Strategic Discipline Blog

Innovation is Critical!

We’re sharing ideas and concepts from Outthink the Competition: How a New Generation of Strategists Sees Options Others Ignore by Kaihan Krippendorff.

We’re experiencing a period of radical change in business.  It’s a revolution.

Revolutions unfold in a predictable four-step pattern that ultimately leads to Outthinkers toppling thinkers.

The Pattern

1. People grow rigid: they accept that a certain way of doing things (Krippendorff calls this the 1-2-3) is the best and stop seeking better options.
2. Someone questions what others have accepted and finds a new strategy (The fourth option).
3. The new strategy proves superior.
4. The competition tries to copy it but can only do so slowly.

The Foundation of Great Companies

Krippendorff suggests you pick any company that has produced an extended run of breakthrough results, and you will find its breakthrough rests on the foundation of a completely new idea that contradicts the prevailing beliefs and habits of their peers.

They are, in a word, Outthinkers. Kevin Constello, president of Ariba, an innovative technology firm that offers collaborative business commerce solutions, calls it a new model for business.

Greatness begins when a company sees a strategic option others ignore.  It decides to embrace!  Breakthrough companies seize moments of competitive rigidity.There are nine powerful trends, not bound by industry or company size, Krippendorff see thrusting us into a new competitive era.

Nine Trends Transforming Our World

The emergence of trends is one reason as Gazelles coaches we’ve switched from SWOT to SWT (Strengths, Weaknesses & Trends) in our planning meetings.  Condensed from Outthink the Competition: How a New Generation of Strategists Sees Options Others Ignore are Krippendorff trends:

