Strategic Innovation in Established Companies

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  • In May 1959, when Harry Cunningham became president of Kresge, the variety store chain (originally founded in 1897) was second only to Woolworth. In the next few years, Cunningham transformed Kresge (with 803 stores in operation) into the largest discount store in the United States and renamed it Kmart. The decision was a particularly difficult one because, as Cunningham explained, “Discounting at the time had a terrible odor. . . . If I had announced my intentions ahead of time, I never would have made president.”1 Yet the move into discounting rejuvenated the company, and by 1976, Kmart had almost twice the sales volume of Woolworth and was only second behind Sears in general merchandise retailers.
  • From 1984 to 1985, Intel decided to exit from the dynamic random access memory (DRAM) business and wholly embrace microchips based on the x86-CISC architecture. The decision completed the company’s transformation from a memory company into a microprocessor company — a move so radical that a mid-level manager commented: “It was kind of like Ford getting out of cars.”2 The move put Intel on an exponential growth curve; in 1996, the company announced record profits of $5.2 billion on sales of $20.8 billion.
  • In 1989, when Denis Cassidy took over as chairman of the Boddington Group plc, the company was a vertically integrated beer producer that owned a brewery, wholesalers, and pubs throughout the United Kingdom. In the next two years, Cassidy set about transforming the company into a “hospitality” organization. He sold the brewery and diversified into restaurants, homes for the elderly, and hotels, while keeping the portfolio of large managed pubs. “The decision to sell the brewery was a painful one, especially since the brewery has been part of us for more than 200 years,” Cassidy explained. But the move resulted in the creation of enormous shareholder value, especially when compared with the strategies of other regional brewers in the United Kingdom.
  • In 1989, Peter Schou, CEO of a small Danish bank called Lan & Spar, set about transforming the bank from a general-purpose, traditional savings bank into a focused, low-cost direct bank. The bank targeted professional retail customers and encouraged them to do their banking via phone, fax, and mail. Within three years, its market share had tripled. By 1997, the direct bank had evolved into the world’s first on-line, real-time PC bank and was also trying an Internet-based version. These changes have helped Lan & Spar move from forty-second in Denmark to tenth, and the bank is consistently ranked first or second in profitability every year.

These stories are more than successful examples of corporate turnarounds (such as Harley-Davidson). They are more than inspired stories of dramatic improvements in the existing business (like IBM). And they are more than successful internal venturing decisions (à la mobile phones at Ericsson) or successful attempts to add another business to the existing product portfolio (like HP moving into digital photography). These are all examples of what I call strategic innovation: a fundamental reconceptualization of what the business is all about that, in turn, leads to a dramatically different way of playing the game in an existing business.

Strategic innovation is difficult to achieve, evidenced by the fact that only a small number of firms (for example, Dell Computers, CNN, IKEA, the Body Shop, First Direct, MTV, Southwest Airlines, Canon, and USA Today) can claim to be successful strategic innovators. What is even more interesting, however, is that within this select group of companies lies an even smaller and more select subset of companies: strategic innovators who are also established industry leaders. All evidence suggests that most strategic innovations come from outsiders, rarely from established players. In this article, I use successful strategic innovations by established companies — such as the four stories above — to explain how long-time industry players can overcome the obstacles and improve their chances of becoming strategic innovators.

While I explore how an established company can achieve strategic innovation, whether the company should pursue and implement the innovation is another matter. This is a separate decision that requires its own thought process. To clarify this point, suppose that, like IBM or American Airlines, you are an established industry player with a substantial market share position. This means that you have already taken a position in your industry and are making a lot of money. Now, suppose that a new position emerges, created by players such as Dell Computer or Southwest Airlines. Should you abandon your current position for the new one? Alternatively, can you occupy both positions simultaneously?

The answers to these questions are not easy. For example, should American Airlines abandon the hub-and-spoke system to adopt Southwest Airlines’ direct system? Alternatively, can it possibly play both games simultaneously?3 Similarly, should IBM give up its extensive distribution channels of dealers and direct salespeople to move into the mail-order business like Dell Computers? Alternatively, can it join the mail-order game while simultaneously playing its current game through its dealers?4 Won’t this damage its relationships with the dealers? Should Barclays Bank shut down its extensive branch network to follow Midlands Bank into telephone banking? Alternatively, can it organize itself to play both games efficiently? My purpose here is not to explore these questions.5 Rather, I take the position of an established firm that wants to discover a new strategic position (that is, strategically innovate) and ask the question: How can this firm identify a new strategic position?

