Building an innovation strategy - Tesla
May—June 2010 19 0895-6308/10/$5.00 © 2010 Industrial Research Institute, Inc.
INNOVATION STRATEGIES FOR CREATING COMPETITIVE ADVANTAGE
Twelve innovation strategies permit catalyzing open innovation processes so that innovation moves out of the confi nes of R&D labs and becomes integral to the way
companies design their futures.
B. Bowonder, Anirudha Dambal, Shambhu Kumar, and Abhay Shirodkar
OVERVIEW: Innovation strategy helps a company in three ways: exciting its customers, outperforming com- petitors, and building a new product portfolio. The lit- erature describes many frameworks for innovation strategy but offers little detail about how to implement them. This paper identifi es 12 ways of visualizing in- novation strategies: platform offering, co-creation, cycle time reduction, brand value enhancement, tech- nology leveraging, future-proofi ng, lean development, partnering, innovation mutation, creative destruction, market segmentation, and acquisition. These strategies allow 100 leading global companies to dominate their markets and outperform the competition through inno- vation.
B. Bowonder was, at the time of his death on December 8, 2009, the Dean at Tata Management Training Cen- tre, Pune, India. Prior to this he was ITC Chair Pro- fessor of Strategic Management of Technology at the Administrative Staff College of India at Hyderabad. He was a member of the editorial board of the Elsevier journal Technovation and held a Ph.D in engineer- ing from the Indian Institute of Science, Bangalore. bowonder@tata.com
Anirudha Dambal is a management trainee at Tata Man- agement Training Centre, Pune. anirudha.dambal@gmail.com
Shambhu Kumar is a research associate at Tata Man- agement Training Centre, Pune. shambhu@tata.com
Abhay Shirodkar is a management trainee at Tata Man- agement Training Centre, Pune. abhay.shirodkar@gmail.com
KEY CONCEPTS: innovation strategy, customer excitement, competitive leadership, portfolio enrich- ment.
Enormous strategic opportunities are emerging as we stand at the intersection of increasing globalization, rapid technology changes and newer lifestyles (1). Innovation has become the major differentiator in the competitive race (2) and innovative companies have learned to sustain themselves over long periods of time. Companies like Bayer, GE, IBM, P&G, Siemens, and Unilever, as well as newer companies such as Ap- ple, Google, Intel, Microsoft, and Nokia have also mastered the mantra of sustained growth and rewritten the rules of the game through a series of innovation strategies (3).
The literature identifi es a number of strategy frame- works that successful companies have used to create in- novative business models, products and services and use them to create competitive advantage. These in- clude:
Market leadership (• 4) Fast cycle time (• 5) First-mover advantage (• 6 ) Customer experience management (• 7 ) Business model innovation (• 8) Co-creation (• 9) Disruptive innovation (• 10) Value chain analysis (• 11) Blue Ocean strategy (• 12) Life cycle approach (• 13) Open Innovation (• 14) Bottom of the pyramid (• 15)
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The literature shows that strategies of innovation help a company in three ways (16 ):
Providing new offerings or experiences that excite the • customer.
Staying ahead of the competition in the market-• place.
Entering into new market segments or creating new • businesses.
The presence of so many different frameworks for stra- tegic innovation can be confusing, and it would help if we could distill some basic guidelines from all of these approaches.
This paper aims to develop a set of strategies based on a study of 100 innovative global companies (17,18). From an analysis of these companies, we identify a set of 12 powerful strategies to help executives visualize and gener ate effective strategic conversations within any or- ganization so that they can make innovation a reality. We establish linkages between innovation and strategic dimensions for competitive advantage. We help execu- tives connect with examples from business history and engage with the power of the 12 innovation strategies and their business contexts.
Basis of the Study
We selected the 100 fi rms from various sectors consid- ered innovative by combining the Boston Consulting Group’s list of top 100 innovative companies and the UK Dept. of Trade and Industry 2007 global R&D score- board (Table 1). We used three criteria for identifying the innovativeness of a fi rm:
The fi rm created an innovative product, service, or • business model.
The innovation impacted the business in a positive • manner.
Patents have been granted for the innovation.• The objective of the study was to identify innovation processes and practices in the 100 innovative companies. The study covered four major aspects:
Leadership support for innovation• Fostering an innovative culture• Creating innovation processes • Implementing innovation•
In this process, we identifi ed 12 innovation strategies used predominantly by the 100 companies. There are several diagnostics for assessing the use of innovation. For example, there are the 10 rules for strategic innova- tors that help a fi rm to become more innovative (20). We
also found the model proposed in the literature on strate- gic dimensions by Anthony, Johnson and Erying (16) to be relevant.
