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any ideas have been developed in the last fifty years on how big established companies could create entirely new markets. This advice has been hungrily consumed by large, established corporations as well as smaller firms. After all, which company does not want to become more innovative and which CEO does not dream about leading their organisation into virgin territories, discovering in the process exciting new markets? Yet despite all this advice and good intentions, it is very rare to find a big, established company among the innovators that create radical new markets. Why not?
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more “innovative” may or may not be the ones that lead to radical new market creation. It’s virtually impossible to offer proper advice on how to create or colonise radical new markets without first understanding where these kinds of markets come from, what they look like and what it takes to succeed in them. A better opening question is, “Where do radical new markets come from, what are their structural characteristics, and what skills are needed to create and compete effectively in them?” This helps us identify the skills and competences needed – and the strategies that must be adopted – if a firm is to be a successful coloniser of radical new markets.
It’s virtually impossible to offer proper advice on how to create or colonise radical new markets without first understanding where these kinds of markets come from.
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The simple answer is that the advice given is either inadequate or plainly wrong. What people often forget is that “innovation” is not one entity. There are different kinds of innovations, with different competitive effects. For example, what a firm needs to do to achieve product innovation may be entirely different from what it needs to do to achieve process innovation. Lumping the two kinds of innovation together is like mixing oil with water. What this implies is that the generic question, “How can the modern corporation be more innovative and create new markets?” only gets us generic answers – and these answers may or may not help the company achieve the kind of innovation that creates radical new markets. In other words, prescriptions to help a firm become
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Major
In fact, as we show in our book Fast Second: How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets, the full extent of what established companies need to change to be successful pioneers is such a formidable challenge that many of them are better off not even trying.
Where do radical new markets come from? Radical new markets get created through radical innovation. It’s important to appreciate this point because it is only by promoting this specific type of innovation inside a firm that the company can hope to create radical new markets. Innovations are considered radical if they meet two conditions: first, they introduce major new value
Major Innovation
Radical Innovation
Incremental Innovation
Strategic Innovation
Effect of innovations on consumer habits and behaviours
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Minor
Enhances
Destroys
Effect of innovation on established firms' competences and complementary assets
Figure 1 26
Different types of innovation
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New markets created through radical innovation
New markets created through strategic innovation
Television
Internet Banking
Personal Computers
Low-Cost Flights
Personal Digital Assistants (PDAs)
Private Label Consumer Goods
Cars
Screen-Based Electronic Trading Systems
Supercomputers
Generic Drugs
Semiconductors
Online Distribution of Groceries
Mobile Phones
Catalogue Retailing
Video Cassette Recorders (VCRs)
Department Stores
Medical Diagnostic Imaging
Steel Minimills
Computer Operating System
Online Universities
New markets created through innovation
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Specifically, we have learned the following about radical innovation over the years: ●
radical innovations that create new-to-the-world markets are disruptive for both customers and producers; ● as a result, these kinds of innovations are rarely driven by demand or immediate customer needs. Instead, they result from a supply-push process that originates from those responsible for developing the new technology; ● such innovations typically lack champions, either in the form of lead consumers or existing market leaders; ● supply-push innovations share certain characteristics: they are developed in a haphazard manner without a clear customer need driving them; they emerge from the efforts of a large number of scientists working independently on totally unrelated research projects who devise the technology for their own uses; and they go through a long gestation process when seemingly nothing happens until they suddenly explode onto the market. ● these kinds of innovation create small niches on the periphery of well established markets. This makes them unattractive to established firms.
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propositions that disrupt existing consumer habits and behaviours – what on earth did our ancestors do in the evenings without television? – and second, the markets they create undermine the competences and complementary assets on which existing competitors have built their success. Not all innovations are radical. When we classify innovations along the two dimensions mentioned above – disrupting customers’ activities and undermining competitors – we get four types of innovation, as shown in Figure 1. The dividing points in the matrix are subjective and our intention is not to defend the boundaries of a particular definition. Rather, our goal is to simply suggest that innovation can mean different things to different people, that different types of innovation exist and that one particular innovation may be more or less radical than another. We focus on radical innovations here because these are the kind of innovations that give rise to brand new markets. They are innovations that disrupt both customers and producers. They are based on a different set of scientific principles from the prevailing set, create radical new markets, demand new consumer behaviours and present major challenges to the existing competitors. The
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Figure 2
introduction of the car at the end of the 19th century is an example of radical innovation. Academic researchers have been studying radical innovation for the past fifty years. As a result, we know many things about this kind of innovation.
