Innovation and the last gasp of dying technologies
In the January, 2008 edition of the Harvard Business Review, Daniel C. Snow shared some research he’s been doing on product transitions—when one dominant design or conventional product gives way to a different or more up to date version. A phenomenon that he has studied is a pattern in which the performance of threatened older technologies rapidly improves, extending their life cycles and simultaneously slowing down the adoption of new technologies. Examples of such “last gasps” include manual versus computerized typesetting, CISC versus RISC architecture for computer processors and steel versus aluminum bicycle frames.
The conventional wisdom about such performance surges is that the managers in charge of processes based on older technologies, when threatened, invested urgently in improving them. Snow’s research finds otherwise. Instead, he finds that the last gasp phenomenon stems from two overlooked mechanisms.
A retreat to defensible ground. What happens here is that markets in which the older technologies perform poorly are the first to adopt newer methods. This leaves the older technology working in markets for which it is better suited—and makes the performance appear to improve as a result. In other cases, retreating from some markets allows greater focus—and subsequently greater learning—in those that remain, which has the effect of actually improving performance.
Use of the new to improve the old. In this situation, the older technology borrows innovations developed to support the newer technologies, again improving their performance.
These explanations surrounding new technology adoption and the persistence (or decline) of older technologies have important implications for technology-based venturing. For one thing, the managers of new ventures need to be quite explicit about their assumptions regarding how quickly a new technology will displace an older one, and deliberately figure out how to test those assumptions. Failing to anticipate the reaction of competitors is a major reason new ventures fail. Secondly, managers in charge of older technologies are highly likely to mistake the improvement of financial and technical performance during a ‘last gasp’ for long-term health. This happened in the case of integrated steel mills coping with mini-mill competition. As mini-mills gobbled up the low end of the steel market, the performance of the integrated mills improved, since they were selling higher-margin steel. But this performance was not to last - eventually, the steel mills were subject to a massive restructuring of their entire industry.
It’s interesting to speculate about whether such transitions as the move to ‘cloud computing’ from a PC base will reflect this pattern.
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- Posted Rita McGrath on March 18, 2008
Staples “M Line” an effort to escape brutal commoditization
As a long-time fan of stationery supplier Staples, I was intrigued to note that they are adding a whole new, more upscale, line of products called the “M Line”. The goal is to create a differentiated offer at a higher price point (though the prices seem pretty reasonable) to attract those among us who can use a lift to our mundane office lives. Business Week featured the line in a recent story.
A couple of points about this development intrigue me. Firstly, this is a great example of what we might call ‘attribute innovation’ in which companies target new offers at customer segments that are prepared to make different tradeoffs than others. In this case, Staples is designing items with a tad more style and cachet, at a higher price point, hoping that the new attributes will attract enough customers to make the extra design and distributions costs worthwhile.
Secondly, and this is supremely ironic, Staples is trying to escape the very commoditization they sparked when they basically put local retail stationers out of business. When I was starting my career (in the dark ages) stationery suppliers were mom and pop operations, who bought everything at huge markups from these huge, colorful catalogs. The prices were high, the selection usually not so great, and often you had to order materials to be delivered some time later. The 1986 opening of Staples, for stationery junkies like me, was like Christmas coming - huge variety of goods, much lower prices than I was used to, and long opening hours were all ‘wow’ factors. The founder was, just like me, frustrated with having to depend on small local stores for critical supplies.
Over time, however, the easy competition folded, and Staples began to have to duke it out with later competitors like OfficeMax and OfficeDepot who essentially copied its business model. Today, customers take low prices, convenient hours and lots of in-stock items for granted, leading the company to need to do something else. Too early to say yet if the new, upscale, offers will have the desired effect, but I wouldn’t be surprised if they do well, particularly among customers who would enjoy a little more pizzazz in their workaday surroundings.
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- Posted Rita McGrath on March 16, 2008
Business Models based on “free”
A point of departure for discovery driven planning is the selection of a unit of business, which implies a particular business model. In a recent edition of Wired magazine, editor Chris Anderson created a useful taxonomy of a powerful new kind of business model, in which some aspects of the offering are free to the end user (although someone in the economic ecosystem is making money). The different models he lists are:
The freemium. In this model, basic versions of products (such as software) are given away for free, while premiums and upgrades are offered for a price. The reason that works is that the cost of providing the basic version is pretty low, and the profits made on the upgraded version are substantial. A clever version of this is currently offered by Classmates.com, a social networking site that provides information about people you attended school with. I’ve been bombarded recently with come-ons from that site, suggesting that I find out who signed my ‘guest book’. But to find out this interesting information—you guessed it—you have to subscribe and take out a ‘premium’ membership. I find that irritating. And no, I haven’t bought.
Advertising. This is probably the best known of the ‘free’ models and has formed the basis for many traditional industries, from newspapers to television. Where advertising dollars go now, however, has been subject to radical change which in turn has dramatically shifted the economic underpinnings of many industries, while creating great wealth for others. The core idea is that advertisers will pay to get your attention, regardless of the ‘free’ offerings you actually came to consume.
