Market(ing) Effects of Innovation - Malta Business School
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Market(ing) Effects of Innovation

About The Author

Lorenzo Mulè Stagno is the Associate for Henley Business School in Malta and the Managing Director of Allied Consultants Limited. Lorenzo holds a Master in Business Administration (2004) from Grenoble and a teaching degree from the University of Malta. He is an educator by profession. He also successfully completed a Post-Graduate Certificate for Online Facilitation and a Post-Graduate Certificate in Coaching, both obtained from the Henley Business School – University of Reading.  Read more >>
Considering that change happens, whether we like it or not, there is a strong argument for doing our bit to either prepare for it, or more proactively, to try to shape the change by becoming innovators. Innovations, however, can be of different types and levels, affecting the market in different ways. The strategic marketing decisions that an organisation takes when innovating are therefore very important factors in the success of an innovation. From another perspective, the strategic marketing decisions an organisation takes could themselves be part of the innovation itself.

Someone humorously likened the practice of innovation in most companies to the mating of Pandas: infrequent, clumsy, and often ineffective. This funny but sad truth can be seen from the low number of companies who are truly innovative, where innovation is a core part of their strategy, and where this innovation effort stands the test of time. Even in the not-so-common cases of innovative companies, very few of them continue to have an innovative stance over the years, and less so over decades. Sony used to be a global leader in innovation, churning out innovative products such as the world’s first portable music player, the Walkman, the CD, the Discman, and the Playstation among others. In March this year, their CEO, Sir Howard Stringer, conceded in an article in the Economist that Sony had become complacent and fallen behind their major competitors, needing a re-think of their strategy and an overhaul of their modus operandi.

Many more companies come up with one-time innovations and then go about the rest of their business life in business-as-usual mode, with occasional (and rare) spurts of innovative effort on an ad hoc basis, usually spurred by a whim or a crisis. The most popular and common innovation effort is generally the entrepreneurial drive of a start-up business. Yet, even in that case, the vast majority of start-ups are replicative businesses, with hardly a shred of innovation in any part of their fabric. A study carried out in 2006 by our firm, Allied Consultants, had shown that less than 20% of local companies are involved in any form of innovation or R&D. In what seemed to be a contradiction, over 20% of these companies claimed to budget money on R&D or innovation. One way of explaining this was by looking at the age of the companies interviewed: some of the “innovative” companies were less than 3 years old, qualifying as start-ups.

Hence, in many of those cases, the money budgeted was in fact the start-up money for the company to take off with its “innovative” idea.

So is innovation really necessary? Not really, at least not in the short run. If it were, than the vast majority of companies would be extinct, or would not have been born in the first place. However, innovation does make one hell of a difference if you want to (a) grow, (b) make super-profits, (c) survive, and/or (d) have some excitement or fun.

In rare cases, where the market supplied is small and exclusive, a product can survive quite successfully with strong, traditional, high-quality and high-profit brands, even without having any innovative advantages. Such cases, however, are pretty rare, and can fall to the wayside irreversibly if the tastes of their exclusive, niche markets change.

Meanings

Taking a look at what innovation really means, we find that there could be different ways of looking at it. It could be:

  • A new way of doing something.
  • Incremental, radical, and revolutionary changes in thinking, products, processes, or organizations.
  • Positive change, to make someone or something better.
  • Increased productivity as a fundamental source of increasing economic wealth.

Innovation is generally a matter of change, either in the product or process. In some cases, it could involve a general overhaul of the organisation. This, in effect, could still be categorised as a process innovation. If on the other hand, the organisation is in the service industry, its overhaul could effectively have redefined the service itself, hence categorising itself as product innovation. In many cases nowadays, there is so much overlap between products and services – through the competitive concept of added-value – that the line between what constitutes a product and what constitutes a service has become very fuzzy. When the brothers McDonald created the Speedie Service system, what they did was overhaul an internal food delivery process. This innovation ended up being so radical that it created a whole new fast-food industry. However, without going into semantics too much, one could hypothesise that product and process innovations basically cover the innovation spectrum. Product innovation is also where Research and Development (R&D) budgets generally go. It is also known, sometimes, as New Product Development (NPD).

Examples of Eager Pandas

Looking at some examples of innovation, we find Apple with its regular churning of innovative iProducts. In recent years these included the iMac, iPod, iTunes and iPhone. These innovations have certainly made Apple one of the most exciting firms in the world today, not to mention the economic advantages garnered. Through their products (though in some cases these were created by others and bought by Apple), their magnificent packaging and marketing, they have created new markets, structures and standards. According to Fortune Magazine, it is the most admired company in the world in 2009.

