Creative People Must Be Stopped (18 page)

Another difficulty with the way performance is defined is that buyers in a market may have a complex mix of performance needs, some of which are highly subjective and difficult to compare. Is a lighter tablet computer better than one with a bigger screen or one with a longer battery life? Ultimately, producers in a market have to place bets on particular configurations, weighting multiple performance criteria in ways that they hope customers will value. The possibility (and costs) of misstep are great. You may miss an important criterion or overweight an unimportant one. To avoid the risk, many firms simply result to a fast-follower mode, waiting to see what the market leader does and then constraining their own innovation efforts to interpreting and mimicking the weights they believe the market leader actually used.

Legacy Systems and Adoption Costs

In addition to forward-looking performance improvement, customers in a market naturally prefer to have low costs of adoption as they switch to new products. To achieve these low adoption costs, producers must ensure that innovations interoperate with the legacy systems that the customers already have in place. These legacy systems may be technical in terms of how the pieces fit together electrically or mechanically, or they can even take the form of systems of knowledge people may already have—for example, knowing how to operate a Windows PC or a Mac.

Another constraint, one that is easy to overlook, is the maturity of a market. Companies in existing markets meeting demand in conventional ways can compete on bases other than product innovation—for example, by expanding distribution or by lowering price. If lower pricing is achieved by increasing scale, the organization may box itself into a corner because changes to a highly efficient high-volume operation will increase costs. This leads organizations serving large mature markets to be slow in response to competitors' innovation and moves.

In contrast, in immature markets where innovation is driving competition and the speed of competitive response is fast, early adopters may be willing to adopt radical innovations quickly, but the market's mainstream customers will sit out the more volatile periods, waiting for a market leader to emerge before making a final adoption decision. This dynamic can cause innovating organizations to minimize their risk by reducing their discretionary investment in new products. Unfortunately, the self-defeating consequence can be to impede adoption. For example, having overspent on the development of a product, one consumer products company I worked with cut early-stage sales and marketing budgets, virtually ensuring that awareness (and, subsequently, sales) of its innovation would be effectively nil.

It's
Always
the Economy

Economic conditions loom large in shaping the dynamics of innovation in a market. If less capital is available in an industry for organizations to use for the purposes of innovation, organizations may be less likely to use innovation as a basis of competition and may resort to other methods, such as by increasing scale or through mergers or acquisitions. Decreased levels of capital may be due to general economic conditions or to those specific to the industry. During the economic crisis that started in 2008, the automotive industry saw decreased investment and lowered levels of new product development, particularly as gas prices increased and sales slowed. One automaker, GM, reduced the number of brands of cars it produced to reduce the costs of developing and selling a larger variety of cars. In contrast, if an industry is dynamic, with high rates of return generated by rapid innovations delivered to a willing customer base—such as in the portable electronics industry or in the Internet or social media industries—then capital is more generally available, as represented by high stock prices or significant venture capital investment in start-ups in the industry.

The ability and willingness of customers to purchase and adopt new products and services are also subject to economic conditions, and may transcend those within an industry. At an estimated cost of $10,000, Kodak's electronic camera didn't make much sense to its average consumer in normal times, let alone during the economic recession of the early 1980s. In fact, Kodak had seen effects of the recession on its film business: people took fewer pictures as unemployment levels rose and as uncertainty about individuals' personal economic security increased. It is not that they enjoyed taking pictures less; it was simply that it was a luxury they could painlessly cut along with the number and length of vacations they might otherwise have taken, which Kodak knew was a driver in the consumption of film.

Overcoming Market Constraints

Being successful in a market requires you to recognize the constraints that guide the adoption of products and services by customers. These constraints arise when customers, acting in their own interests, behave in ways that reduce the options a firm has for addressing the market need. Once you identify the specific needs of your customers and can pinpoint how the customers' interests diverge from your own, you can use the following strategies to overcome those constraints.

Redefine Performance

Customers use performance criteria or metrics when choosing among alternative products to adopt in a market. It stands to reason, then, that being in control of that definition can generate significant competitive advantage. Performance metrics defined in this way may even provide advantage when the definition of the need has become outdated and is no longer technologically valid. Consider the high-end Rolex mechanical chronograph watches. Although these were once at the top of the watch market in terms of accuracy and durability, now $20 and a visit to your local drug store will net you a quartz-controlled black plastic watch of far greater accuracy and much higher durability (not to mention lower insurance costs). Yet when I ask people why Rolex watches remain popular, the first answer is invariably that they are accurate and durable.

Owning a market's performance criteria is to be in control of the definition of performance. Successfully executed, this strategy allows you to define performance in ways that you can most advantageously satisfy through exploitation of your core capabilities, and in ways that make it difficult for your competitors to meet. However, this strategy can have a significant downside when your organization becomes so enamored of its own performance standards that it loses track of changing needs in the marketplace. You may find yourself investing millions in making film ever better, while your customers are deciding that having it now is better than having it perfect.

