Restoration Hardware exploited a niche in the home-improvement market. It is in essence a highly edited Home Depot with New England lifestyle touches. Along with standard and not-so-standard items, it sells American-made furniture and tools — $1850 Amish cabinets, $20 scissors, $15 dustpans, a $5 bottle opener. The company is really selling nostalgia for an imagined simpler lifestyle, not housewares. A visit to the store brings a sense of comfort and rest. Restoration Hardware has expanded its store locations to 93 stores in 29 States and its revenues exceeded $200 million in 1999.
to express their individuality through the choice of their designs. A man or woman can choose to either modify a pair of Levi’s or create a pair of khakis from scratch at any of the Levi’s Original Stores in eight major states. The program boasts a large variation in fit, style, and color — up to 1.7 million combinations to meet customer tastes. The customer’s curvaceous details are sent electronically to the Levi’s factory, and perfect made-to-measure jeans are delivered in two to three weeks.
Drug companies hope to create a map of genetic landmarks that will lead to an understanding of why some individuals are particularly susceptible to certain diseases. With that knowledge, the drug makers At Sephora, a chain of perfume and cosmetic stores hope to develop safer, more potent drugs. Bristolowned by LVMH, shoppers are treated with respect. Myers Squibb Co., Roche Holding Ltd, and Novartis Most cosmetic retail stores are AG already are using genetic organized by brand, forcing signposts to finetune their Microsoft’s original shoppers to walk from counter delivery of existing drugs to to counter to find a product. vision — a computer on every identify breast cancer patients Not Sephora stores, where the who are most likely to respond merchandise, from high-end desk and in every home — to its drug Xeloda. Dior to budget lines, is organized alphabetically. The was based on a universalized Universalization: Elite→Universal: Industrialization and the fixtures put all items within development of a mass market easy reach of the customer. The notion of computers spread products and services only counter is at the checkout. from elite segments to entire populations. JP Morgan Product testing is encouraged. Fixtures in the brought investments to the masses in the late 19th makeup area simulate daylight to help shoppers century, as did Ford’s Model-T with automobiles. evaluate cosmetics. Revolutionary firms are not satisfied with the conventional served market, but rather envision the Immediacy: There and then→Here and now: Most martotal market. ket spaces have temporal and geographic boundaries: consumers must go to a specific store at a specific Consider Ralph Lauren, who was one of the first to location between certain hours, which is often not at offer designer clothing to a mass audience. all convenient for the consumer. Cable news channels Microsoft’s original vision — ‘A computer on every and all-night convenience stores meet the needs of desk and in every home’ — was based on a univeroff-hour consumers. salized notion of computers. Southwest Airlines with its tight cost controls has made flight travel cheaper Consider Stadtlanders, an old-fashioned Pittsburgh than driving by car in many regions. drugstore that transformed itself to a mail-order enterprise. About a decade ago a social worker contacted Stadtlanders about a patient who was conUniversalization requires one to see beyond the curcerned about getting specialized medications once rently served market to the total imaginable market. she returned to her rural Midwest home from the It’s about asking the defiant question, ‘Why should hospital where she was being treated. Pharmacists only those guys be able to do it?’ Think about how assured the patient that they would fill her prescripjust a year ago only professional brokers traded tions and send her regular shipments of her medistocks in real-time and after-hours. Datek changed cations — using an express delivery service! the rules by being the first to provide a streaming applet for free real-time quotes and after-hours tradFrom this beginning, Stadtlanders developed more ing. Most people would never have dreamed of being ways to serve customers, including a separate tollable to make a movie of their own, but Apple thought free Pharmacists Respond hotline. Stadtlanders is the differently. With the new iMac DV model, you can nation’s leading specialty pharmacy with a mailcreate your own pro-quality home movies, using order operation involving more than 4000 different your camcorder and Apple’s simple-to-use iMovie drugs, along with counseling and referral services. digital video editing software. What’s amazing is that Estimated 1997 revenues topped $400 million, up the iMac film editor is no worse than the machines from $16.2 million in 1988. that only a few movie studios owned just a couple of years ago. Customers heartily welcomed the Mass-customization: Mass→Individual: Levi’s highly opportunity to play Spielberg in their homes — advertised Original Spin program allows customers which helped Apple’s comeback in 1999. European Management Journal Vol. 19, No. 4, pp. 424–429, August 2001
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PATTERNS OF STRATEGY INNOVATION