Overcoming Obstacles

In any industry, companies have to take a position on three strategic issues: Who is going to be the customer? What products or services should we offer to the chosen customer? How can we offer these products or services in a cost-efficient way?6 The answers to the “who-what-how” questions form the backbone of any company’s strategy. In fact, some will argue that they are the strategy of a company.7 Over time, different companies make different choices on these three dimensions, and before long, the industry gets “filled” — that is, most possible customer segments are taken care of, most products and services are being offered in one form or another, and most possible distribution or manufacturing methods or technologies are being utilized. In fact, this filling up of the industry space by enough competitors eventually leads to industry maturity.

As I explained in an earlier SMR article, strategic innovation takes place when a company identifies gaps in industry positioning, goes after them, and the gaps grow to become the new mass market.8 By gaps, I mean: (1) new customer segments emerging, or customer segments that existing competitors neglect; (2) new customer needs emerging, or existing customer needs that existing competitors do not serve well; and (3) new ways of producing, delivering, or distributing existing (or new) products or services to existing (or new) customer segments. These gaps tend to emerge for various reasons, such as changing consumer tastes and preferences, changing technologies, changing government policies, and so on. The gaps can be created by external changes or proactively by the company itself.

The majority of companies that strategically innovate by identifying and exploiting new who-what-how positions in the business tend to be entrepreneurial start-ups (for example, the Body Shop, CNN, Dell Computers, or IKEA) or new market entrants (for example, Canon or National Bank of Scotland). It is rare to find a strategic innovator that is also an established industry big player — a fact that hints at the difficulties of risking a sure thing for uncertainty.

The generic issue of innovation (not only strategic) by established companies is the subject of numerous studies.9 Compared to new entrants or niche players, established companies find it hard to innovate because of structural and cultural inertia, internal politics, complacency, fear of cannibalizing existing products, fear of destroying existing competencies, satisfaction with the status quo, and a general lack of incentive to abandon a certain present (which is profitable) for an uncertain future. In addition, since there are fewer industry leaders than potential new entrants, the chance that the innovator will emerge from the ranks of industry leaders is small.

Given all these barriers to innovation, it is understandable why there are not more strategic innovators emerging from the ranks of established players. Yet Intel, Kresge, and Boddington were all established industry players that conceptualized their businesses in an entirely different way and thus started playing the game in a totally different way.10

What we can learn from these firms is how established companies overcome obstacles to innovation. In general, established players face four types of obstacles:

  1. I am having a good time in my little part of the world and making good money. Why should I change?
  2. Even if I recognize the need to change (and, in particular, to change my strategy or who-what-how position), what shall I change into?
  3. Even when I see a possible new position emerging, how do I know that it’s going to be a winner? What if I jump into it and it turns out to be a mistake?
  4. Even if I decide to jump, how do I make sure that my employees (who have vested interests in maintaining the status quo) jump with me? Can I manage two industry positions simultaneously or do I have to relinquish the old for the new? And if I can have both positions, how do I organize to manage the old and the new simultaneously?

Based on my research on strategic innovation by established industry players, I explore some tactics for overcoming the four obstacles to innovation.

How to Overcome the Inertia of Success

You will never discover new lands if you don’t venture outside the safety of the harbor. Similarly, you will never discover new ways of playing the game if you don’t question the way you currently play. A prerequisite for strategic innovation is a fundamental questioning of the way we do business today. It means actively thinking about the business and perhaps mentally experimenting with a few “whys” and “what ifs.” This is difficult for any company to do but it is almost impossible for a successful one.

Successful companies “know” that the way they play the game is the right way. After all, they have all those profits to prove it. Not only do they find it difficult to question their way of doing business, but their natural reaction is to dismiss alternative ways even when they see competitors trying something new. For example, it took Xerox at least twenty years to recognize Canon as a serious threat and respond. It took Caterpillar even longer to face up to Komatsu.

Unfortunately, advising companies to question their way of playing the game and think of alternative ways, especially when they are successful, is fruitless. They simply do not do it, even though they know and agree with the principle. It’s like advising people that they should not wait to get sick before visiting a doctor, but that they should do so every few months. Although most human beings agree with these sentiments, few actually do it. The same is true with companies: even though few managers disagree with the need to fundamentally question the way they do business before a crisis strikes, few do it.