Cross-subsidies. These are the traditional loss-leaders well known to retailers. The idea here is that you give away one product (or portion of a product) in the pursuit of charging higher prices on others. So money-losing sale offers in the supermarket, low-priced CD’s at Wal-Mart or toasters at the bank are all provided to get you to actually buy the more expensive offers. The key assumptions to watch for here are that customers actually are open to cross-purchasing. Not always true. When Wal-Mart went into Germany, for instance, they discovered (much to their dismay) that German shoppers are happy to engage in ‘basket splitting’ - meaning they will go to multiple stores and scoop up the low priced items only, rather than buying everything from one place. Wal Mart eventually had to make a rather humiliating exit from that market. Ironically, business books fall into this category too. Very few people make a lot of money on business book sales—instead, the real money comes from speaking and consulting work.
Zero marginal cost. Software distributed over the web and digital music would fall into this category. While there is a cost to create the initial offer, the cost of distributing it broadly is very low. Sometimes, the free good is actually a come-on for another item. For instance, while it may be impossible for a singer to limit the distribution of songs in digital form, they may actually make their money on concert sales (a variant on the cross-subsidy idea).
Labor Exchange. In this model, marketers offer you something for free in exchange for your providing information or assistance to them. Anderson uses the example of Google providing ‘free’ directory assistance because they can use the calls to improve their voice-recognition technology, potentially opening the way to a huge market down the road.
Gift economy. In this model, things are given away for free out of altruism or because people simply enjoy doing the work required to create the goods. The classic examples here would be open-source software and Wikipedia entries. People voluntarily create and consume the free good.
While there is still room in the economy for premium-priced real goods, the ‘free’ based business models are becoming a force to be reckoned with.
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- Posted Rita McGrath on March 16, 2008
Revlon’s “Vital Radiance” - a failure to spark innovation led growth with some interesting lessons
In a bitter fight to grow against formidable rivals such as Proctor and Gamble and L’Oreal, cosmetics manufacturer Revlon tried the innovation route, with a new line of cosmetics called “Vital Radiance,” introduced in January of 2006. The products had a lot going for them. They were targeted at an older demographic of women, who are generally enthusiastic about any product that makes them look younger, right away. According to users, the products helped make them look younger, right away. The research behind the offer was formidable, and it was introduced with great fanfare, including a web-based personalization campaign. Many users developed quite a passionate affection for the products.
So what could have possibly gone wrong? Although it’s hard to know in retrospect, the assumptions underlying the major launch were not borne out. Specifically:
- Women would respond well to being targeted by age (the products are intended for “prime time” women over 50. Our research suggests that you are much better off targeting consumers by attitude and behavioral patterns, not by demographics. A classic mistake.
- The products would not need to leverage the Revlon brand. In a move which baffles me, the whole product line was introduced with its own identity, failing to leverage the powerful and very well known Revlon brand. It’s basically leading the product to be set up like a startup, failing to leverage the company’s investments in brand-building.
- There was no need to use a well-known spokesperson for the brand. Other manufacturer’s use models such as Diane Keaton and Christie Brinkley to represent their products, again leveraging on names customers will recognize
- The products were introduced at fairly high price points
Had the company done some discovery driven planning, they might have caught some of these assumptions early.
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- Posted Rita McGrath on March 14, 2008
Even private equity firms need to worry about management disciplines to add growth and create value
As the financial markets continue their dizzying spiral into a never-never land of losses (did I see that UBS lost over $11 billion in the fourth quarter alone???) I’ve been interested to watch the response of LBO shops and hedge funds to the changing economic situation. One of the more intriguing shifts, to me, is a recognition of management as—gasp—potentially important to enjoying good returns from their investments. Indeed, in a recent column in the Wall Street Journal, the editors of BreakingViews.com, a financial commentary site, report on suggestions being made to those managing private equity firms. Among the suggestions:
- Greater focus on operational improvement. This one is a hoot! You mean, people actually have to learn to run companies to create value? The columnists observe that “Every buyout firm claims to bring strategic focus, but it isn’t clear that many do.”
- Don’t focus only on financial returns.Here, the need to think about the longer term and about opportunities in different kinds of markets (such as emerging markets, or with innovative products and services). Intriguingly, it was long thought that the absence of short-term quarterly earnings pressure would allow LBO managers to function with longer time-frames. This presumption is now being tested.
It has long struck me that the way we structure rewards and incentives to value creation in our society is skewed. Taking a job and exercising your entrepreneurial talent in the financial sector has for some time now rewarded individuals much more richly than taking those same talents and investing them in the improvement of, say, a manufacturing company. It would be a very interesting change to see value-creation through real growth, rather than through financial engineering, to once again take priority. One can live in hope.
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- Posted Rita McGrath on March 05, 2008