Providing Solutions: Component→Solution: Companies that want to provide a total solution, rather than simply parts of a solution, need an exceptionally detailed grasp of a customer’s needs. For example, Dell Computer realized that its corporate customers didn’t need computers, but computing capability. Dell has since restructured contracts with many of its customers to take full responsibility for all aspects of procurement, training, and services. Often, providing a solution means bundling different products or services to meet specific customer needs. Oscar Meyer ‘Lunchables’ provides a solution for school kids and their parents by bundling together foods that otherwise must be bought separately. Consider Bloomberg, which designed a system that gave traders far more than just information. Bloomberg realized that traders wanted an efficient way to perform analyses, not just data — which is what its competitors provided. Bloomberg devised a package with terminals and keyboards labeled with familiar financial terms. The systems had two flat-panel monitors, so traders could see all the information they needed at once without having to open and close numerous windows. Since traders had to analyze information before they acted, Bloomberg added a built-in analytic capability. Users can quickly run ‘what if’ scenarios to compute returns on alternative investments, and they could perform longitudinal analyses of historical data. (De-verticalization): Vertical→Horizontal: Companies are moving away from the industrial era vertically integrated strategy in favor of extended enterprises that draw on the skills of partners. Current trends toward downsizing, outsourcing, and otherwise distributing activities away from centralized to decentralized management support this theme. Firms will become smaller, comprised of complicated webs of well-managed relationships with business partners that include customers, suppliers, and competitors. Take automobiles, once the epitome of a vertically integrated industry. As a firm like General Motors is transforming itself into an assembly shop with a marketing function, suppliers such as Magna are thriving. Magna has carved out a strong position in making parts for the major automobile manufacturers like GM and Ford, taking advantage of the fact that they no longer wanted to make them themselves. Unlike parts suppliers in the past, Magna delivers entire car modules — not just bumpers or headlights. For example, it builds vehicle navigation systems for auto manufacturers — and is even known to be able to design and build an entire car. Not surprisingly, the company experienced splendid revenues growth in the 1990s, from just $1.3 billion in 1990 to $9.4 billion in 1999. More recently, Handspring has used the extendedenterprise strategy through an open architecture for 428
its PDAs, which allows the products to accept hardware add-ons by third parties, to transform the basic PDA into an MP3 player or digital camera. Developers have free access to all mechanical, electrical, and software specifications. In return, Handspring shortens product development cycles and builds market share through the customize-it-yourself value proposition. Consolidation: Fragmented→Consolidated: Industries around the world are consolidating at a fearsome pace, seeking the massive scale they think they need to survive. Companies rescaling their industries include Cisco, Tyco International, Jiffy Lube in automobile maintenance, Enron in gas services, and Blockbuster in home entertainment. Cisco has used acquisitions to gain access to new technologies and capabilities. The strategy was unusual in the high tech industry, where many companies viewed looking to the outside for technological help as a sign of weakness. But CEO John Chambers believed that this was just the sort of insular thinking that had led to IBM’s difficulties and Wang’s downfall. He viewed consolidation as the most efficient means of offering customers networking solutions and developing next generation products. Not all consolidation attempts work. In fact, most acquisitions and mergers fail. However, firms that do it well create enormous value. Cisco was able to make its acquisitions work by employing a systematic methodology, from pre-acquisition due diligence to post-acquisition integration process. For example, Cisco’s HR professionals would systematically spend many weeks before and after the acquisition with the acquired firm’s employees and go to great lengths to tailor the specifics of the transition plan to their needs. Cisco regarded acquisitions primarily as a means to secure intellectual assets, and thus attached importance to employee retention. Cisco also made every effort to make the acquisition pay off quickly. Often, the acquired company’s products appeared on Cisco’s price list on the day the deal closed so that Cisco’s powerful salesforce could immediately begin to sell the new products. Disintermediation: Intermediated→Disintermediated: Companies don’t just compete head-to-head, but also for the positions in the value chain that extract the most profits. As a result, non-value adding middlemen in the value chain are being squeezed out or replaced by new kinds of middlemen. Dell’s directto-consumer model is a spectacular example of disintermediation that bypasses the retailer. Author Stephen King disintermediated booksellers and publishers alike when he published the 66-page novella Riding the Bullet as a Web-only e-book (an estimated 400,000 computer users downloaded copies). Major airlines’ effort to encourage customers to use their Web sites for tickets and services is an attempt to cut out the travel agents. European Management Journal Vol. 19, No. 4, pp. 424–429, August 2001