Suppose your company goes through the experience depicted in Figure 1: a history of growth and profitability and then a sudden change of fortune and a financial crisis at point B. Given this scenario, when are you most likely to seriously question the way you operate? If you are at all typical of the majority of companies, you would probably start thinking about change around point B, and then start doing something about it after things get even worse, right in the middle of the crisis. Why change when everything seems to be going so well and the company is enjoying record profits?

Needless to say, trying to change in the middle of a crisis is the worst time to do so. It is much better to think about the business in a proactive, long-term way when times are good, probably at point A. Established companies that want to strategically innovate must take the time to question the way they do business, especially when they are successful. They should not wait for a crisis to start contemplating the future.

The ideal scenario is the pattern in Figure 2: well before the company gets into trouble, it actively rejuvenates itself at point X, which allows it to embark on another growth curve. Just when the new growth curve is about to taper off, the company rejuvenates itself again at point Y, once again embarking on another growth curve, and so on.11 (As I point out later, an organization can identify where it is on the curve — and decide whether the moment for rejuvenation has arrived — by monitoring not only its financial health but also its strategic health; and it can successfully rejuvenate itself by creating internal “positive crises,” that is, by creating challenges that have been “sold” to the rest of the organization.)

Although this scenario looks utopian, there are companies that have gone through such an evolution. Hewlett-Packard made rejuvenating transitions in moving from instruments to computers, from minicomputer-based technology to microprocessor-based technology, and finally, from computers to desktop publishing. Motorola went from consumer electronics to semiconductors and now telecommunications. Johnson & Johnson has moved from consumer products to pharmaceuticals. 3M has changed business at least three times so far — from mining to sandpaper to tapes and so on. Microsoft is attempting such a transition by moving into an Internet-based world, and General Electric is trying to move heavily into services and out of manufacturing.12

Unfortunately, such examples are rare. Most companies do not question their way of doing business until a crisis hits them. How did the strategic innovators succeed in overcoming the inertia of success and fundamentally question their way of doing business? I identified two interrelated approaches:

  • They monitored not only their financial health but also their strategic health for early warning signals before the crisis came.
  • They artificially created a positive crisis to galvanize the organization into active thinking. More importantly, because the positive crisis they created usually took the form of a new challenge for the organization, they took the time to sell the challenge to all employees.

Monitoring Strategic Health

Strategic health refers to a company’s future health that could be different from today (as measured by its financial health). Many companies appear to be very profitable (for example, IBM in 1990), only to discover two to three years later that they are facing a crisis. Conversely, many companies that appear today to be in financial difficulties (for example, IBM in 1994) are really ready to embark on a period of growth and profitability.

This implies that there is often a difference between a company’s financial and strategic health, and that financial health may not be a good predictor of the future. This, in turn, implies that a company needs to monitor not only its financial health but also its strategic health. The company must find measures or indicators that are like early warning systems. Two to three years before a crisis, they indicate that something is not going well and the company needs to make a correction.

Consider, again, the case of Boddington. In 1989, Denis Cassidy’s decision to sell the brewery was not very well received by several board members who were part of Boddington’s founding family. One family member remarked: “The brewery has been part of our company since our founding in 1774; you cannot sell it!” The strategic reorientation went ahead anyway (not without casualties), and all measures suggest that it was a great success. Why did Cassidy undertake such a dramatic change in the first place? After all, the company was financially doing quite well at the time. He rationalized his decision:

“At the time I took over, the company was still profitable. So, if you only looked at the numbers, there was nothing to worry about. However, when you looked at our business over time, you could tell that something fundamental was happening. For example, consumption of traditional English ale (the traditional lukewarm English ‘beer’ and Boddington’s mainstream product) went from 85 percent of the population in 1950 to less than 45 percent in 1988. What took its place? Imported beer which could be drunk cold. It’s as if the consumer was telling us that our product was not wanted any more. Making the situation even more serious was the fact that the Mergers and Monopolies Commission (MMC) was about to announce its decision on the brewing industry. We all expected that the decision would require big brewers to unbundle their vertical integration by divesting their captive pub operations. These fundamental changes in the industry required action, even though we were still quite profitable.”

