An interview with Costas Markides

Transcription

1 An interview with Costas Markides Interview by Sarah Powell Constantinos ( Costas ) Markides is Professor of Strategic and International Management and holds the Robert P. Bauman Chair of Strategic Leadership at the London Business School. Professor Markides has also taught in-company programmes for numerous companies including Unilever, British Aerospace, Pirelli, Honeywell, Wellcome, Polygram, Mercury Asset Management, Nestlé, ABF and LVMH. His current research interests include the management of diversified firms and the use of innovation and creativity to achieve strategic breakthroughs. Professor Markides has published widely, writing on topics of strategic innovation, corporate restructuring, refocusing and international acquisitions. His most recent book (with Paul Geroski) is Fast Second: How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets (Jossey-Bass 2005). Your book, Fast Second, explores why the early pioneers of radically new markets are almost never the ones that scale up and conquer these markets. This being the case, why is there such emphasis on so-called first-mover advantage? This is an interesting question. The first point to make is that in certain, primarily demand-driven, markets first-mover advantages do exist. However, what we are discussing in our book is the creation of radical new markets, i.e. markets that are created primarily through new technology or the combination of existing technology to create something entirely new. Here first-mover advantage does not apply. Where it does is in markets where a product exists and someone else either improves or adds something to it, i.e. there is a change to an existing market that creates a new market. First-mover advantages also apply in the small number of markets with increasing returns, e.g. the online auction market once a company such as ebay starts growing and captures a certain percentage of the market, it has a substantial first-mover advantage over everybody else. A myth surrounding first-mover advantage has also been propagated by companies claiming to have pioneered products or services that they have developed, creating mass market appeal. Take the disposable diaper. Anyone would have thought that Procter & Gamble created this product. In fact, the first disposable diaper, called Chux, was invented back in 1932 by a small company called Chicopee Mills which was later acquired by Johnson & Johnson. For some 35 years this was very much a niche market. It only became a mass market in the 1970s when Procter & Gamble s R&D efforts led to the launch at a very cheap price of Pampers. The market then took off. Procter & Gamble can certainly claim to have created a mass market for this product, but it did not create the product itself, any more than IBM can claim it created the PC. IBM did, however, create a mass market for this product previously there was only a niche market for it. IBM entered the market, simplified the product and cut the price to a reasonable level. To recapitulate the emphasis on first-mover advantage derives both from its existence in certain industries, but not others, and from companies claims to innovation. Consumers have short memories and the original innovators are generally dead and gone, missing out on the fame and glory of their inventions and superseded by second fast movers who created mass markets. When did you become aware of and interested in the seeming paradox that first movers, or colonizers as you call them, innovate, yet it is those who follow, the consolidators or fast second players, who establish and grow the nascent market, effectively enjoying first-mover advantages? This has been in the past five to six years, my interest being raised partly in response to some of the writings of Professor Clay Christensen at Harvard: The Innovator s Dilemma and The Innovator s Solution. While I agree with much of 1

2 the theoretical analysis in his books, I was struck by his advice to companies that to grow they needed to create new disruptive markets and he gives advice as to how to do this. As I read, I realized that I knew many companies that had grown not by creating these markets but by moving in second and consolidating them. I found Professor Christensen s writings so influential and yet in a sense so wrong, and I felt this phenomenon merited systematic study to highlight what actually happens rather than what we believe companies should do. All sorts of companies fail to meet Professor Christensen s model. Look at Microsoft. What did it create? The answer is basically nothing. What Microsoft did was to take the creations of others and scale them up into mass markets. There is a similar history to Internet search engines. The pioneering model was not Microsoft, it was Netscape. Microsoft came in several years after Netscape, and then took over the market. Then consider the handheld computer. Who created that? Some people believe that Psion created this product with the introduction of its Organiser in 1984; others maintain it was Apple in the early 1990s with the Apple Newton. No matter who you accept to be the creator, the fact is that neither of these two companies captured any of the spoils of the mass market that Palm and HP created following the introduction of the original products. Examples such as these and many others led us to write this book. An important point is that, especially in the western world, we see innovation as being all about creating new things. I believe innovation is two things: both the creation of something and also and more importantly the commercialization, the scaling up, of that something. The world is littered with wonderful products that came onto the market and then died because there was a failure to innovate in scaling them up. Why, for example, has the answerphone with video that enables you to see your correspondent only recently come to market when the first such device was introduced on the American market by AT&T in 1962? The reason is that nothing happened, i.e. there was no scaling up. So innovation encompasses not only the creation of product or idea, but also its scaling up to make it viable and available for all of us to enjoy. During your research, did you come across any notable exceptions, i.e. companies that managed to combine the roles of both colonizer and consolidator in the same market? I did, proving the point about exceptions to rules. We cannot say that there are no creators, or colonizers as we call them in the book, who are not consolidators or vice versa. What we can say is that it is very difficult to do. However, there are always exceptions and probably the most prominent is 3M, which created and commercialized the Post-It note. We could also cite Sony with its Walkman and HP with its inkjet laser printers. What is also interesting about these atypical success stories is that these big companies, which are generally consolidators, i.e. market scalers-up rather than creators, usually made their discoveries in separate units. They recognized that it is very difficult for the skills and mindset of the consolidator to co-exist with the skills and mindset of the colonizer and saw keeping them separate as a solution. You have written that the skills, mindsets and structures needed for discovery and colonization are not only fundamentally different from those needed for consolidation and commercialization, but actually conflict with them. Can you offer some examples? A classic example of this conflict is the story of Lotus in the 1980s. Before Lotus was acquired by IBM it was an independent company that created the Lotus spreadsheet software a huge success in the market that brought this hitherto little-known company a considerable profit and profile. However, five years on, top management became concerned that the company s success and growth was leading to a loss of entrepreneurial spirit. To put this concern to the test, they took the CVs of the first 50 people hired by Lotus back in the early 1980s, changed their names and put them in the application pool. Not one was invited for interview. This tells you that these entrepreneurs, pioneers, revolutionaries even, no longer fitted into the new culture. McDonald s offers another example of such conflict. The company was founded in California in the 1950s and did extremely well there. But when the founding McDonald brothers were approached by Ray Kroc with a proposal to go national, they just weren t interested. Examples such as these demonstrate that some people prefer the quiet life; others want to be revolutionary; and it can be very difficult for such different people to co-exist. You have proposed further reasons to explain why large, established firms are unlikely to be the creators of radically new markets, notably 2