PATTERNS OF STRATEGY INNOVATION
New middlemen can also jump in and disintermediate an existing service provider from having direct relationship with its customers. Examples include eloans.com, which has positioned itself between the consumer and the loan providers. Intuit Inc. has used its Quicken program to interpose itself between banks and their best customers. Over one million Quicken customers now use the software to pay bills and conduct their banking online, accessing their banks via Quicken. Quicken has become the value adding intermediary with a strong relationship with its customers, having made ‘commodities’ out of the banks. Indeed, according to a Boston Consulting Group study, Quicken customers have said they would rather change their banks than change software. In response, banks even pay Intuit a fee for each customer that visits the banks’ Web sites via Quicken. Virtualization: Physical→Virtual: Mail-order or phone-based firms have thrived for years, e.g., J. Crew or 1-800-FLOWERS. The Internet has broad-
DAVID CHOI, 1495, Belleau Road, Glendale, California 91206, USA. E-mail: [email protected] Dr David Choi is a consultant with DiamondCluster International and a Fellow with the Global Leadership Institute at Harvard Business School. He publishes on marketing and strategic management.
European Management Journal Vol. 19, No. 4, pp. 424–429, August 2001
ened and accelerated the growth of non-physical commerce. Consider that the largest physical Barnes & Noble bookstore in the United States carries about 200,000 titles. Amazon offers about 5 million volumes and is ‘located’ on any PC with Internet access. Careerpath.com links potential employers with job seekers in a classified-ad market more than 50 times larger than that of any physical newspaper. Virtual businesses are unconstrained by physical limitations. Digitized content gains in value over content that remains strictly physical. Consider Mapquest, the online provider of maps and driving directions. On MapQuest.com, consumers can find over three million locations, obtain maps and driving directions, hear traffic updates, and learn about places of interest on their routes. The company generates most of its revenues by supplying its services to other Web sites, such as Walmart.com. Mapquest makes as much as $5 or more each time a customer on a retailer’s Web site asks for directions to one of that retailer’s stores. In December 1999, MapQuest.com delivered over 130 million maps to its users.
LIISA VALIKANGAS, Strategos, 2460 Sand Hill Road, Suite 202, Menlo Park, California 94025, USA. E-mail: lvalikangas@ strategos.com Dr Liisa Valikangas is Director of Research at the Strategos Institute, California. She has published widely on organization design and strategic management and is a visiting scholar at Stanford University.
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PII:
European Management Journal Vol. 19, No. 4, pp. 424–429, 2001 2001 Elsevier Science Ltd. All rights reserved Printed in Great Britain S0263-2373(01)00045-7 0263-2373/01 $20.00 + 0.00
Patterns of Strategy Innovation DAVID CHOI, DiamondCluster International and Harvard Business School LIISA VALIKANGAS, Strategos Institute, California The authors examine nearly 200 corporate strategies which promised innovation at the level of the business model, and which were successful. They distill ten essential ‘innovation themes’ which provide basic elements for a fresh perspective on strategy. In particular, the themes can be used in two ways to devise a business strategy. Corporate examples are given of each innovation theme. 2001 Elsevier Science Ltd. All rights reserved. Keywords: Strategy innovation, Management theories, Strategy paradigms, Innovation themes
Introduction In today’s world of over-hyped fads, celebrity CEOs, and ‘New Economy’ business periodicals, new management theories pop up all the time. The profusion serves to confuse or cloud CEOs’ perception of management thinking: what, ultimately, is valuable? Rather than concoct a new theory of strategy innovation, we decided to systematically examine the strategies that have worked. What made them successful, and what did they have in common? How can these findings stimulate new strategy innovations? We examined nearly 200 strategies that departed from industry norms over the last two decades, i.e., they were new, different, and promised to change the rules. We were primarily interested in innovations at the business model level; thus, many impressive product or marketing strategies were not considered in the analysis. In this way, we distilled 10 essential ‘innovation themes’ — they are basic elements for a fresh perspective on strategy. Some of these innovation themes have been around for centuries, e.g., consolidation and universalization, while others, such as going virtual or immediacy are of more recent vintage. To our surprise, many of the same innovation themes appeared in different industries, though in slightly mutated forms. Furthermore, we found that 424
innovation themes, in general, have history, and a predictable trend or direction.