The fact that radical innovations result from a haphazard supply-push process has a serious implication for the modern corporation. Specifically, since this process cannot be easily replicated in the R&D facility of a single firm, it is highly unlikely →
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Not all innovations are radical. We classify innovations along two dimensions: disrupting customers’ activities and undermining competitors.
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→ that brand-new markets will be created by a single firm. Consider the development of the Internet over the last forty years. The associated technology, both hardware and software, was developed in a haphazard way without a clear customer need driving it. No one involved with the technology in the early days had any idea that things would end up where they are today; there was no master plan linking the development of new client server relations between users and mainframe computers to the possibility of booking a hotel room by computer from a mobile phone. This unplanned, unsystematic development of the underlying technology seems to have largely been a consequence of how the work was done,
to offer them and how they would feel about them, the race to bring the fruits of the new technology to market is wide open. No one knows what consumers really want and no one knows just what new technology can do; nor how to produce economically whatever it is that results from the innovation. Your guess is, therefore, as good as ours. Since there are no real barriers to entry into the (as yet) underdeveloped new market, there will not in principle be any shortage of entrepreneurs who are willing to try out their own particular vision of what the new technology has to offer. Anyone who understands the new technology is a potential entrant; anyone sufficiently enthused by what the new technology might ultimately offer will try to become an actual entrant.
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These kinds of innovation create small niches on the periphery of well established markets. This makes them unattractive to established firms.
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and by whom – scientists and engineers in research institutes and universities in this case. Even the major early user, the US Department of Defense, took a remarkably hands-off attitude towards the research work sponsored by DARPA, rarely insisting that it be linked explicitly to defence needs but instead, giving it a blue skies mandate. Furthermore, the research efforts that “suddenly” culminated in the Internet were undertaken by a host of scientists from a number of institutions and government agencies over a very long period of time. Such a process can hardly be planned or co-ordinated.
Supply push and the emergence of new markets
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Different innovations produce different kinds of markets. Figure 2 lists a number of markets that have been created through innovation. Those on the left came about through radical innovation, while those on the right came about through strategic innovation. Our interest here is with the markets that are created through the supply-push process of radical innovation–how and when they emerge and how firms ought to compete in these markets. So what kind of markets do supply-push innovation processes produce? What are their structural characteristics and what skills and competences are needed to compete effectively? Supply-push innovation processes have one very important property and this property has a profound impact on how new markets develop. Since the ultimate consumers of the new products or services which embody a new radical technology typically have very little knowledge of what the products have 28
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This is what happens in all new markets created by radical innovation. Consider the television market. Thirty firms were producing television sets in the US in 1947, 40 more entered the following year and another 71 entered between 1949 and 1953. The peak population of television producers in the US was 71 in 1951, a number larger than the entire number of TV manufacturers that exist today. This massive wave of entry is a phenomenon that always happens in the early days of new markets. Since all of these entrants bring their own product variants to the market, the massive swelling in the population of producers is usually matched by a widening in the range of product variety which is wholly unmatched by anything that happens later on. Eventually the wave of entry subsides and is in turn followed by what is sometimes a sharp, sudden and very sizeable shakeout that leads to the death of most of the early pioneers. The shakeout is associated with the emergence of a dominant design in the market; this is an event that signals the beginning of growth in the industry. The dominant design is a basic template or core product that defines what the product is and what it does. It is a consensus good that commands the support of a wide range of early consumers (even if it is not their first preference). It is a product standard that sends signals to suppliers upstream, retailers downstream and producers of complementary goods everywhere. Finally, it is a platform good that allows different manufacturers to offer differentiated versions of the product without destroying the consensus or requiring new complementary goods. The emergence of a dominant design is the decisive step in establishing a new market. Racing to be second
Notice that most of these so-called “first movers” were not, in fact, the first into the market. All of them were preceded by many, now forgotten, entrepreneurial start-ups whose work formed the foundation upon which these slightly later entrants built.