Strategic Dimensions
The frameworks for innovation broadly cover three dimensions of innovation strategy to meet a variety of business objectives. Based on an assessment of litera- ture, we arrived at three basic dimensions of competi- tive space:
Customer excitement• Competitive leadership • Portfolio enrichment•
Each of these dimensions gives insight into the appro- priateness of innovation strategy at every stage and ev- ery part of the fi rm’s value chain. Moreover, they are not mutually exclusive ways of benefi ting from innovation, but interact among themselves as well (Figure 1).
To keep our model simple, we assumed that innovation benefi ts customers in any one of the three ways, assum- ing that the interactions between others are negligible. The logic for having a new model is that it helps a com- pany recognize how the innovation could help it and how it is going to affect the competitive space.
3M Airbus BMW Bayer Boeing BP BSF Canon Colgate Corning Daimler Dell Disney Dow DuPont eBay Eli Lilly FedEx GE Genencor Genentech Genzyme Google Henkel Honda
HP
IBM IDEO IKEA Intel Kellogg McDonald’s Mitsubishi Motorola Nike Nokia NTT DoCoMo Philips Procter & Gamble Raytheon Research in Motion SAP Shell Unilever Siemens Southwest Airlines Tetra Pak Toyota UPS Volvo Whirlpool
and more.
Table 1.—Companies in the Study
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Customer Excitement
One of the three basic tenets of innovation is to offer customers distinctly different value propositions, for example, in the form of an exciting experience in the case of services. When we talk of customers, we include potential and new customers, in addition to:
Consumers who lack specialized skills or training to • use the product/service and hence turn to experts to solve important problems.
Consumers who lack the purchasing power to • participate in the market.
Consumers who use a product/service in a centralized/ • inconvenient setting.
We propose that fi rms could use four distinct strategies to generate innovation and thereby create customer ex- citement. These are:
Platform offerings• Co-creation• Cycle time reduction• Brand value enhancement•
Table 2 offers examples of customer excitement as well as benefi ts of the strategy. Before implementing the inno- vation strategy, a company has to carry out a strength, weakness, opportunities, and threat analysis. If it is weak in customer interaction and customer excitement, it needs to ask the following questions in order to lever- age innovation so that the weakness can be eliminated:
Is there a possibility of using platform offerings for • enhancing the customer excitement?
Will it be possible to work with the customers to evolve • an improved product or a next-generation product?
Can cycle time reduction or fi rst-to-market be used • for any of the product offerings?
Can the value of the brand be enhanced by using • innovation as a key differentiator or value creator?
Platform offerings
A product platform is a set of products that share a com- mon technology and address related market segments, or even markets. Platform offerings are essentially dif- ferent from one-off offerings; they provide repeatable, customized products or services by combining and re- combining modules (21).
For example, there are four different variants of the iPod: iPod touch, iPod shuffl e, iPod classic, and iPod nano. Nokia uses the platform concept to provide a series of mobile phones for distinct market segments. Although its Series 40, Series 60, and Series 80 have much in common inside the phone, their external appearances are distinctly different.
Toyota has used the Innova car platform to develop a series of differentiated offerings. Usually, in a platform, 60 to 90 percent of the components are common and planned for simultaneously offering commonality and differentiation. Toyota customized the car for each of its markets according to the customer’s requirements. Two paradoxical requirements were met by the strategy: global consistency and local customization.
Chemical companies have begun to use the platform strategy to develop a series of products. An example is DuPont, whose corn-based plastic caters to various mar- kets. Its platform uses corn as raw material. Boeing uses the platform strategy with its B-777 to give customers a family of products (standard version, extended range, long haul, larger capacity, and freighter) using the same size wings and many other components.
Platform planning requires a strong leadership team. Boeing executives and the directors demonstrated
Firms can use four distinct strategies to generate innovations
that excite customers.
Figure 1.—Competitive space can be viewed from three basic dimensions.
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Table 2.—Innovation Strategies for Customer Excitement
Strategies of Innovation
Thrust of Innovation Illustrative Examples Benefi ts
Platform Offering
Using a common strand to meet varieties of needs or delivering to a variety of segments.
Toyota Innova: The fi rst car produced outside Japan by Toyota. Toyota developed customized vehicles in Russia, China, India, Brazil, South Africa, Vietnam, Indonesia, and Thailand on the same platform.
Two paradoxical requirements were met, namely, global consistency and local customization. Six offerings meet the specifi c needs of customers of specifi c countries. Through customization, they were able to meet local performance price points.
