Unless protected by some effective legal monopoly (for example, a patent, although even that only delays the inevitable), the introduction of even the most brilliantly useful new product is the beginning of the end of its usefulness. There's nothing you can do that can't be done, so upon introduction of your brilliant product, your competitors will start their ultimately successful search for ways to duplicate your achievement. Even if they can't duplicate it exactly, they will ultimately find a way to achieve the same result. Thus, while you might be able to price your product so as to extract above-average returns for a while, once your competitors have found a way to offer customers the same functionality, your days of above-average returns will come to a sudden end.
In real life, the situation is even worse. Developing your brilliant new product might have been costly. You might have made false starts, or perhaps only one in ten of your new product ideas might actually reach the market. For a while, you'll have the customer to yourself, but much of your "above-average return" might actually go to pay off your research and development costs not only for that product but for all of your failures, too. Your competitors, on the other hand, don't have these same costs. Because they can go buy your product and study why customers like it, they don't have to take the risks or pay the price for research and development. You've kindly volunteered to do that for them. Even worse, they'll have the chance to see how your product can be improved to better serve your customers. Free-riding on your investment, they might be able to undercut your price and still make a better overall return. We call this the second-mover advantage.
Assuming you don't have a monopoly, the only way to beat these free-riding second movers is to present them with a moving target: by the time they have managed to copy your brilliant but dated product, you have to have a second even-more-brilliant product ready to go. Thus, one of the truisms of strategy: strategy is not what you do, but what you do next.
If coming up with a new innovative product is not the key to above-average returns, what should the firm do? It can wait for someone else to be an innovator, but that has it's own problems. There is also a first-mover advantage, and letting your competitors go first cedes to them the ability to decide where the industry is going and what the product looks like. Often, the key is to develop a "dynamic capability." A dynamic capability is a organizational talent for doing something useful not just once, but serially. In this example, not simply stumbling across one innovation, but the ability to introduce a series of innovations that always keeps your competitors one step behind.
The idea that a sustained competitive advantage has to be a process, rather than a one-off, comes from Kathy Eisenhardt, a professor at Stanford who studies the tech industry. It's application there seems fairly straight-forward, but it is not only applicable to high-tech companies. McDonald's, for example, pulled itself out of a long-period of sales stagnation by expanding its menu, but once it started it didn't stop. Coffee followed fajitas followed salads followed breakfast followed nuggets. Moreover, a dynamic capability doesn't have to involve new products. Toyota, for example, has a dynamic capability in quality control. It's cars aren't the most advanced, but they work while allowing Toyota to build them more efficiently.
There's nothing you can do that can't be done, but there are things you can do next that won't be done until you've already moved on.
I hope you guys are right. We have a lot of undoing to do in November.
ReplyDeleteI've never quite understood what the Beatles meant to tell us with this line ...
ReplyDeleteThat they were drug addled nitwits, perhaps? (That's my takeaway, anyhow).
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Apple and BMW are two good examples of staying ahead of the pack. How do they manage it?
The Beatles are an excellent example of a dynamic capability. At the peak of popularity they completely changed their style and lead an absolute revolution in popular music. They had their core capability, too. I think John Lennon said something like he thought they were always just a great little rock 'n' roll band.
ReplyDeleteChris:
ReplyDeleteOkay, I was over the top. And, you are right, they were an excellent example of dynamic capability (see also Gilmour and Waters).
However, I think much of the Beatle's repertoire does not stand up well to re-listening. Lyrically banal (Here Comes the Sun in its entirey) where not wallowing in druggy incoherence (Lucy), or just plain incoherence (Paul McCartney warbling "Baby I'll never do you no harm"), and frequently musically undistinguished.
It is hard to say whether they led, or participated in, a revolution in popular music. But whether they stand the test of time better than, say, Steely Dan, is more problematic.
Skipper:
ReplyDeleteIt's amazing how much the introductory strategy class has become a class about Apple and, by comparison, Microsoft. The iPhone and iPad are every student's example of good strategy (and their professor's, too).
That obviously means that Apple is about to crash and burn.