Patterns and Trends The 10 dominant innovation themes are listed in the first column of Table 1. Each of them requires a significant shift in perspective or paradigm, as shown in column 2. Also listed are firms illustrating that strategy. Note that many of these innovation themes are not necessarily new to the business world. For example, experiencing — the idea of marketing and delivering a total experience, rather than just a product’s functionality — has been widely accepted and discussed in The Experience Economy and other books. Other gurus and books extol mass-customization. Innovation themes fall into three major patterns: Same theme, different industry. Some themes replicate across different industries over time. What works in one industry wins attention in another industry. For example, Dell has built competitive advantage with its ‘built-to-order’ production model. Covisint, the online exchange developed by GM, Ford, and other manufacturers, is considering this idea. In fact, some auto executives have said that their eventual aim is to forge a Dell-like model. Their vision is that the efficiency created by the exchange will allow customers to order and receive customized vehicles within a few weeks. The growth curve of a strategy. Strategy concepts generally follow a predictable evolutionary direction, as depicted in column 2 of Table 1. Consider immediacy, the strategy of providing immediate access to or delivery of products and services. Examples include CNN for news, Federal Express for mail delivery, and Kozmo.com’s one-hour delivery service for videos in some metro areas. Innovative firms can use speed as a form of competitive differentiation, European Management Journal Vol. 19, No. 4, pp. 424–429, August 2001
PATTERNS OF STRATEGY INNOVATION
Table 1
Innovation Themes and Strategy Paradigm Shifts
Innovation themes
Strategy paradigm shifts
Convergence
Discrete→Converged
Experience
Product→Experience
Immediacy Mass-customization
There and then→Here and now Mass→Individual
Universalization
Elite→Universal
Providing solutions
Component→Solution
De-verticalization
Vertical→Horizontal
Consolidation
Fragmented→Consolidated
Disintermediation
Intermediated →Disintermediated Physical→Virtual
Going virtual
Examples American Express, General Motors, Monsanto, LVMH Moet Hennessy Louis Vuitton Harley Davidson, Barnes and Noble, Swatch, Restoration Hardware, Trader Joe’s Stadtlanders, Dell, CNN, U of Phoenix, First Direct, Broadcast.com, Kozmo.com Levi’s, Dell, Personalized-Medicine, Reflect.com, Customatix
Ralph Lauren,, Microsoft, HP laser printer, Liberty Financial, iMac, Datek IBM, Home Depot, Bloomberg, Oscar Meyer ‘Lunchables’
IBM PC, Solectron, Magna International, Trintech, Handspring, MasterCard CarMax, AutoNation, Jiffy Lube, Enron, Manpower, Blockbuster, HMOs, Cisco, Tyco MP3.com,, Wal-Mart, travelocity.com, Ikea, OnlineOriginals, Intuit Charles Schwab, First Direct, Amazon.com, Mail-Order Drugs, E-Books, Ask Jeeves, Mapquest.com
especially when they deploy the Internet and wireless technologies. Note that innovations often occur by moving strategy along its predictable direction. Consider universalization, the strategy of making expensive or complex products accessible to more people through dramatic changes in price or usability. AOL universalized Internet access with its ubiquitous sign-up now CD ROMs, plus the service’s simple-to understand user interface. Netzero, already one of the largest ISPs with 5 million users, is moving to the next level of universalization by distributing free, advertising based Internet access to consumers, although its future remains uncertain. Everything old is new again. Few innovation themes are radically new, that is, many core ideas date back decades or centuries. Consider again universalization: One of the most widely reported examples is the Ford assembly line, which had such a profound effect on the manufacturing process that the cars became affordable to the plant workers. Going virtual the process of digitizing products and services (or some part of them), is not dramatically new, either. Before Charles Schwab went online, most of its transactions were conducted over the phone — a ‘virtual’ apparatus before the term existed. Wells Fargo Bank claims to have been the first ‘online’ bank, when it completed an ‘electronic transaction’ over the telegraph in 1864. Fads usually do not have patterns of success, innovation themes in a good strategy probably do. This European Management Journal Vol. 19, No. 4, pp. 424–429, August 2001
insight implies that CEOs shouldn’t worry about fads, but rather should discern if fads contain a core, lasting business principles. What seems like a passing fad might warrant a second look if it takes a timetested theme in a new direction. Once you’ve stripped away the tinsel of the hot new idea, you can consider whether the strategic theme makes sense for your company.