Google created a platform consisting of Gmail, browser, search engine, Google earth, Google image and Google talk.
Customers could use a single platform for a series of operations which otherwise would have needed different platforms. Search engine is customized for different countries, leading to customer excitement.
B-777 airliner developed as a platform and consists of a number of variants having different capacities and ranges.
This strategy helped user airlines with different confi gurations and customers could use the same pilots for all the versions.
Co-Creation Working with the customer and using his insights to provide new insights.
B-777 was developed jointly with major user airlines.
Co-creating airlines placed large orders when they saw the benefi ts of the aircraft; at the same time, all customer needs were met at the time of design. Time for introduction was considerably reduced.
Cemex, working with construction companies for producing ready-mix concrete for their requirements.
Co-creation helped customers in meeting design specifi cations of small and large users.
P&G working with users for developing 50% of the products in the co-creation mode.
By understanding the customer requirements they were able to incorporate the “voice of the customer” at the development phase and multiple customer voices could be integrated.
3M working with Mayo Clinic to develop a series of products for hospitals to replace surgery with non-invasive options.
By working with a lead user they were able to resolve problems ahead of coming to the market. It is in a way test marketing ahead of time and meeting the customer requirements.
Cycle Time Reduction
Reducing time to market so that customers could get the product early.
Toyota Prius reduced its cycle time by 1 year and surprised the customers.
Toyota surprised customers who were given an option that was far above their expectations. Speed and surprise are the two elements that helped Toyota.
Gillette developed the M3P Razor in which the hair is brought out by an electric pulse. Gillette took only fi ve months to develop this razor.
Gillette provided customers with a neat and tidy shave, leading to customer excitement.
Intel launched its quad-core processor by reducing the cycle time ahead of AMD through concurrent engineering. AMD was the fi rst to propose quad-core processor. Intel launched the quad-core processor six months ahead of AMD.
Intel was able to retain its customers and also surprise them by launching the quad-core processor much ahead on AMD. Time has become one of the critical success factors in business strategy.
Brand Value Enhancement
Delivering new elements for meeting customer aspirations.
P&G acquired Oil of Olay, which was not profi table prior to the acquisition by P&G. After that, P&G delivered a series of breakthrough skin care innovations. The anti-aging innovations have completely transformed the Olay brand.
Customer gets a unique offering, and automatically the brand value goes up. An old brand which was on the verge of losing customer attraction was able to rejuvenate and the market share increased substantially.
Delivering new elements for meeting customer aspirations.
In Moto RAZR, Motorola introduced many new innovative features not provided in any other cell phone.
Moto RAZR was able to introduce a variety of innovative features that customers found interesting. It gained market share because of customer excitement.
Unilever added proteins derived from Arctic animals and plants to ice creams and frozen desserts to make them soft and frost free.
Frost-free ice creams delight customers. The paradoxical requirements of remaining solid and keeping softness were met.
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visionary industry leadership by focusing on innova- tion and product development, at the risk of fi nancial and technical failure. In doing so, Boeing transformed its industry through innovation (22,23).
Google is another example. It started as a search en- gine, then extended its platform by integrating Gmail, Google search, Google images, Google chat, Google earth, and Orkut (24).
Co-creation
Co-creation is a mode of innovation in which value is created by jointly working with the consumer and using customer insights to generate greater satisfaction (25). It may entail involving potential customers or lead users (26 ). 3M used the lead user method for its Mayo Clinic series of hospital products. It leveraged its adhesion technology to replace surgery with non-invasive options, thereby creating customer excitement (27).
P&G decided to get 50 percent of its ideas from outside the fi rm (28). Its co-creation policy of working with the
customers to create a series of products has helped P&G to enhance its product pipeline without increasing the size of its R&D. Working with mothers, P&G introduced better diapers for infants.
Boeing developed the twin-engine B-777 airliner by in- teracting with customers ahead of its design. Executives from a number of leading airlines were invited to pro- vide ideas on what kind of futuristic aircraft they envis- aged (29). By capturing customer requirements before product realization, Boeing gained new insights from potential customers and integrated the responses to multiple needs, thereby eliminating the need for sepa- rate customization exercises after production. Boeing named this process in which customers, designers, and suppliers worked together “working together teams.” With it, Boeing created one of the best selling aircraft in its class.
In the case of the B-787 Dreamliner, Boeing is simulta- neously launching several variants to address different customer needs. This is an example of the combined use of platform concept and co-creation (30).
Figure 2.—Innovation frameworks for the strategic dimension of Customer Excitement.