The Boddington story highlights two emerging points in all the cases of strategic innovators that I examined:

First, this particular manager decided to strategically innovate, even though his company was financially healthy. What motivated him to act was the state of the company’s strategic health. He worried that financial problems might surface in the future. What allowed him to “see” the future were several indicators of strategic health: customer dissatisfaction, structural change in the industry, and deregulation. Additional indicators of strategic health that other strategic innovators used include trends over time in the financial health of the company, employee morale, innovation and new products in the pipeline, customer satisfaction as well as distributor and supplier feedback, changes in the industry and the company’s fit with the new environment, and the company’s financial health relative to its best competitors.

Second, it is one thing to get an early warning that trouble is brewing and another thing to decide what to do about it and then do it. This is where strong leadership comes in: being able to see a different future and having the courage to abandon the status quo for something uncertain.

Creating Positive Crises

A second tactic the strategic innovators used to overcome the organization’s natural inertia of success was to convince all employees that the current performance was good but not good enough. They achieved this not by denying how well the organization was currently doing but by developing a new challenge that made the current performance appear inadequate. Their purpose was to galvanize everybody into active thinking — to question how they worked, what they did, and what they had to do differently to respond to the new challenge. In a sense, the CEO created a positive crisis by saying: “I know we are doing quite well, but our goal now is not to just do well but to aim for the moon. Can we achieve that?”

The notion of creating a stretching goal is not new.14 However, the key word is convince: what distinguished the successful strategic innovators is the time and effort that went into selling the new challenge to everybody. People started thinking actively and started questioning the status quo only after they “bought” the new challenge. How did the successful innovators succeed in selling the challenge to so many people? The selling process consists of three steps:

First, the company must communicate and explain its objective so that there comes a point when everybody says, “I know what we are trying to achieve and I understand why.” People cannot get excited about anything unless they first know what it is that the company is aiming to achieve and why.

Second, the company should make the objective realistic and achievable so that people say, “Yes, I think we can achieve this objective.” This is more difficult than it sounds. Usually, ambitious and stretching goals and objectives are needed to generate excitement. Yet these are exactly the goals that tend to generate disbelief and dismissal as unrealistic and unachievable. Somehow, these ambitious goals need to become believable to employees. A few early victories (manufactured, if necessary) can help a lot in generating belief.

Third, people must move from rational acceptance of an objective to emotional commitment. At the end of this magical jump, people should be saying: “Yes, I know what the objective is, I understand why we are aiming for such an objective, I believe we can achieve it, and I am personally committed to it.” This jump is extremely difficult to accomplish, and various tactics are needed to pull it off, among them:

  • Make people feel part of an elite group that is difficult for others to enter. Reinforce the team feeling through symbols and rituals.
  • Create a credible enemy for the team.
  • Create positive and negative incentives to promote the chosen objective.
  • Allow people to develop the objective themselves and empower them to carry it out.
  • Lead by example.
  • Keep communicating and reminding people of the objective.

The experience of Douwe Egberts — a subsidiary of Sara Lee and a leader in ground coffee and coffee systems in Europe — highlights the difficulties and frustrations of trying to sell an organizational objective to hundreds of people. Despite being very successful, the company decided to rejuvenate itself by developing a new challenging goal. The process was initiated in November 1995 when the top twenty global managers met to analyze their environment and develop a new objective and a new strategy.

The company communicated the new objective to the top 180 managers at a two-day conference in April 1996. The company divided the managers into groups of ten and asked them to meet periodically to discuss how the company could achieve its objective. Their ideas would go straight to the CEO’s office. To generate momentum, a few successful projects that had been initiated after the November meeting were introduced at the April conference. (For example, the company announced the successful introduction of a new product in Spain.) These projects represented early victories in achieving the new objective.

Finally, the company asked conference participants to consider how their annual operating plans and the company’s incentive system should reflect the new objective. Progress toward achieving the objective would be monitored at similar conferences. The company now repeats the whole process in every country subsidiary and every product division.

Change into What?

The second obstacle facing established companies is that, even when they know that their current profitability will not last and they see the need to change, they don’t always see what to change into. This is a problem that every company, not just established players, faces. Therefore, the five generic steps to identifying strategic positioning gaps that I described in my previous article are applicable here: an established company must continuously question the answers it has given to the who-what-how questions and must question the definition of its business.15 Here, I highlight two specific tactics that established companies in particular can use to achieve innovation in their strategic thinking and planning: (1) challenge the accepted strategic planning process, and (2) institutionalize a questioning attitude.