IMO, by far the most important factor going forward in the whole innovation and competitive advantage thing is which companies are more successful at pulling strings in the government to damage the competition and loot the consumers' wallets. This post, and apparently this blog, assume a level playing field, but that's rarely how it works. As time goes on it will be legions of lobbyists and lawyers pitted against each other in a death struggle to control the government for their sector of the economy and strategy (as defined in this post) will be completely secondary and meaningless without first knowing the outcome of the government level competition. The money will be made by the skillful lobbyists and lawyers and, of course, the public "servants" who decide the winners and losers. The innovators and consumers will be cut out completely.
ReplyDeleteThat obviously means that Apple is about to crash and burn.
ReplyDeleteThey already have. Maybe they learned from the experience.
The money will be made by the skillful lobbyists and lawyers and, of course, the public "servants" who decide the winners and losers. The innovators and consumers will be cut out completely.
While I'm not underplaying the self-licking ice cream cones that are lobbyist, lawyers and congresscritters, in general, I don't think there is much impact.
Take cars, for example. A big industry, with plenty of parasites.
Have innovators and consumers been cut out?
Bret:
ReplyDeleteThis post, and apparently this blog, assume a level playing field.
Not at all. In this post and this post we're very up-front that one strategy to achieve sustained above-average returns is to get the government to rig the game. But it's not the only way, and even government regulation crashes and burns eventually. For example, one of the advantages of globalization is that it limits government's ability to force citizens to pay more for worse quality.
Hey Skipper asks: "Have innovators and consumers been cut out?"
ReplyDeleteGM is an example of what's coming in the future. A company that's been poor at the innovation thing is the one that'll survive because they're better at the government game.
Bret:
ReplyDeleteHuh? Among domestic, Ford is in far better shape than GM, even after GM ostensibly won the gov't game.
However, even more contradictory to your assertion, so long as we don't erect trade barriers, to the extent rigging goes on, it will have to be in the context of, and generally in opposition to, other governments doing precisely the same thing.
What's good for GM is much better for Toyota.
Hey Skipper wrote: "...so long as we don't erect trade barriers"
ReplyDeleteProviding subsidies such as cheap money acts significantly like a trade barrier, except that it affects other domestic companies in that industry as well.
So you don't think Ford was adversely impacted by GM's bailout relative to what their position would've been if GM had been allowed to go under?
No.
ReplyDeleteIf GM had been allowed to "go under" it would not have ceased to exist.
Instead, it would have continued to exist, only in a more rational, streamlined, and competitive form.
How does one explain the ongoing failure of GM against the continued success of Toyota, BMW, or the probable future success of Ford if tilting the playing field towards GM actually tilts the playing field towards GM?
Todays word verification: Alaterma
What could be the name of GMs latest offering, and absolutely should be if one syllable was added: Alatermina.
Hey Skipper wrote: "Instead, it would have continued to exist, only in a more rational, streamlined, and competitive form."
ReplyDeleteYeah. Ford would've bought the profitable parts and the rest would've been liquidated.
Or something like that.
BTW, here is a perfect example using the government to rig the game.
ReplyDeleteMost employees in this country are allowed to form unions under the National Labor Relations Act. Airline employees, however, fall under the jurisdiction of the Railway Labor Act, which contains additional restrictions on unionizing. Non-airline United Parcel Service (UPS) employees are governed by the National Labor Relations Act and are largely unionized.
Conversely, non-airline FedEx Express employees are covered by the Railway Labor Act and are largely not members of a union. Section 806 of the House-passed FAA Reauthorization bill would change the rules to place all non-airline employees of express carriers under the National Labor Relations Act, presumably to ease unionization of FedEx Express non-airline employees.
Last time I heard, those rapacious capitalist exploiters of the heroic proletariat were running FedEx so as to put it on the top ten list of employers in the US.
The bastards.
I reckon McDs has done well recently because the recession has prompted a lot more people to look for cheaper eats when they go out albeit where they can expect prompt service in a clean environment. That's probably why other chain restaurants like the Yum Brands group and Dominos have done OK too.
ReplyDelete"A dynamic capability is a organizational talent for doing something useful not just once, but serially."
I reckon that's dependent on recruiting good people, having sensible management and being in a business environment which rewards continuous improvement. And that's a lot more difficult than it sounds.
Hi Ali:
ReplyDeleteOne of my co-authors is very interested in the difference between human capital (what your employees know) and organization capital (what the organization "knows"). A really good dynamic capability is encoded in organizational routines so that it's less dependent on having particular people.