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Cycle time reduction
Many innovative fi rms have reduced the time from con- cept to market through an overlapping arrangement known as cycle time reduction (5). Innovation agility at- tempts to bring out products/services faster. This, along with “stretch goals,” is one of the innovation strategies widely used by Boeing, Gillette, Honda, Nissan, and Toy- ota, among others (31).
Gillette introduced its M3P razor in a record fi ve months. It had many innovative features, and speed-to-market helped the company to excite its customers. M3P uses a number of patented technologies. A patented cooling pro- cess produces the smooth blade surface for improved glide and comfort; a motor sends micro-pulses to the blades which help in close shaving in one easy power stroke.
Intel uses a fast cycle time approach for designing its mi- croprocessors so that its competitors can only react to its offerings. For example, AMD was the fi rst to announce the development of a quad-core processor, which it sched-
uled to launch in mid-2007. By reducing the cycle time, Intel launched its quad-core processor in November 2006 and thereby captured the market ahead of AMD. Although AMD perceived the quad-core processors ahead of Intel, a speed-to-market approach helped Intel to overtake and outperform AMD. Intel believes that there are only two types of fi rms: “the quick and the dead.”
Using speed to outpace the competition is also illus- trated by Toyota’s Prius hybrid car. Originally, Prius was to be launched in December 1998. However, at the request of the managing director, the launch was brought forward by one year to December 1997 (32,33). Competitors were not ready and were therefore unable to react, which led to superior customer excitement.
Brand value enhancement
This involves redefi ning the boundaries of the brand through innovation and helping companies create dis- tinct product and service experiences (34). Consider, for
Figure 3.—Innovation frameworks for the strategic dimension of Competitive Leadership.
May—June 2010 25
example, Oil of Olay, a cosmetic product that was con- sidered humdrum and not so profi table (and considered the “Oil of Old Lady”) when Procter & Gamble acquired it two decades ago. When its rival Unilever launched a series of products with distinct innovative features, P&G had to respond with variants of Oil of Olay, the sales of which were relatively static. P&G introduced a cleans- ing line in 1990, a daily ultraviolet protection product in 1991, and the Olay beauty bar in 1994. Also, P&G real- ized that to sustain these products it would have to inno- vate aggressively. The result: a series of breakthrough skin care innovations in which “anti-aging” features were delivered (35). The anti-aging innovation com- pletely transformed the Oil of Olay brand as P&G intro- duced Olay Total Effects and transformed it into a billion-dollar line.
Unilever conducts bio-prospecting studies to create newer products. While experimenting with plants and animals in the Arctic, it found certain proteins that can withstand the cold without losing their physical and chemical proper- ties. These proteins have been used as additives to make ice creams and “frozen desserts soft and frost-free,” thereby helping Unilever to enhance its brand value.
Motorola’s RAZR introduced a number of new fea- tures that no other cell phone had provided (36 ). For example, to maximize strength while minimizing weight, the team used magnesium for housing inside
the phone. Also, while most of the Motorola phones had “three connectors” for power, data, and ear- phones, the RAZR has only one mini-USB side port that does triple duty. In this way, through brand value enhancement, Motorola was able to resume a domi- nant position (36 ).
Competitive Leadership
Dominating competitors by outwitting, outmaneuvering, and outperforming them through innovation is known as competitive leadership. It involves competitive analysis, competitive benchmarking, and competitor learning and evolving a roadmap to stay ahead of the competition. The European Community Initiative is a similar effort at the country/regional level (37 ). Firms like Adobe, Canon, DuPont, P&G, Pixar, Tetra Pak, and Toyota have used the competitive leadership approach through one or more of the innovation strategies in Table 3.
Before implementing an innovation strategy, as noted earlier, the company has to carry out a strength, weak- ness, opportunities and threats analysis. If the analysis indicates that the company is weak with respect to com- petitors, then it has to fi nd a way of overcoming the weakness. It has to ask the following four questions to fi nd out whether leveraging innovation can help it to achieve the competitive leadership:
Figure 4.—Innovation frameworks for the strategic dimension of Portfolio Enrichment.
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Can any new technology be leveraged for enhancing • the competitive position?
How can the company secure its future by hedg-• ing against emerging options or actions by com- petitors?
Can the company leverage lean development so as to • outperform competitors?
Can a company use partnering for leveraging inno-• vation?