Challenge the Strategic Planning Process

Companies that are able and willing to start their thinking at different starting points are more likely to escape existing assumptions and stereotypes and to see or discover something new. Therefore, established players that have adopted a certain strategic planning process must find a way to go through the process from many different possible angles.

In practice, established companies are constantly preoccupied with how they need to compete in their business without ever questioning the who and the what. They spend all their time finding ways to improve their operations (such as reengineering the business or restructuring the operations) and not enough time questioning who their customers are and what they really want. New or small companies start with a clean slate and are therefore more likely to see new customer segments or new customer needs emerging. Only by shifting some of their emphasis away from the how and more toward the who and the what can established companies succeed in discovering new customers and new products or services.

To identify strategic positioning gaps, thinking through the “who-what-how” questions in different order may prove to be particularly useful. For example:

  • A company can define first which customers it will target (who), determine what these customers want (what), and then decide how to satisfy these needs (how).
  • Alternatively, it can start by deciding what products or services it will offer (what) and, based on that, decide who will want to buy these products (who) and how it will produce and deliver them (how).
  • In another approach, the company can start with its existing core competencies (how) and, based on those, decide what products and services to offer (what) and to whom (who).

There is no right or wrong way. However, every company has a dominant way of thinking. An established company able to abandon that and experiment by starting its thinking at different places has a better chance of finding something new and innovative. Any attempt to create strategy must force managers to use as many approaches as possible.

Institutionalize a Questioning Attitude

The second tactic for discovering new strategic positions is to create an innovative culture. The underlying logic for this tactic is that what creates behavior in organizations is the underlying “context” or “environment” of that organization. By environment, I mean four things: the firm’s culture, its incentives, its structure, and its people. If people are to be more innovative, the environment must promote innovation. A company that wants to create a questioning attitude in its people must first ask: “What kind of culture, incentives, structure, and people do we need to create this behavior?”16

Successful strategic innovators have done exactly this. They have designed the appropriate environment that encourages and promotes a questioning attitude. As a result, continuous questioning of the status quo and continuous experimentation just happen.

What kind of environment promotes this kind of behavior? At Lan & Spar Bank in Denmark, the CEO knows the name and background of all 250 employees and spends more than 50 percent of his time mixing and talking with them. He acts quickly on new ideas from employees and gives small gifts or monetary rewards to some. 3M Company expects employees to spend 15 percent of their time on unauthorized projects. If a project reaches the new venture stage, it is spun off as a separate division, with the entrepreneur as divisional president. MCI encourages people to take calculated risks, and top management fosters a culture that questions everything. As a result, whereas in most companies people are afraid to make mistakes, at MCI, people are afraid of not making mistakes! At the Body Shop, every employee has access to the DODGI (Department of Damn Good Ideas) and can discuss ideas with senior managers.

These are only a few examples of tactics that promote innovation. An enormous amount of literature exists to help managers institutionalize innovation in their companies.17 However, if so much is known about creating an innovative organization, why is strategic innovation by established firms the exception rather than the rule? The main reason for this is that even though many companies know how to achieve innovation, very few actually do it, primarily because top management has no incentive to change the status quo. What, then, differentiated the successful strategic innovators in this study from the rest? Strategic innovators not only institutionalized a questioning attitude (through a variety of tactics), but, no matter how successful they had been, they always found ways to shake up the system every few years.

What these innovators seem to know is that it doesn’t matter how actively you question your way of doing things or how much you encourage this kind of behavior in the organization. Eventually, the system will reach blissful stability, characterized by contentment, satisfaction with success, managerial overconfidence or even arrogance, strong but monolithic culture, strong institutional memory that allows the company to operate on automatic pilot, and strong internal political coalitions. Inevitably, success will breed unyielding mental models that, in turn, produce passive thinking. These things will happen no matter how successful you have been in institutionalizing a questioning attitude. This implies that every few years, something must stir things up again and destabilize the system all over again.