Applying the Patterns These themes can be used in two ways to devise a business strategy. ❖ See what works elsewhere, then do it. Survey all interesting business models in other industries and see which, if any, can be applied in your industry. Start with the list of 10 in Table 1. See which ones your company uses — and consider why some haven’t been deployed by your firm or industry. If untried innovation themes make sense, then think hard and creatively about how they could be applied. ❖ Take an innovation theme to the next level. The idea here is to get ahead on the innovation theme’s evolution curve. Consider how you can make a product or service even more universal, virtual, or immediate and see if the scenario, however implausible at first, makes sense. Don’t assume you have reached the end of the line with a theme. Based on historical evidence, it is much more likely that your imagination will run dry before 425
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the theme does (don’t be like the 19th century bureaucrats who wanted to close the Patent Office because they were sure everything had been invented). Here’s how the process might work: Imagine that you are a golf instructor or owner of a golf instruction school. Traditionally, instructors drew on their personal skills and experiences (and eyesight) to detect faults in their students’ swing. The instruction flowed from the instructor’s opinion or theory about the golf swing. Can virtualization using new technologies augment the instructor and give students a more objective view of their swing? Entrepreneurs have turned to the virtualization theme — already proven in architecture and engineering — to enhance the instruction process. The instruction school GolfTec, for example, uses a threedimensional motion analysis computer to measure the body movements during the golf swing. It compares a student’s swing to those of over 150 touring professionals. By detecting faults, the approach can quicken the learning process — it boasts a 31 per cent improvement in its customer’s handicap. GolfTec’s learning system eliminates guesswork in enhancing customers’ skills and lowering their handicaps. By importing an innovation theme, GolfTec gained a competitive advantage in its industry as reflected in a 70 per cent jump in revenue to $3 M in revenue in year 2000, still small but far more successful than your average golf instruction shop. In 1999, the firm offered 27,647 lessons at its nine store locations in four different states. GolfTec just got another boost when Denver’s most widely quoted telecommunications analyst, Ted Henderson left his position as managing director of institutional research at Denver’s Janco Partners to become its CEO. Henderson expects the firm to open four to six new stores before the end of the year 2000. Or suppose you were a long distance phone carrier, stymied in efforts to expand into the local phone market. Furthermore, you are paying local phone companies some $15 billion of access fees for completing the last mile in a long distance call. Might not dis-intermediation of the local phone companies sound promising? A strategy might be to distribute free cell phones and offer unlimited wireless local calls for a fixed price — one that matches the usual local call rates. In fact, AT&T is trying just this approach. In a suburbanDallas test, AT&T has experimented with offering free phones and unlimited wireless local calls (in a larger area than usual local calls) for a fixed fee per month. Another dis-intermediation strategy for AT&T would be to utilize its cable infrastructure to offer local telephone service. As of September 2000, the carrier started offering five months of free local cable telephone service in 10 markets (including 426
Dallas, Chicago, San Francisco, Seattle, and St. Louis) in an all-out effort to grab subscribers. If either idea works, it could shove aside the regional Bell companies and endanger their revenues from AT&T. Mutual fund companies face tough competition as funds multiply. The customer market appears saturated by the universal acceptance of funds; yet, can the universalization theme be pushed even more? How about selling mutual funds to children — a largely unexplored market? Liberty Financial Companies has done that since 1994. Today, Liberty Financial’s Stein Roe Young Investor Fund has assets of $725 million. Its average investor is 9 years old. Among the marketing materials are a quarterly coloring book and a money bingo game geared to teach children ages three to five about saving and investing. Conclusion. Thinking about the big themes sheds new light into strategic thinking. It provides a new level of analysis that goes beneath the surface of strategy to dig out timeless patterns of innovation.