Technology leveraging
The essence of this approach is leveraging an inno- vative technology so as to dominate the competi- tion. The technology may be generated internally or obtained from outside (38). Competing in mature
markets requires strong product pipelines. P&G had for decades fueled its consumer products engine from in-house R&D (28), but recently switched to an open innovation model whereby it obtains half of the ideas it uses from external sources. The open innovation approach is less risky and also helps to broaden the geographic base of innovation (14). P&G has been able to deepen and broaden its product offerings by acquiring innovation from around the globe faster and at a lower cost.
FedEx has leveraged the technology of RFID-based tracking to track packages and reduce lost and mis- placed packages (39). Similarly, Tetra Pak, which manu- factures aseptic packing, has dominated the competition by creating diffi cult-to-imitate products, leveraging its knowledge of packaging technologies to create propri- etary and innovative offerings.
Table 3.—Innovation Strategies for Competitive Leadership
Strategies of Innovation
Thrust of Innovation Examples Benefi ts
Technology Leveraging
Leveraging technology to be better than competitor’s.
FedEx using RFID technology for keeping track of the approx. 3.2 million parcels it delivers daily.
FedEx was the fi rst to introduce RFID to track packages. They are able to trace lost and misplaced packages and reduce lost packages to a minimum.
Tetra Pak applied nanotechnology in cosmetics to develop high skin penetration emulsions.
Tetra Pak was able to leverage nanotechnology to create diffi cult-to-imitate products with very specifi c properties which are diffi cult to match.
Airbus implemented a program on RFID. Airbus 380 uses about 10,000 RFIDs.
Airbus has been able to improve the effectiveness of maintenance and thereby reduce turn around time by using RFID-based monitoring.
Future- Proofi ng
Creating multiple options to reduce uncertainty.
Toyota pursuing multiple options such as diesel, hybrid, electric, fuel cell cars and biofuel engines.
Toyota can compete with others even if any one of the fuels emerges as the basis of energy for transportation, thereby securing the future.
Airbus pursuing these options: 320, 330, 340, 350, 380, 318, 321 and 319.
Airbus has been able to reduce the number of parts and also pilot utilization compared to the competitors.
Lean Development
Reducing waste, cost of production.
Toyota is the fi rst company to use the lean development concept.
With low cost of development, low usage of materials and waste minimization, they are able to dominate most of the markets.
Adobe uses the Agile Software Development Ecosystem to complete the job in short time with better quality.
By outsourcing on a large scale, Adobe is able to develop software faster and cheaper. Adobe leads through patenting the technology. New versions of Photoshop were introduced rapidly.
Part nering Using collaborative forms to meet competitive pressures.
Genencor partnered with DuPont to make Sonora, a new fi ber using corn as a raw material.
Risk sharing, resource pooling, knowledge and joint learning make them formidable.
Pixar partnered with Disney and changed Pixar’s landscape. The main focus of the partnership was learning.
By collaborating, they are able to share complementary competencies to generate world-class offerings.
EADS is a merged entity of Airbus Industries, Deutsche Airbus, CASA, and British Aerospace Limited.
Sharing resources and complementing knowledge have helped them to compete effectively in the marketplace. They introduced the largest passenger aircraft in the world through joint development.
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Technology leveraging is essentially value creation and value capturing to seize new market opportunities. It is not limited to creative breakthroughs; rather, it involves applying technology to create a range of products, services, or features to dominate the com- petitors. Using technology foresight to create business value has become an ongoing process in a number of companies (40). As open innovation and crowd sourc- ing are more widely used, fi rms are able to leverage technology from many sources, thereby helping them to maintain their lead (41). Recently, Kraft Foods, Nestle and Unilever have announced open innovation as a major method for leveraging technology created elsewhere (42).
Future-proofi ng
Future-proofi ng is essentially hedging against techno- logical obsolescence by pursuing multiple technological options (43). Because the future is not easy to predict, fi rms need to pursue multiple options rather than putting their eggs in a single basket.
For example, Canon realized that liquid crystal dis- plays (LCDs) would soon be replaced by either plasma or fi eld emission displays (FEDs), technologies in which the company did not have a sound foothold. So it decided to team up with Toshiba and make sure it would have a share in the future displays market. The two companies worked together to create an alterna- tive. Instead of investing in plasma displays or FEDs, they developed “surface conduction, electron emis- sion displays” (SEDs), which offered excellent bright- ness, wider viewing angles, and faster response time. This example is a combination of future-proofi ng and partnering.
Future-proofi ng is ensuring that options are not foreclosed and that the fi rm will have the ability to meet a threaten- ing change in the technological trajectory. Thus, Toyota is looking into the future and pursuing fi ve potential options for fuels, as it is not sure which technology will emerge as the winner. The Toyota technology pipeline includes im- proved direct-injection combustion engines, gasoline hybrids, diesel (the preferred option in Europe), fuel cell- based vehicles, and biomass-fueled automobiles.