The successful innovators were not afraid to destabilize a smooth-running machine and to do so periodically but continuously. How did they do it? The development of positive crises, especially challenges sold to the rest of the organization, is a powerful mechanism to destabilize the system and start the thinking process again. Equally powerful is the arrival of new blood at the top, a new leader unconstrained by the past and ready to challenge the status quo. In most of the examples of strategic innovation at established companies, the innovation occurred with the arrival of a new CEO, such as Walter Haas at Levi’s, Denis Cassidy at Boddington’s, Harry Cunningham at Kmart, Peter Schou at Lan & Spar Bank, Jack Welch at GE, Colin Marshall at British Airways, and Lou Gerstner at IBM. Even Intel’s decision to exit the DRAMs memory business was made after Andrew Grove asked CEO Gordon Moore to consider what new management would do if he and Moore were replaced.18

This point has serious implications. The current CEO may find it extremely difficult to break away from the past and transform the company. But even if a new CEO succeeds in transforming a company once, what is the chance that the same CEO will be able to do it again in a few years? What is the chance that an Andrew Grove or a Jack Welch or a Bill Gates will be able to transform their companies two or three times in their lifetime? It takes a great leader indeed to fundamentally question his or her mental models continuously and escape the trappings of success more than once. If that is the case, CEOs need to develop the ability to move on so that new blood can take their place. Alternatively, companies must be willing to remove their leaders (especially if they are very successful) to an advisory role, so they can still have the successful CEO’s knowledge and experience while receiving an infusion of new blood at the same time.

Will It Be a Winner?

The third obstacle facing established companies is the uncertainty surrounding new strategic positions. At any given time, a company does not know which of its many bright ideas will succeed; nor does it know which core competencies will be essential for the future.

How do successful strategic innovators decide which core competencies they should build and which new ideas they should place bets on? How do they know if the strategic position they have just come up with or the numerous positions they see other companies creating will be winners? If you are Revlon, how do you know that the Body Shop’s idea for environmentally friendly cosmetics will catch on? If you are IBM, how do you know that Dell’s idea of selling personal computers direct to individuals will succeed? If you are Perdue, how do you know that consumers will accept your idea of differentiating chickens?

The simple answer to this question is that you don’t know. A company should be willing to experiment with new ideas and see if they work out. But, should a company place bets on anything and everything that moves? To answer these questions, consider why the capitalist system won over the socialist system.19 In the socialist system, somebody tries to decide beforehand what is a good idea and then allocate resources accordingly. In the capitalist system, on the other hand, no central coordinating mechanism exists. Nobody tries to outsmart the market. Instead, multiple bets (i.e., initiatives) are made, and through some selection process (which is not necessarily efficient), winners and losers emerge. The capitalist system is certainly wasteful, but it is the best engine of progress so far designed.

What characterizes successful strategic innovators is their ability to incorporate the essential features of the capitalist system into their organizations. They have purposefully created internal variety (even at the expense of efficiency) and then allowed the outside market to decide the winners and losers. Thus, within many strategic innovators is the harmonious coexistence of often conflicting features (i.e., variety) that are continuously tested in the market and, if found wanting, are eliminated without too much debate.

The Leclerc organization in France illustrates vividly how successful strategic innovators create the necessary internal variety and then let the market decide what wins and what loses (see the sidebar). At any given time, 1,000 experiments are taking place within Leclerc, all within certain accepted parameters, all at the initiative of an individual. Nobody really knows which will succeed. But from this experimentation, winners do emerge: the practices and products that consumers choose as winners. The winners are quickly picked by the rest of the organization and inevitably become part of the day-to-day business.20

Creating Internal Variety at Leclerc »

How to Organize?

The final obstacle for any strategic innovator is the implementation of a new idea. Established firms face two unique challenges:

  • Because the strategic innovation will compete with the established business for managerial attention and resources, the managers of an established firm must convince everyone of the need and usefulness of the new idea if it is to have any chance of success.
  • Because the strategic innovation will be different from the status quo, it needs its own institutional support. The organization cannot simply export its current strategy, culture, systems, and processes into the strategic innovation. A completely new setup is required, which raises the issue of harmonious coexistence of the old and the new.21

For example, consumer goods companies such as Unilever and Procter & Gamble face the threat of generic, unbranded products entering their markets. Major supermarkets offer their own brands of products ranging from colas to soaps and detergents. These distributor-owned brands have made significant inroads in most European countries and the United States and account for 20 percent to 50 percent market share. Their success is based on their recipe of good quality at low prices.

The challenge facing companies like Unilever and P&G is whether to offer their own generic products along with their more well-known brands. However, even if they do decide to get into this business, another challenge awaits them: Unilever’s or P&G’s organizational setup is now geared toward innovation and the development of branded products. This setup requires a certain organizational culture, structure, incentives, systems, and processes, all of which support a differentiation strategy. On the other hand, generic products compete on price and require a low-cost strategy, which needs a totally different setup.