Google is another such case, with “googling” becoming the adopted term for internet searching, with their offerings of YouTube (acquired), GoogleEarth, GoogleMaps, GoogleDesktop, GoogleBooks and so in and so forth. And let’s not forget their incredibly successful targeted text ads, which have made them the advertising revenue benchmark in the online world.

Dell Computers, on the other hand, changed the way we look at access to the home computer. Through a breakthrough innovation of the supply chain process, they reduced the lead time of the PC from what used to be the industry standard of a number of weeks to a matter of days.

Toyota created new ways of looking at quality, with their Lean Manufacturing and the Toyota Way, while Motorola invented the Business Six Sigma standard. Some of these benchmark processes have permeated the global manufacturing industries and even found raison d’etre in various service industries. Toyota’s hybrid car Prius, and its Luxury brand Lexus are also excellent examples of product innovation. Their innovative philosophy has reaped fruit, making this Japanese firm the global leader in car manufacturing.

Finally, though the list could go on and on, think of Ryanair and EasyJet’s low-cost airfare revolution in Europe, with their precursor, Southwest Airlines in USA. They changed the way we look at air travel and tourism, probably for ever. Their aim was to provide air travel to the non-flying publics at the cost of travelling with their car.

In all such cases, market structures and the respective marketing dimensions change, at least to some extents. Taking a look at certain established strategic marketing models can prove this point.

The Product/Industry Life Cycle

This is an often used, useful and universal model (fig 1). It has explained many a product or industry’s growth, saturation and demise. Its universality probably stems from its lack of commitment to timelines or absolute quantities. Hence the printing industry’s life cycle spans hundreds of years, while the fax machine’s a couple. Yet both cases are represented by the same curve.

Innovation can do a number of things to this curve. The most radical effect is caused by breakthrough innovation, which creates or precipitates a decline of one product or industry as we know it, in favour of the birth and growth of another, newer offering. This phenomenon is sometimes referred to as disruptive technology, modifying the life cycle into an S-curve (fig 2). Such was the case of the typewriter with the advent of the word processor/PC or the more contemporary landline telephone after the diffusion of mobile phone.

Fig12

The maturity/saturation stage is generally the ideal phase for the type of breakthrough innovation that causes the form of disruption discussed above. However, the ultra-competitive atmosphere of this stage pushes various companies, struggling for survival, to find ways of differentiating themselves from the rest. This creates the more common forms of innovation processes where the changes are incremental or peripheral. If the change is substantial enough, such as the multi-fold improvement in the efficiency of a process (for an extreme case, think of the delivery time of a Dell PC), the saturation phase could be bumped up with an additional growth phase (see fig 3).

Fig3

Market Diffusion

Depending on the different phases a product or service might be in its life cycle, different types of customers come into play as can be seen in the market diffusion curve (see fig 4). When a product, service or industry is in its introductory or embryonic stage, the typical customer is the pioneering, risk-taking, adventurous, must-have-the-latest type. They are called Innovators. These are not very willing or able to pay, but they are great guinea pigs because they tolerate bugs and faults. They account for a very small percentage, 2.5% of the market. Next comes a 13.5% segment called the Early Adopters. These are savvy buyers who are willing to pay, but are hard to please  The take-off point, where a product becomes a commercial success, is reached with the next batch of buyers, a 34% bulk called the Early Majority, followed by a similar amount called the Late Majority. At this point, the Life Cycle has reached Maturity and entering the final phase of Decline, where the residual percentage (16%) of buyers, called Laggards, actually starts getting interested in the product.

 Fig4

One of the main challenges, which any innovative offering needs to face, is how to reduce the gap or time lag from when the innovation is introduced on the market to when it reaches the masses (in this case the Early Majority). Before it reaches that stage it is not likely to have made any distinguishable profits. Thus, the quicker the entry into the mass buying arena, the faster the return on investment, and the better the chance that the offering is not replicated, or improved upon, by competitors. A reasonably shocking fact is that studies have shown that it took various innovative products an average of twelve to seventeen years to reach just 3% of its market potential (Kohli et al 1999). The sewing machine took 29 years, the car 38 years and antibiotics 28 years (Agarwal and Bayus, 2002).

There seem to be at least 5 factors that can affect the rate of adoption i.e. the relative speed with which an innovation is adopted:

  • Relative advantage – a new offering has to show that it performs or is better than what is on the market, or that it provides more or better benefits
  • Compatibility – it needs to be compatible with the surroundings, such as having electric cars but no charging stations.
  • Complexity – the more user-friendly, the easier it is for people to feel comfortable going for it.
  • Tryout possibility – few people commit blindly. Most people prefer being able to see what they are going in for, especially with novelties. Hence it helps if they can try out the offering before they commit.
  • Visibility – the most important ground-breaking inventions are useless if no one knows about them. Many innovations are created, patented and locked up in the limbo of company bureaucracy or politics before someone else discovers them, sometimes many years later. A good marketing strategy, on the other hand, would do wonders.