Managing a business in an uncertain world requires fu- ture-proofi ng. Toyota was not an active player in diesel automobiles until recently. Its entry into this market is a typical illustration of future-proofi ng. The company plans to enter the European market in a big way, and it sees diesel as a means to win market share.
Lean development
Lean product development aims at meeting three distinct demands (44,45):
Market price• Development and manufacturing cost • Time to market •
This approach involves reducing resource requirements as well as eliminating waste. Adobe, the desktop software applications company, wanted to include the Photoshop application in its printer software platform. The work was assigned to the company’s R&D center in India. By putting a large number of engineers on the job, the com- pany developed the product in a short time and at a low- er cost. Adobe used the Agile Software Development Ecosystem, a conceptual framework that uses multiple teams to complete the job in a short time by overlapping the phases of development. It helped Adobe maintain its dominant position as a major player in the digital docu- ment business.
Although Toyota was one of the fi rst companies to adopt lean manufacturing, many other fi rms have now adopted this approach (33). Boeing is using lean devel- opment for its 787 Dreamliner. The 787 team learned the approach from Toyota and intends to reduce its assembly time from 21 days to 3 days. Companies are innovating in different ways with a view to dominat- ing the competition, and lean development is a multi- pronged approach that helps them create competitive advantage (44,45).
Partnering
Corporate partnering for innovation helps fi rms syner- gize complementary capabilities besides sharing re- sources and risks (46,47). Disney, for instance, partnered with animation specialist Pixar to produce blockbuster animation movies like Toy Story and Finding Nemo. This partnership changed the Hollywood animation landscape by combining Pixar’s software and Disney’s marketing reach (48).
DuPont moved into biology from petroleum-based products like nylon by partnering with the biotech com- pany, Genencor. The two companies worked together to use a bacterial DNA path to create green chemicals based on natural products using the concepts of pathway engineering. They designed a “custom cell factory” in which bacteria could be made to produce a designated product. Genencor used corn instead of petroleum- based hydrocarbons; it got results using genes from three microorganisms through genetic engineering. The custom-designed microbes converted glucose into pro- panediol, which was then used by DuPont to make the new fi ber, Sorona.
Such partnerships facilitate innovation by sharing capa- bilities and risks. DuPont was facing competition in the fi bers business; it had to innovate to beat the com- petition and it achieved this through partnering. The
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product of the partnership could well change the com- petitive landscape of the man made fi bers industry.
Airbus partnered with Deutsche Airbus, British Airways, and CASA to create the A-380 (49,50). Sharing of knowledge and resources helped Airbus create the world’s largest passenger aircraft and it is a very innova- tive product.
Portfolio Enrichment
The third dimension of innovation strategy enriches the portfolio by adding innovative offerings, which, in turn, create new market opportunities. Even established com- panies in mature markets have to use innovation to cre- ate new business segments. For example, DuPont has been continuously expanding its product portfolio by developing new products to meet customer needs, in- cluding nylon, polyester, Tefl on, Lycra, and more re- cently, Sorona. The portfolio enrichment process is guided by four strategies (Table 4):
Innovation mutation• Creative destruction• Market segmentation • Acquisition•
Prior to implementation of the innovation strategy, the company has to undertake a comprehensive strength, weakness, opportunities, and threat analysis. If the analy- sis indicates that the company has a weak portfolio, it has to ask the following typical questions to fi nd out how in- novation can be leveraged to eliminate the weaknesses and exploit the strengths:
Can innovation help quickly improve the portfolio by • changing the technology?
Can a company destroy its current product and intro-• duce a completely new product to correct its stagnant portfolio?
Can a company create a new market segment by an • innovative product introduction?
Can a company acquire innovation from outside to • enrich its product pipeline?
Innovation mutation
Innovation mutation involves mutating the technology and creating a number of offerings. The difference be- tween platform offerings and innovation mutation is that the basic technology remains the same in platform offering, whereas in innovation mutation the technolo- gies are different. Products or technologies are modifi ed or adapted to meet new requirements and to expand the portfolio. The benefi t is the ability to recycle knowledge, thereby gaining from economies of scale (51).