3 that they should not want to create radically new markets. Can you elaborate on this? There are three reasons why large established firms should not want to create radically new markets. The first is that evidence shows that even if they did create a radically new market, the likelihood is that someone else will come in and take it away from them. The second reason is that they generally do not have the skills to create radical new markets; what they have are consolidation skills. The third and most important reason is that most of the money to be made will come from consolidation not creation because it is the consolidators that create the mass market. So, my advice to large, established companies is to let someone else with the appropriate skills do the creating, and then move in at the right time, take it away from them, scale it up and make considerably more money. It s a simple choice given the competences. What does a fast second or consolidator strategy involve and how does this differ from a secondmover strategy? There is one key event in the evolution of a radically new market that determines the difference between fast second and second mover. That key event is the emergence of the standard or the dominant design. In the first ten or fifteen years of the car, for example, no one really knew what it would eventually look like. As a result numerous people created different kinds of cars hoping that their design would dominate. Eventually a design or standard emerged. The same goes for other products and services. This emergence of a standard is a key event in the evolution of the industry. Anyone entering the market before the emergence of the standard is called a first mover. Anyone who comes after is termed a second mover. Anyone who comes in just at the time when the dominant design of the standard is emerging, and actively helps in creating that dominant design, is what we call fast second. Second movers have a major problem because they need to be extremely innovative in what they do if they want to make any inroads in the market. Conversely, the fast seconds are at a substantial advantage. Timing is really of the essence in fast second movement. But how does anyone know when the dominant design is about to emerge? That s certainly the million or ten million dollar question. It is extremely difficult to know which is why, most of the time, getting the timing right is largely down to luck. However, we have outlined some indicators that can be monitored to help determine the right time to move. One is the rate of innovation in terms of new product features, looking out for when this slows and new product innovations no longer signal significant changes from previous products. Another indicator is the emergence and growth of complementary goods. For example if you produce a car, a complementary good is the petrol station you cannot have cars without petrol stations and you cannot have petrol stations without cars. Finally, companies should also monitor whether the product is becoming legitimized in the press, and recognized by consumers. The world is littered with wonderful products that came onto the market and then died because there was a failure to innovate in scaling them up. Why, for example, has the answerphone with video that enables you to see your correspondent only recently come to market when the first such device was introduced on the American market by AT&T in 1962? So a fast second strategy involves, first, timing, moving at the right time and winning the dominant design; second, a move away from emphasis on product peformance towards price, by which I mean that early pioneers invest heavily in technology and product features, aiming at perfection, while what the mass market wants is not a perfect product but a product that is cheap and good enough in performance terms; third, building confidence in the product through branding and reputation; fourth, building the necessary distribution capacity for the mass market because it may exist; and fifth, developing complementary goods. Can you offer some examples of notably successful fast second players? 3