1. The Erosion of Economies of Scale Previously, a company that wanted to create a new product would have to invest millions to build or retool the factory. Today that company can go to Alibaba.com and find a manufacturer ready to provide the product with minimal incremental cost. In other words, with a few mouse clicks and e-mails, an entrepreneur today can achieve the economies of scale that used to require months of planning and millions of dollars. That same entrepreneur can build the rest of her business at little or no cost. Even in production-heavy industries, of which there are fewer, factories grow smaller, more specialized, and they are easily turned on and off. Products grow more customized, turning standardization into liability. Niche brands pop up and, at very little cost, pick off small segments of the market from incumbents who invested decades in building mass loyalty. A new form of competition that draws strength from sources other than scale is emerging.
2. Acceleration As economies of scale slip away, they are making room for a historic acceleration in the pace of business competition. Cycle times are shortening and the pace of competition is accelerating. Not only can entrepreneurs start companies at a radically lower cost, they can do so at a fraction of the time once required. It took Walmart 27 years to reach $30 billion in revenue. It took Amazon.com 16 years to do the same, and Google did so in just 13. Companies that went public in the 2000s reached $30 million faster, 18 months faster on average, than those that had had their IPO in the 1990s. Today conventional wisdom about the time needed for a product launch is being shattered.
3. Disaggregation Harvard Business School professor Shoshana Zuboff, wrote that the era of economies of scale is giving way to what she calls distributed capitalism. In her view, the “myriad ways in which production and consumption increasingly depend on distributed assets, distributed information, and distributed social and management systems” is transforming the nature of business competition. Today, customers can customize cars (such as Toyota's Scion), sneakers (from Nike), their own romance novels (from www.YourNovel.com), and radio stations (through Pandora) to get precisely what they want from the manufacturer, not what the supplier decides to push onto the shelves. Parts are pulled as needed from disparate suppliers and warehouses for assembly. Krippendorff compared about 20 Outthinkers to their less successful peers and found that the Outthinkers generate nearly twice the profit per employee.
4. Free Flow of Information Information, once controlled by the powerful to maintain their power, is now slipping between their fingers. Global data flows are growing by nearly 50 percent per year. More than 150 million new people connected to the Internet in China in 2009. Facebook has more than 500 million members, a population that would make it the third-largest country in the world. Consider that in 1995, less than 3 percent of the world's population had a cell phone and less than 1 percent was online. Today, more than 60 percent of the world's population has a cell phone and more than 40 percent are online. More people (6 billion) have access to cell phones than have access to toilets (4.5 billion). Today, people can access and share information with a freedom unimagined a decade ago. This puts more power in customers' hands and wrestles control away from the hands of marketers.
5. The Death of the Middleman The free flow of information is leading to the death of the middleman. Technology and online consumer habits have changed to the point that airlines can efficiently sell directly to consumers, and consumers can search across airlines for free. Airlines would rather you search on a free service and then click through to their websites to book your seat. This allows them to up-sell you extra luggage, more legroom, and other once-free services that they increasingly depend on for profits. In a disaggregated world, players and information come together fluidly, as needed, at little cost. A more efficient model is replacing the middleman’s job.
6. Self-Organized Citizens and Customers In early 2011 we heard a great deal about the notion that the revolutions in Tunisia and Egypt were made possible by Twitter and Facebook. It's a compelling idea. How, after 30 years of firm-handed rule, could Egyptian President Mubarak have faced the prospect of losing power? Surely other factors are in play—shifts in global power, macroeconomic pressure, and demographic changes—but it does feel as if social media has finally passed a point of critical mass, ushering in a new era. A new type of organization has emerged. In a recent survey, CEOs cited the “development of technologies that empower consumers and communities” as one of their top concerns for the next five years.
7. The Shift in Power Toward the Developing World Some predict that by 2050, developed countries will have a lower share of global gross domestic product (GDP) than they had in 1700. Tata Nano is the cheapest car in the world. Indian businesspeople see it as a symbol of India's emerging flavor of innovation. One question: Why did this happen in India? I was conducting a workshop with Hermann Simon, known as an advocate for what he calls hidden champions—companies (mostly German) that you have never heard of but that dominate a global niche like making glass for museum cases. Half of Tata's components are manufactured by German companies. This fact just agitates our need to answer the question: If much of the technology for the Tata Nano is manufactured in Germany, why was this innovation born in India? The Tata Nano is what is commonly referred to as reverse innovation, a process that begins by focusing on the need for low-cost products for countries like India and China and then adapting that innovation for the developed world. If a German car company was given the challenge of developing the cheapest car in the world, the result would most likely be a car priced just under the competition and with just enough stuff to still give it the feel of a high-quality German car. But by understanding what price tag they had to beat to capture the Indian market, Tata is able to engineer a vehicle that caught everyone by surprise—the customer, with a price tag that was half of the closest alternative ($2,000 per car), and the engineering community, with a product that featured smaller wheels, a unique mix of materials, and a movable steering wheel to reduce the cost.
8. A Rising Global War for Talent A Chinese businessman and Krippendorff, introduced by a mutual friend, were talking about management training. His company specialized in leadership education, and he was describing how his firm and his Chinese clients are changing their view on training local managers. Krippendorff was in my usual mind-set, hunting down innovative growth strategies, but soon realized he was coming at it from an entirely different perspective. His greatest challenge was not finding new customers or introducing new offerings; it was recruitment. How could he best focus his firm's growth so that he did not run into the trap, already facing so many Chinese companies, of not being able to recruit enough people? In a recent McKinsey Global Survey, business leaders cite a global talent war as one of their key challenges. This is emerging as a top issue because when you compete for talent today, you are increasingly competing globally. There are equally hungry and exciting companies vying for the person whose résumé you are looking at right now. They are pulling from across the country and across the world. The war for talent is increasingly becoming a global, rather than a regional, fight.
9. Global Network Volatility We are competing in a more volatile world. Goods, capital, information, and people are flowing more freely, creating an interconnected network in which small changes in one place can produce radical shifts on the other side of the world. Over the past 10 years, trade flows between countries have grown 50 percent faster than global GDP. Cross-border capital flows have grown 300 percent faster. Only 1 in 10 U.S. dollars today is a physical note, one you can touch and fold into your wallet. Some 63 percent of executives surveyed by McKinsey in 2010 believe it will become a permanent feature of the world economy. Companies that can make volatility work to their advantage will win. Those who hold on to old strategies will be hobbling themselves. There are no more lone islands to run to. Everything is connected.

Conclusion

Combine these nine shifts and we begin to see a fundamentally new basis of competition emerging. The companies winning today are adjusting to this new reality quickly. They've stopped clinging to economies of scale; they move faster, they scatter, they use the free flow of information to create advantage, they are disrupting the middleman, they let customers self-organize, they think and hire globally, and they embrace, or at least understand, the heightened volatility in which we compete.

NEXT BLOG

All things are changing: and thou thyself art in continuous mutation and in a manner in continuous destruction, and the whole universe too.

~ Marcus Aurelius

At McKinsey & Company, Krippendorf trained to break problems down into mutually exclusive, collectively exhaustive (MECE) components. The first steps to Krippendorf’s Method (MECE) to Outthink the competition next blog.