For example, Syngenta introduced a micro-encapsulation technology in which it could squeeze 50 trillion microen- capsulated pesticide molecules into one liter of liquid. It used this knowledge to produce Karate Zeon pesticides, which offered greater consistency and safety (52), and a product called Force CS to control soil pests affecting germinating seedlings. Next came the Demand CS insec- ticides to control household pests like cockroaches and ants, in which the pesticide gets activated on contact with a pest. The company has also developed Iconet to reduce the spread of tropical diseases caused by mosqui- toes. The proprietary encapsulation technology releases the pesticide only when it reaches the insect’s stomach. In this way, Syngenta has applied encapsulation technol- ogy to create products for different market segments.
iPod and iPhone are other examples of innovation muta- tion. In both devices, the technologies are different. iPods address the needs of music listeners while iPhones are de- signed as communication platforms. Different technology bases are used to address the various needs of customers. Similarly 3M produced a series of adhesive tapes for various applications such as offi ce use, packaging, label- ing, and medical adhesives. So far the company has in- troduced about 16,000 products through innovation mutation (27).
Innovation mutation also refers to modifi cation of an in- novation to rapidly provide new market segments. Syn- genta will use its micro-encapsulation technology to produce human drug formulations. Mutation is faster than regular product evolution or incremental innova- tion. The advantage is not just speed to market but also low costs. Mutation can also help fi rms dominate the competition along with portfolio enrichment.
Creative destruction
Creative destruction was coined by Schumpeter to describe the economic impact of technological change. Creative destruction involves rapid withdrawal of old products and their instant replacement with new products.
Four innovation strategies allow fi rms to achieve
competitive leadership.
May—June 2010 29
mount design. Canon did this so that no one could attack its products; at the same time, it transformed its product portfolio.
Creative destruction helps fi rms move to higher growth trajectories, as demonstrated by the experience of sev- eral global companies. The success of creative destruc- tion depends on judicious selection of innovations that can fuel future growth.
Market segmentation
Market segmentation is identifying new market segments as windows of opportunity. Segmenting the market in an innovative manner has become a source of competitive differentiation.
Market segmentation stimulates demand in multiple ways. Low-fare Southwest Airlines created a new mar- ket segment by using a number of innovative features.
Surprise is key here. For example, Toyota suddenly dis- continued its fast-selling multi-utility vehicle Qualis and replaced it with a new platform Innova—a crossover multi-utility vehicle that combines the features of a car and a van—which was launched simultaneously in many markets, including Brazil, China, India, Indonesia, Rus- sia, South Africa, and Thailand (53).
Microsoft launched its new Vista operating system when XP was doing very well. Microsoft Vista has many more features than Microsoft XP and aims to increase the level of communication between machines on a home network to simplify sharing fi les and digital media. This illustrates how a company can benefi t from creative destruction and expand its portfolio.
Similarly, Canon introduced electro-optical system cam- eras, replacing the earlier auto-focus cameras without prior warning. It also replaced the fi xed mount lenses on the cameras with new electro-focus lenses and a new
Table 4.—Innovation Strategies for Portfolio Enrichment
Strategies of Innovation Thrust of Innovation Examples Benefi ts
Innovation mutation
Creating a new product through mutating technology.
iPods and iPhones are products of innovation mutation; iPhone came into the picture only after mutating the iPod technology.
Original portfolio consisted of only computers; then Apple expanded its portfolio by launching MP3 and MP4 players and iPhones.
Creative destruction
Purposeful destruction of an ongoing offering and replacing it with another product.
3M produces adhesive tapes for various applications like packaging, labeling, transportation, medical adhesive tapes, etc.
3M entered transportation, medical support systems, offi ce supplies, etc.
Canon introduced “electro optical system cameras,” replacing the earlier generation “auto-focus” cameras.
Canon killed its own best selling products to create a new market.
Microsoft introduced the new Vista operating system at the time when Microsoft XP was doing very well.
Microsoft enhanced its portfolio by adding a new operating system with superior features.
Market segmentation
Creating a new market segment and creating a new window of opportunity.
Southwest Airlines created a new market segment and by strategic positioning was able to operate a low-cost airline.
Created a new market segment.
IKEA became a global furniture company through market segmentation.
IKEA has become a global company with a wide portfolio.
Acquisition Acquiring technology, brand, or market.
BASF acquired Crop Design for producing new plant vari eties with desirable traits.
BASF was able to extend its portfolio to cover plant biotechnology products.
Unilever combined the acquired “Slim Fast” technology to create a series of new foods with weight-reduction potential.
Unilever was able to launch products for the weight-reduction market.
Research . Technology Management30
Fast turn-around time, low break-even load factor, and a large number of trips per day made it a very economical airline. Southwest has made a profi t for the past 34 years (54). Southwest’s example shows how business model innovations involving change in the operating structure of the business can also be a viable innovation strategy under market segmentation.