The Innovation Themes in Detail and with Examples Convergence: Discrete→Converged: Revolutionary firms have not only radically changed the valueadded structure within industries but also blurred the boundaries between industries by converging value propositions, technologies, and markets. Deregulation, the ubiquity of information, and new customer demands let innovators transcend an industry’s boundaries. For example, Monsanto has transformed itself from a chemical concern to a life sciences company, now competing with top pharmaceutical firms. Louis Vuitton Moet Hennessy, the world’s leading luxury brands group, has been making aggressive investments in 20 European Internet companies, including Datek Online Holdings, Europ@Web, iCollector, 1800Flowers.com and PlanetRx. Netscape failed to reach its potential by defining its business too narrowly. Peter Currie, ex-CFO, said, ‘We believed that we were in the browser business, not content business.’ Netscape missed out on being the dominant portal on the Internet by not expanding its Netcenter, a popular website with a captive audience it had ever since the firm’s inception. The biggest beneficiary was a fledgling company called Yahoo, which was even given an advertising space on Netscape’s homepage. Only recently did Netscape decide to enter the content business — many ‘Internet years’ behind Yahoo and many other portals. Experiencing: Product→Experience: Goods and services fulfill needs beyond their specific functionality. Leading brands such as Nike, Gatorade, Swatch, Harley-Davidson, and Starbucks also offer emotional European Management Journal Vol. 19, No. 4, pp. 424–429, August 2001
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benefits by connecting with buyers’ psychological needs for community and identity. Founded in 1980, home furnishing retailer Restoration Hardware exploited a niche in the home-improvement market. It is in essence a highly edited Home Depot with New England lifestyle touches. Along with standard and not-so-standard items, it sells American-made furniture and tools — $1850 Amish cabinets, $20 scissors, $15 dustpans, a $5 bottle opener. The company is really selling nostalgia for an imagined simpler lifestyle, not housewares. A visit to the store brings a sense of comfort and rest. Restoration Hardware has expanded its store locations to 93 stores in 29 States and its revenues exceeded $200 million in 1999.
to express their individuality through the choice of their designs. A man or woman can choose to either modify a pair of Levi’s or create a pair of khakis from scratch at any of the Levi’s Original Stores in eight major states. The program boasts a large variation in fit, style, and color — up to 1.7 million combinations to meet customer tastes. The customer’s curvaceous details are sent electronically to the Levi’s factory, and perfect made-to-measure jeans are delivered in two to three weeks.
Drug companies hope to create a map of genetic landmarks that will lead to an understanding of why some individuals are particularly susceptible to certain diseases. With that knowledge, the drug makers At Sephora, a chain of perfume and cosmetic stores hope to develop safer, more potent drugs. Bristolowned by LVMH, shoppers are treated with respect. Myers Squibb Co., Roche Holding Ltd, and Novartis Most cosmetic retail stores are AG already are using genetic organized by brand, forcing signposts to finetune their Microsoft’s original shoppers to walk from counter delivery of existing drugs to to counter to find a product. vision — a computer on every identify breast cancer patients Not Sephora stores, where the who are most likely to respond merchandise, from high-end desk and in every home — to its drug Xeloda. Dior to budget lines, is organized alphabetically. The was based on a universalized Universalization: Elite→Universal: Industrialization and the fixtures put all items within development of a mass market easy reach of the customer. The notion of computers spread products and services only counter is at the checkout. from elite segments to entire populations. JP Morgan Product testing is encouraged. Fixtures in the brought investments to the masses in the late 19th makeup area simulate daylight to help shoppers century, as did Ford’s Model-T with automobiles. evaluate cosmetics. Revolutionary firms are not satisfied with the conventional served market, but rather envision the Immediacy: There and then→Here and now: Most martotal market. ket spaces have temporal and geographic boundaries: consumers must go to a specific store at a specific Consider Ralph Lauren, who was one of the first to location between certain hours, which is often not at offer designer clothing to a mass audience. all convenient for the consumer. Cable news channels Microsoft’s original vision — ‘A computer on every and all-night convenience stores meet the needs of desk and in every home’ — was based on a univeroff-hour consumers. salized notion of computers. Southwest Airlines with its tight cost controls has made flight travel cheaper Consider Stadtlanders, an old-fashioned Pittsburgh than driving by car in many regions. drugstore that transformed itself to a mail-order enterprise. About a decade ago a social worker contacted Stadtlanders about a patient who was conUniversalization requires one to see beyond the curcerned about getting specialized medications once rently served market to the total imaginable market. she returned to her rural Midwest home from the It’s about asking the defiant question, ‘Why should hospital where she was being treated. Pharmacists only those guys be able to do it?’ Think about how assured the patient that they would fill her prescripjust a year ago only professional brokers traded tions and send her regular shipments of her medistocks in real-time and after-hours. Datek changed cations — using an express delivery service! the rules by being the first to provide a streaming applet for free real-time quotes and after-hours tradFrom this beginning, Stadtlanders developed more ing. Most people would never have dreamed of being ways to serve customers, including a separate tollable to make a movie of their own, but Apple thought free Pharmacists Respond hotline. Stadtlanders is the differently. With the new iMac DV model, you can nation’s leading specialty pharmacy with a mailcreate your own pro-quality home movies, using order operation involving more than 4000 different your camcorder and Apple’s simple-to-use iMovie drugs, along with counseling and referral services. digital video editing software. What’s amazing is that Estimated 1997 revenues topped $400 million, up the iMac film editor is no worse than the machines from $16.2 million in 1988. that only a few movie studios owned just a couple of years ago. Customers heartily welcomed the Mass-customization: Mass→Individual: Levi’s highly opportunity to play Spielberg in their homes — advertised Original Spin program allows customers which helped Apple’s comeback in 1999. European Management Journal Vol. 19, No. 4, pp. 424–429, August 2001
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Providing Solutions: Component→Solution: Companies that want to provide a total solution, rather than simply parts of a solution, need an exceptionally detailed grasp of a customer’s needs. For example, Dell Computer realized that its corporate customers didn’t need computers, but computing capability. Dell has since restructured contracts with many of its customers to take full responsibility for all aspects of procurement, training, and services. Often, providing a solution means bundling different products or services to meet specific customer needs. Oscar Meyer ‘Lunchables’ provides a solution for school kids and their parents by bundling together foods that otherwise must be bought separately. Consider Bloomberg, which designed a system that gave traders far more than just information. Bloomberg realized that traders wanted an efficient way to perform analyses, not just data — which is what its competitors provided. Bloomberg devised a package with terminals and keyboards labeled with familiar financial terms. The systems had two flat-panel monitors, so traders could see all the information they needed at once without having to open and close numerous windows. Since traders had to analyze information before they acted, Bloomberg added a built-in analytic capability. Users can quickly run ‘what if’ scenarios to compute returns on alternative investments, and they could perform longitudinal analyses of historical data. (De-verticalization): Vertical→Horizontal: Companies are moving away from the industrial era vertically integrated strategy in favor of extended enterprises that draw on the skills of partners. Current trends toward downsizing, outsourcing, and otherwise distributing activities away from centralized to decentralized management support this theme. Firms will become smaller, comprised of complicated webs of well-managed relationships with business partners that include customers, suppliers, and competitors. Take automobiles, once the epitome of a vertically integrated industry. As a firm like General Motors is transforming itself into an assembly shop with a marketing function, suppliers such as Magna are thriving. Magna has carved out a strong position in making parts for the major automobile manufacturers like GM and Ford, taking advantage of the fact that they no longer wanted to make them themselves. Unlike parts suppliers in the past, Magna delivers entire car modules — not just bumpers or headlights. For example, it builds vehicle navigation systems for auto manufacturers — and is even known to be able to design and build an entire car. Not surprisingly, the company experienced splendid revenues growth in the 1990s, from just $1.3 billion in 1990 to $9.4 billion in 1999. More recently, Handspring has used the extendedenterprise strategy through an open architecture for 428