How can Unilever or P&G develop a setup that supports the differentiation and low-cost strategies at the same time? This is a situation that established firms contemplating a new strategic position face: how to make the new strategic position coexist harmoniously with their existing business. At the same time, they have to worry about a second challenge: how to manage the transition from the old to the new.

Strategic innovators usually respond to the first challenge by setting up a separate organizational unit to support the new strategic innovation. For example, Midlands Bank established its banking unit, First Direct, as a totally different subsidiary. Similarly, Direct Insurance is a separate unit within the Royal Bank of Scotland.

Even though this solution is quite efficient, it is not without problems.22 Once a company sets up a separate unit, the challenge is how to integrate the two so that they work together. What distinguishes successful innovators is not that they ask or even demand integration. Rather, they create a context that encourages and supports integration.

What kind of context or environment promotes integration? At Leclerc, the strong family culture and the founder’s motivating vision both act as the glue that holds everything together. Lan & Spar Bank regularly uses team-based incentives and rewards while letting information flow quickly and uninterrupted. Unilever often transfers managers across subsidiaries and national boundaries. 3M uses cross-functional teams and shares information at regular company conferences.

At Bank One, business integrators travel from one branch to another exchanging ideas and best practice.

There is an almost unlimited number of tactics and practices that an organization can use to achieve integration.23 The problem usually is not lack of tactics or ideas; it is lack of will to put the tactics into practice.

The second challenge facing strategic innovators is far more difficult — how to manage the transition from the old to the new. When questioned about why his bank was not moving into direct banking, the CEO of a British bank replied: “I see that direct banking is the future. But what do you want me to do, shut down 1,000 branches and fire 20,000 people overnight?” His solution is to move from the old to the new slowly: let the two systems coexist but, over time, allocate resources to the new so that it grows at the expense of the old. This minimizes the trauma of change but has its own weaknesses in that it allows the supporters of the status quo — or the managers whose interests lie with the status quo — to sabotage the transition. The solution is strong leadership from the top.

Conclusion

When it comes to strategic innovation, the big challenge for small firms or new entrants is coming up with new strategic ideas. On the other hand, the big challenge for established companies is organizational: they need to develop the culture, mind-set, and underlying environment to continually question current success while promoting continual experimentation. Underpinning all the successful strategic innovators examined was a specific mind-set that encouraged dissatisfaction with the status quo and demanded ongoing soul searching. Ultimately, those companies that strive for self-renewal will succeed in the long term.

Topics

References

1. “K Mart Has to Open Some New Doors on the Future,” Fortune, July 1977, p. 144.

2. R.A. Burgelman and A.S. Grove, “Strategic Dissonance,” California Management Review, volume 38, Winter 1996, pp. 8–28 (quote from p. 15).

3. The answer, according to Michael Porter, is no. He describes how Continental Airlines tried to play both games by maintaining its position as a full-service airline while creating a new service dubbed Continental Lite to imitate the strategy of Southwest. This venture failed, suggesting that “positioning trade-offs deter straddling or repositioning, because competitors that engage in those approaches undermine their strategies and degrade the value of their existing activities.” See:

M. Porter, “What Is Strategy?,” Harvard Business Review, volume 74, November–December 1996, pp. 61–78 (quote from p. 69).

4. Earlier attempts by IBM to play both games simultaneously (through a direct-sales operation called Ambra) had failed. For a fascinating discussion on how IBM, Compaq, and HP are now trying to imitate Dell’s position (without abandoning their current position), see:

D. Kirkpatrick, “Now Everyone in PCs Wants to Be like Mike,” Fortune, 8 September 1997, pp. 47–48.

5. See C. Markides, Crafting Strategy: A Journey into the Mind of the Strategist (Boston: Harvard Business School Press, forthcoming).

6. See D. Abell, Defining the Business: The Starting Point of Strategic Planning (Englewood Cliffs, New Jersey: Prentice-Hall, 1980).