Gillette and BIC are dominant players in the refi ll- able cartridge razor market, competing in the inex- pensive and disposable razor segment. Recognizing the threat posed by low-cost rivals, Gillette sought to reverse the trend of commoditization of shaving products, and found, through its research, that there was a strong market for reusable razors. The com- pany launched the Sensor Excel razor in 1994 and it became a hit; the Mach3, the fi rst triple-blade razor, followed in 1998.
Microsoft practices creative destruction and mar- ket segmentation on a regular basis. Over the past 25 years, Microsoft products have evolved from a single one-size-fi ts-all desktop operating system into a diverse family of operating systems. Microsoft has continually enriched its product portfolio by offering better products with enhanced features through cre- ative destruction, introducing new-generation operat- ing systems long before the older systems becomes obsolete (55).
IKEA, which started as a small Swedish furniture store, became a global company through smart market seg- mentation. It became the fi rst company to introduce in- expensive furniture assembled by customers at their locations; then it moved up market with designer furni- ture for offi ces, stores, and houses and used different channels to market and deliver its products, including direct marketing, catalogue marketing, and Internet mar- keting (56). At the root of IKEA’s success was its abil- ity to identify new market segments to continuously expand and enrich its product portfolio, thanks to which it has remained a market leader for years.
Acquisition
Innovation acquisition involves obtaining a technology, product, or brand from outside.
Unilever has used acquisition time and again to lever- age innovation. For instance, the company determined that weight-reducing foods would be an emerging op- portunity, but recognized that developing products for this market would take a long time if it depended on its own research. So, in 2000 it acquired the Thompson Medical Company, which had developed a range of milk-and soya-based drinks called SlimFast. Later, in 2006, Unilever developed a process to alter the molecu- lar structure of fat-containing emulsions that resulted
in the intestines absorbing the fat more slowly, delay- ing hunger pangs. These emulsions are used in SlimFast Optima, which is the new segment it launched for milk- shakes in 2006, and is now extending to other beverages and to ice creams. Unilever has successfully combined acquired technology with in-house R&D to create a se- ries of blockbuster products.
Pharmaceutical companies are increasingly using the innovation acquisition strategy, which is less risky and more effective. Among the fi rst to do this was Novartis, which, in 2006, purchased Chiron (a mar- ket leader in vaccines), thereby creating a new seg- ment in their business. Similarly, Merck of Germany acquired Serono (57 ), AstraZeneca acquired the bio- technology fi rm Medimmune, and Roche acquired Genentech.
BASF acquired a Belgium-based university spin-off called Crop Design, which had proprietary technology for identifying genetic traits of plants. BASF now uses this technology to produce new plant varieties with de- sirable traits.
Enriching a portfolio through acquisitions is a lower-risk process with relatively faster brand building and realiza- tion of competitive benefi ts.
In Conclusion
Innovation can become a major competitive differentia- tor delivering benefi ts in three distinct dimensions:
Exciting customers through new features, offerings, • experiences, and services.
Leading competitors with innovative responses, • including proprietary techno logies.
Expanding, enriching, and diversifying the product • portfolio to achieve different growth trajectories.
Enriching the portfolio with
innovative offerings is the third
dimension of innovation strategy.
May—June 2010 31
The above three strategic dimensions can be realized through any one or combination of 12 innovation strate- gies. By implementing them, one will be able to reduce the number of failures in crossing the “valley of death.”
With globalization, brands have become the messaging tools of global companies, which are using innovation to create and strengthen brand differentiation. Leading companies have begun to adopt external technologies for innovation. The 12 innovation strategies provide a way to catalyze open innovation processes so that inno- vation moves out of the confi nes of R&D labs and be- comes an intrinsic part of the way companies plan their futures and implement those plans.
Without innovation, many global companies could not have sustained their market leadership and profi t mar- gins. Oil of Olay would have become defunct if P&G had not pumped innovative ideas into it and created innovative products. Boeing’s 777, a product of co- creation, has become the best selling two-aisle aircraft. Companies like Nokia, Canon, and IKEA have main- tained their lead through innovation. Examples of such innovation should inspire executives to build new prod- ucts and services.
Acknowledgement
The authors are grateful to Tata Sons and Tata Services Ltd. for providing the necessary institutional support for undertaking this study. We especially thank Mr. Ratan, Tata Chairman, Tata Group; Mr. R. Gopalakrishnan, Ex- ecutive Director, Tata Sons; Mr. S. Pradhan, Executive Vice President, Group HR; and Mr. Chetan Tolia, Direc- tor, TMTC, for their encouragement and organizational sponsorship of this research at TMTC.
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