its PDAs, which allows the products to accept hardware add-ons by third parties, to transform the basic PDA into an MP3 player or digital camera. Developers have free access to all mechanical, electrical, and software specifications. In return, Handspring shortens product development cycles and builds market share through the customize-it-yourself value proposition. Consolidation: Fragmented→Consolidated: Industries around the world are consolidating at a fearsome pace, seeking the massive scale they think they need to survive. Companies rescaling their industries include Cisco, Tyco International, Jiffy Lube in automobile maintenance, Enron in gas services, and Blockbuster in home entertainment. Cisco has used acquisitions to gain access to new technologies and capabilities. The strategy was unusual in the high tech industry, where many companies viewed looking to the outside for technological help as a sign of weakness. But CEO John Chambers believed that this was just the sort of insular thinking that had led to IBM’s difficulties and Wang’s downfall. He viewed consolidation as the most efficient means of offering customers networking solutions and developing next generation products. Not all consolidation attempts work. In fact, most acquisitions and mergers fail. However, firms that do it well create enormous value. Cisco was able to make its acquisitions work by employing a systematic methodology, from pre-acquisition due diligence to post-acquisition integration process. For example, Cisco’s HR professionals would systematically spend many weeks before and after the acquisition with the acquired firm’s employees and go to great lengths to tailor the specifics of the transition plan to their needs. Cisco regarded acquisitions primarily as a means to secure intellectual assets, and thus attached importance to employee retention. Cisco also made every effort to make the acquisition pay off quickly. Often, the acquired company’s products appeared on Cisco’s price list on the day the deal closed so that Cisco’s powerful salesforce could immediately begin to sell the new products. Disintermediation: Intermediated→Disintermediated: Companies don’t just compete head-to-head, but also for the positions in the value chain that extract the most profits. As a result, non-value adding middlemen in the value chain are being squeezed out or replaced by new kinds of middlemen. Dell’s directto-consumer model is a spectacular example of disintermediation that bypasses the retailer. Author Stephen King disintermediated booksellers and publishers alike when he published the 66-page novella Riding the Bullet as a Web-only e-book (an estimated 400,000 computer users downloaded copies). Major airlines’ effort to encourage customers to use their Web sites for tickets and services is an attempt to cut out the travel agents. European Management Journal Vol. 19, No. 4, pp. 424–429, August 2001
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New middlemen can also jump in and disintermediate an existing service provider from having direct relationship with its customers. Examples include eloans.com, which has positioned itself between the consumer and the loan providers. Intuit Inc. has used its Quicken program to interpose itself between banks and their best customers. Over one million Quicken customers now use the software to pay bills and conduct their banking online, accessing their banks via Quicken. Quicken has become the value adding intermediary with a strong relationship with its customers, having made ‘commodities’ out of the banks. Indeed, according to a Boston Consulting Group study, Quicken customers have said they would rather change their banks than change software. In response, banks even pay Intuit a fee for each customer that visits the banks’ Web sites via Quicken. Virtualization: Physical→Virtual: Mail-order or phone-based firms have thrived for years, e.g., J. Crew or 1-800-FLOWERS. The Internet has broad-
DAVID CHOI, 1495, Belleau Road, Glendale, California 91206, USA. E-mail: [email protected] Dr David Choi is a consultant with DiamondCluster International and a Fellow with the Global Leadership Institute at Harvard Business School. He publishes on marketing and strategic management.
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ened and accelerated the growth of non-physical commerce. Consider that the largest physical Barnes & Noble bookstore in the United States carries about 200,000 titles. Amazon offers about 5 million volumes and is ‘located’ on any PC with Internet access. Careerpath.com links potential employers with job seekers in a classified-ad market more than 50 times larger than that of any physical newspaper. Virtual businesses are unconstrained by physical limitations. Digitized content gains in value over content that remains strictly physical. Consider Mapquest, the online provider of maps and driving directions. On MapQuest.com, consumers can find over three million locations, obtain maps and driving directions, hear traffic updates, and learn about places of interest on their routes. The company generates most of its revenues by supplying its services to other Web sites, such as Walmart.com. Mapquest makes as much as $5 or more each time a customer on a retailer’s Web site asks for directions to one of that retailer’s stores. In December 1999, MapQuest.com delivered over 130 million maps to its users.
LIISA VALIKANGAS, Strategos, 2460 Sand Hill Road, Suite 202, Menlo Park, California 94025, USA. E-mail: lvalikangas@ strategos.com Dr Liisa Valikangas is Director of Research at the Strategos Institute, California. She has published widely on organization design and strategic management and is a visiting scholar at Stanford University.
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