Tell Them What's New

Instead of owning the performance standard, you may be trying to break into a market with a decidedly new idea and set of benefits. In that case, you'll find the established criteria to be problematic, as they are unlikely to capture the new kind of value that you are offering. Customers may not understand what criteria to use in evaluating your offering—unless you tell them.

The R&D director of a tool manufacturer told me how the company had put all manner of new technology into a line of hand tools, yet customers failed to appreciate the improvements. The problem was that these tools were sold in retail mass-market home improvement stores. Unfortunately, due to the economics of the product and the demands of the retailer, the packaging of the product was minimal and unobtrusive. That left precious little real estate on the product package to present the information that customers might use to teach themselves about the radical improvements. And although the experts staffing the aisles of the stores understood the advantages, they were too busy to afford the time needed to communicate them to the customers.

Solving this problem can require some additional investment. Traditional marketing is one avenue for building awareness of your products; just make sure you build awareness of the new performance standards in addition to selling your performance in the conventional ones. Another way to educate customers is a result of the explosion in use of social media; it has become a vehicle for getting people to tell and sell their friends. Adele, a thirteen-year-old girl I know, gets samples of the latest makeup and lipstick innovations sent to her from the marketing departments of large cosmetics companies for the low price of an email and the promise of a review. Certainly it costs them in product and in shipping, but it is an ingenious way to sell. Representatives at cosmetic counters in department stores often work on commission and are too busy to fool with mall-trolling gaggles of thirteen-year-old girls with limited allowances. And even when the reps do make the time, a young teenage girl will not find the sales pitch from a thirty-five-year-old woman convincing or compelling. These companies realize that as she reviews them on her blog and demonstrates their use in her video makeup tutorials, Adele will take all the time she needs to convince her friends and fans about their relative merits. Adele has only about seventy-five permanent subscribers, but with over eight thousand hits of her videos, she educates more potential customers in two months than a full-time cosmetic representative will in an entire year.

Grab 'em and Keep 'em

Customers want low adoption costs and the ability to easily find substitutes for your product. The more customers depend on a product or service, the more they would like to be able to substitute it should a problem occur. The lower the adoption cost, the easier it is to implement the switch. They might also like having the ability to use threat of substitution as a means of driving a discounted price.

For the firms in a market, this presents a conundrum. To acquire new customers, you would like to make their switching costs low. This argues for constraining innovation to make the product more like others in the market. But to retain customers, you'd like to set switching costs very high, which argues for a more radical innovation that locks people into what you are selling.

Consider application software for personal computers. When owners of PCs have a significant investment in software that works only in Windows, it's difficult to justify a switch to a Macintosh, which is exactly why Microsoft's Windows platform has enjoyed such a long period of dominance over competitors, such as the Apple's Macintosh platform. Yet as I write this, computer users are switching in record (if still modest) numbers to Apple. Why? Besides redefining performance to include a “cool” factor and experiencing a lower rate of attacks by hackers (turning its lower profile into a competitive advantage), Apple has also made the costs of switching much lower. With the Bootcamp program, all recent Macintosh computers come with the built-in capability of running Windows. This makes the perceived cost of switching quite low—after all, you are not really switching if you can run both. But Apple is really aiming at winning both sides of the “cost of switching” dilemma. The company is betting that once you're on the Apple platform, you'll like it enough to want to stay in that environment—and that means your next computer will be made by Apple. A Mac can run Windows, but there are no legitimate non-Apple machines that are able to run the Apple platform.

Watch the Market, Not the Competition

People don't necessarily know what they want until they see it. That's both the beauty and the curse of innovation. What they do know, however, is whether an innovation they are considering adopting is likely to fit into the larger system of products and services in their lives. In the story of Kodak, the digital camera itself would not have been sufficient to dislodge film from the top of the market. Digital's triumph also required that users have a way to view, print, and store the electronic images the camera produced.

The strategic planners at firms like Sony did not create these other functions through omniscient predictions and brilliant insights; in fact, they didn't create them at all. Instead, necessary innovations such as HP's printer, Conner's hard drive, IBM's PC, Intel's processor, Xerox's network, and Adobe's software were themselves the products of competitive pressures in the industries where they had originated. Once all the pieces were in place, the purchase of a digital camera began to make a lot more sense. As a customer, you didn't have to take the risk of buying all of the parts, because you already owned a computer, a printer, and a hard disk. The only risk, now greatly reduced, was in the camera itself.

The danger of intently watching the competition while ignoring the other weak signals emanating from the far ends of the market and from complementary industries is not only to risk acquiring the expertise needed to develop the core product but also to risk losing out on creating necessary alliances and partnerships that may be needed to enable and then drive full market adoption.

Putting the Framework to Work: Industry Constraints

To aid you in assessing the constraints at this level, use the following diagnostic survey. It is intended to help you assess the extent to which the constraints described in this chapter may be unintentional hindrances to innovation in your organization.