4 There are endless examples of successful fast second markets. The handheld computer is just one. One of the first products on the market was the Apple Newton, a small machine that boasted handwriting recognition software. This was introduced in the early 1990s. Then Palm introduced the Palm Zoomer. Palm like Apple was trying to compete on product features so it included handwriting recognition software, word processing software, Excel spreadsheets and so on. The Zoomer retailed for $1200 and practically no one bought it. The Newton meanwhile was selling around the $1000 mark. But then the designer of the Palm Zoomer realized that most consumers didn t require all these functionalities, instead wanting just a basic digital organizer, synchronized with their computers. So he took the product and removed most of its functions, only retaining its organizing features. This simplified product, the Palm Pilot, retailed at $299 and took off. The list of such fast second successes is endless. For example, there is a widespread perception that Canon created the 35 mm camera, which is not the case. The original creator was the German company called Leica. Canon conquered the market later. Similarly, in the VCR market, JVC took the market from Sony. In the disposable diaper market, as already mentioned, P&G took the market from Chicopee Mills, the original pioneer. And how many consumers know that the pioneer of the diet cola was a company called Kirsch, in 1952? Pepsi and Coca Cola only entered the market in the 1960s as did Royal Crown in Canada. The telephone answering machine, spreadsheets, online bookselling, word processing software, all are markets that were eventually captured by second movers. You have described a situation in which existing market leaders often lock themselves into the existing market making it difficult for them to change to something radically new. What can be done to combat this? What they can do comes under four categories, representing influences on human behaviour. The first has to do with the culture of the organization; the second structure; the third incentives; and the fourth and final category, people and management. First, in terms of culture, companies need to create a sense of urgency in the organization. This is achieved by giving people goals that really stretch them, both personally and organizationally, and selling these to them to ensure they believe in and are committed to them. Culturally companies also need to allow people to experiment, knowing full well that some of these experiments will fail. There are no innovations without failures and none without experimentation. In terms of people and mindsets, companies also need to introduce outsiders to bring in new blood senior people cannot stay forever and people from outside the business can rejuvenate how it thinks and what it does. However, there is a balance to be struck to avoid losing the efficiency, experience and knowledge of senior people. Second, in terms of structures, to enable them to survive and grow, new growth businesses in mature companies need to be nurtured unencumbered by big company bureaucracy. As we discussed earlier, large companies such as 3M, Sony and HP that have managed to combine the roles of colonizers and consolidators, all managed to do so by creating separate units. The same goes for HSBC Midland when it created First Direct, the Royal Bank of Scotland which launched Direct Line, and IBM when it created its PC business in Florida, as far away from headquarters as possible. Structurally, what large companies need to do if they really want to avoid locking themselves into the existing market is continuously to create separate baby units on the periphery of their business, giving these the necessary protection and resources to experiment. The third category, in terms of incentives, is the need to allow people to experiment and make mistakes. You must reward people for new ideas rather than for making money at the end of the year. You must give them time to bring new products to market. It s no good demanding, say, a three-year payback period on your investment. For new growth markets, it could take ten years before a new product actually starts delivering. If you impose a three-year rule, you ll kill it. Fourth comes leadership, without which nothing can be achieved. By this I mean leaders at the top with the guts to try to do some of these things and that is something many people talk about but few people do. In your book you have cited Procter & Gamble as an example of a company that aspires to outsource half of its innovation. Is this, i.e. the separation of innovation from consolidation, the recommended solution to the colonization /consolidation conflict? The problem we discuss in the book, i.e. the difficulty of colonizers co-existing with consolidators, is not new. As early as 1961 two British academics, T. Burns and G.M. Stalker, 4

5 wrote a book, The Management of Innovation, on just this problem, albeit focusing specifically on the Scottish textile business. The authors talk about the organic versus the bureaucratic corporation, highlighting the problem we have discussed. This poses the question: if this problem has been recognized for over forty years, what solutions have been proposed? There have, in fact, been a number of solutions put forward. The first, proposed by Michael Porter, concludes that it is not possible to play the two games at the same time and recommends deciding which to play and focusing on that. I recognize the logic in this, but do not consider that it s a viable solution to tell companies to focus on what might be a dying business. A second solution, the co-existence solution, recognizes the problem and advocates creation of separate units. This is also what I propose and is the solution put forward by Professor Clay Christensen. The third solution, proposed by Michael L. Tushman and Charles O Reilly III in Ambidextrous Organizations: Managing Evolutionary and Revolutionary Change, maintains that you need cultures in your organization that are ambidextrous and leaders that have ambidextrous mindsets and, if you develop these, you as an organization can both colonize and consolidate. My answer to this is show me such an organization! I am willing to accept that a few may exist but I believe they are more the exception than the rule. It is so difficult to be ambidextrous that most people who try will fail. entrepreneurs and young firms. However, this said, allowing others to create doesn t mean the market is theirs. Large companies have the resources to negotiate with these companies to sub-contract commercialization, distribution and marketing to them, because the large companies have the expertise, cost base, reputation and power to assume these roles. There is a clear separation between the two roles that of colonizer and that of consolidator and my solution recognizes this. However, I am not insisting that this is the sole solution. There is some validity in all the solutions proposed. It is a matter of each company evaluating which of these options is the best for it given its particular circumstances. Following these three solutions, I would like to flag up a fourth. In the book, we talk about creative industries which we define as industries which live and die by the fact that they have to create new products all the time. Such industries include film and theatre, book publishing, art and music. In the film industry, even if you create a wonderful film this year and make lots of money, you will not continue to do so next year or the year after you will need to create a new product next year and so on. The same is true for all creative industries where you will find a clear separation between the creator of the product and the distributor. Book publishers sub-contract creation to the market, to authors who have the skills needed for this task. The authors, meanwhile, concentrate on writing and do not attempt to promote and sell their books themselves. They don t have the resources so leave that side to the publishers. The structure of this kind of business separates the creators of the product from those that scale it up. That is exactly what I m proposing with radical innovation. I suggest that large companies leave the creation of new technologies and new products to young 5