To make money out of it, therefore, the innovation itself may not be enough. Besides the importance of all the factors involved in market diffusion, one also needs to have the capability of getting one’s innovation to the market, and to protect it from competing firms who may be stronger in certain aspects.

Complementary Assets

If a company’s innovations would be instantly available to their competitors, would the company still be able to make money from these offerings? To answer that question one would need to look at the complementary assets the organisation possesses, which could be simplistically defined as those assets that would allow a firm to make money from an offering, even if the offering is not unique. RC Cola invented the first diet soft drink, Diet Rite Cola. However, they could not protect their invention, and the much stronger Coca Cola and Pepsi Cola firms used their superior complementary assets to own/exploit that market.

There are two main types of complementary assets: resources and capabilities. Resources can include distribution channels, customer relationships and brand names. Capabilities involve production capabilities, and expertise, particularly in service and sales.

The relationship between the “inventor” of an innovation, and the owner of the complementary assets are aptly portrayed in the TEECE model (figure 5), which categorises the relationship into 4 distinct scenarios. If someone creates a new offering, which can be protected through legal or expertise factors, and complementary assets are unimportant or freely available, then the “inventor” stands to gain. This could be the case of downloadable games on the internet, for example.

If the invention can be easily copied or replicated, and also easily distributed, then trying to make money off it is a waste of time. In the case where both the invention and the complementary assets are equally necessary and tightly held by different parties, then a good negotiation situation may very well arise. Quite a few millionaires have become so thanks to such a situation, where a strong company with adequate complementary assets bought an invention off someone for seven digit figures.

Figure 5

figure5

Ansoff’s Matrix

The final category is, as was already mentioned in the diet soft drink business, where the “invention” could be replicated, whilst strong complementary assets were of vital importance for success. In such cases, it is the holder of these complementary assets who stands to gain.

Ansoff’s Matrix (figure 6) also lends itself well to innovation strategies. Using current offerings on current markets is a standard case of competitive strategy. In marketing terms this would be a case where one spends more marketing money, shouts louder and works harder just to gain a slightly bigger share of the pie (if at all).

Figure 6

figure6

Incremental and cosmetic improvements and innovations fit into this segment. Hyundai’s buyback option during the financial crisis in USA did wonders to their market share. This is, most of the time, a necessary strategy for survival in the market. It is also short-lived, and hence needs to be repeated frequently at great cost.

New offerings in present markets and present offerings to new markets present another two entrepreneurial and innovative possibilities. New markets could be geographical, demographic or psychographic. The offering could be presented as is, or it could be offered to the new market from a different angle, possibly with a different packaging. The existing market that is already well known to the company could be seen as an excellent potential customer base for a new offering, possibly complementing its existing product or service range.

Finally, Ansoff’s Diversification segment can be restated as the Blue Ocean Strategy, which would imply creating new untapped markets (Kim and Mauborgne, 2005). This strategy can be considered the ultimate in commercial innovation since it creates the ideal scenario where the “inventor” takes it all and remains happily uncontested for a while. Some examples of this segment include the Cirque du Soleil, Southwest Airlines and the iPod, among others.

Marketing Mix

Finally, the tactical 4 or 7Ps of the Marketing Mix is another good example of how innovation can be applied to marketing models. Whether it is the Product that is the innovation (as in many cases mentioned previously), the Price (as in the case of low cost airlines), the Place (as in Dell’s supply chain miracle or Heineken’s innovative distribution processes), or Promotion (as in Hyundai’s campaign in America), each innovation can give some form of competitive advantage. The extension of the Marketing mix with the remaining three Ps, mostly applied for the service industry, also applies. Innovation in Processes could be seen in various examples already mentioned, especially in low-cost airlines and Dell. Physical evidence and People reflect other cases such as an innovative fitness centre for housewives with appropriate décor and design, called Curves, and the high customer orientation and CRM attitude of Virgin Airlines staff.

The above models are just some examples of how Marketing and Innovation blend well together. Various factors contribute towards creating the all-important competitive advantage that any company would crave. However, from all possible factors of all possible marketing strategies and innovation initiatives, one thing always seems to stick out as being a vital spoke in the wheel of commercial success: customer orientation. This “obvious” concept is sadly and frequently overlooked, and companies and inventors alike forget that whatever their innovation, commercial success will happen thanks to one factor: the customer.