7. Porter (1996).

8. C. Markides, “Strategic Innovation,” Sloan Management Review, volume 38, Spring 1997, pp. 9–23.

9. See, for example:

M. Tushman and P. Anderson, “Technological Discontinuities and Organizational Environments,” Administrative Science Quarterly, volume 31, 1986, pp. 439–465;

R. Henderson and K. Clark, “Architectural Innovation: The Reconfiguration of Existing Product Technologies and the Failure of Established Firms,” Administrative Science Quarterly, volume 35, 1990, pp. 9–30;

A. Meyer, G. Brooks, and J. Goes, “Environmental Jolts and Industry Revolutions: Organizational Responses to Discontinuous Change,” Strategic Management Journal, volume 11, 1990, pp. 93–110; and

D. Leonard-Barton, “Core Capabilities and Core Rigidities: A Paradox in Managing New Product Development,” Strategic Management Journal, volume 13, 1992, pp. 111–125.

10. The other firms that form the backbone for this article include British Airways, Midlands Bank, Hewlett-Packard, Leclerc Supermarkets (in France), 3M, Royal Bank of Scotland, Tesco, Lan & Spar Bank (in Denmark), Douwe Egberts (in the Netherlands), and Hanes Corporation.

11. For similar concepts, see:

C. Handy, The Empty Raincoat (London: Basic Books, 1994);

C. Markides, “Business Is Good? Time for Change!,” London Business School Alumni News, Spring 1994, p. 15; and

Burgelman and Grove (1996).

12. See “Jack Welch’s Encore,” Business Week, 28 October 1996, pp. 42–50.

13. The importance of monitoring the organization’s strategic health to anticipate (rather than react to) change is also emphasized in:

M. Tushman, W. Newman, and E. Romanelli, “Convergence and Upheaval: Managing the Unsteady Pace of Organizational Evolution,” California Management Review, volume 26, Fall 1986, pp. 29–44; and

C. Markides, “Strategic Management: An Overview,” in S. Crainer, ed., Financial Times Handbook of Management (London: Financial Times Pitman Publishing, 1995), pp. 126–135.

14. See, for example:

G. Hamel and C.K. Prahalad, “Strategic Intent,” Harvard Business Review, volume 67, May–June 1989, pp. 63–76; and

J. Collins and J. Porras, Built to Last: Successful Habits of Visionary Companies (New York: HarperBusiness, 1994).

15. Markides (1997).

16. The notion that the underlying “structure” of the system creates the behavior in that system has been the subject of a large amount of literature in the systems dynamics field. See, for example:

J. Forrester, Principles of Systems, second edition (Portland, Oregon: Productivity Press, 1968); and

A. Van Ackere, E. Larsen, and J. Morecroft, “Systems Thinking and Business Process Redesign,” European Management Journal, volume 11, 1993, pp. 412–423. For a more managerial angle, see:

C. Bartlett and S. Ghoshal, “Rebuilding Behavioral Context: Turn Process Reengineering into People Reengineering,” Sloan Management Review, volume 37, Fall 1995, pp. 11–23.

17. The literature on this topic is huge. As a start, see:

R. Burgelman and L. Sayles, Inside Corporate Innovation: Strategy, Structure, and Managerial Skills (New York: Free Press, 1986);

R.M. Kanter, The Change Masters (New York: Simon & Schuster, 1984);

M. Tushman and W. Moore, eds., Readings in the Management of Innovation, second edition (New York: HarperBusiness, 1988);

D. Miller, “The Icarus Paradox: How Exceptional Companies Bring about Their Own Downfall,” Business Horizons, volume 35, 1992, pp. 24–35; and

S. Ghoshal and C. Bartlett, “Changing the Role of Top Management: Beyond Structure to Processes,” Harvard Business Review, volume 73, January–February 1995, pp. 86–96.

18. Burgelman and Grove (1996), p. 20.

19. R. Nelson, “Capitalism as an Engine of Progress,” Research Policy, volume 19, 1990, pp. 193–214.

20. For a supporting discussion, see:

M. Tushman and C. O’Reilly III, “Ambidextrous Organizations: Managing Evolutionary and Revolutionary Change,” California Management Review, volume 38, Summer 1996, pp. 8–30;

Burgelman and Grove (1996); and

Bartlett and Ghoshal (1995).

21. This same point is also discussed in:

Tushman and O’Reilly (1996); and

Burgelman and Grove (1996).

22. See, for example:

Burgelman and Sayles (1986).

23. See, for example:

S. Ghoshal and C. Bartlett, “Rebuilding Behavioral Context: A Blueprint for Corporate Renewal,” Sloan Management Review, volume 37, Winter 1996, pp. 23–36.

Reprint #:

3933

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