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Very few of the original entrants (the pioneers) survive the consolidation of the market. Most disappear, never to be heard of again. The consolidators who ultimately win are rarely the first in the new market. Their success is based precisely on not moving fast – but by choosing the right time to move. Consolidators’ activities – entering at the right time, standardising the product, cutting prices, scaling up production, creating distribution networks, segmenting the market, investing in advertising and marketing – are the activities that create what we somewhat inaccurately call “first mover advantages.” Consolidators’ shrewd movements create buyer loyalty, obtain preemptive control of scarce assets, go down the learning curve, create brands and reputation and enjoy economies of scale benefits – all of which
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The upshot of all this is that the companies that end up capturing and dominating the new-to-theworld markets are almost never the ones that created these markets. Henry Ford did not create the car market, but his company ended up capturing most of the value in that market in its first century of existence. Procter & Gamble did not create the market for disposable nappies, but it harvested most of the value from the mass market. And General Electric did not create the CAT scanner market, yet it was GE that made most of the money. It turns out that when it comes to radical new markets, this is more the norm than the exception. So – given this fact – why would any company want to create a new market? Surely, the advice we should be giving companies is how to scale up and consolidate new markets, not how to create them.
How to “create” the industries of the future All this has serious implications for big established companies. Specifically: ●
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the innovation process that creates radical new markets cannot be replicated inside the modern corporation; the companies that create brand-new markets are almost never the ones that end up consolidating and dominating these markets.
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It is important to emphasise three points that emerge from this.
give them advantages that potential new entrants don’t have. Thus, even though pioneers are chronologically first to market, consolidators are the “real” first-movers. They are the first to the market that counts – the mass market!
These two facts suggest to us that big, established firms should leave the task of creation to “the market” – the thousands of small, start-up firms around the world that have the requisite skills and attitudes to succeed at this game. Established firms should, instead, concentrate on what they are good at – which is to consolidate young markets into big mass markets. They could do this by creating a network of feeder firms – young, entrepreneurial companies that are busy colonising new niches. Through its business development function, the established company could serve as a venture capitalist to → Winter 2004
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It signals the emergence of a standard product that is capable of forming the basis of a mass market. For the many potential consumers who have yet to enter and make a choice, it signals the end of choice and therefore reduces their risk. A successful dominant design almost always triggers massive entry by consumers into the market, and ushers in the early heavy growth phase that most markets undergo. The emergence of a dominant design is important for a second reason. The hundreds of early pioneers who entered the new market on the basis of different product designs die soon after the dominant design emerges. On the other hand, the champion whose product forms the basis of the dominant design often develops substantial and very long lived first mover advantages from being the product champion. Notice that most of these so-called “first movers” were not, in fact, the first into the market. All of them were preceded by many, now forgotten, entrepreneurial start-ups whose work formed the foundation upon which these slightly later entrants built. These “first movers” were first only in the sense that they were the first to champion the particular product variant that became the dominant design. They were first when the market, not the product, emerged – and this is why they ended up with most of the profits.
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→ these feeder firms. It may also help them with their own R&D, more to keep close to technological developments than for any other reason. Then, when it is time to consolidate the market, it could build a new mass-market business on the platform that these feeder
builds upon the strengths of each participant and is a solution that maximises the welfare of everyone involved. There may be disagreements and problems between publisher and author, but that’s what management is there for.
Established firms should, concentrate on what they are good at – which is to consolidate young markets into big mass markets.
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firms have provided. Since the younger firms do not have the resources, power, marketing and distribution to scale up their creations, they should – in principle – be happy to subcontract this activity to the bigger firms, subject to a fair division of the spoils. What we are proposing here is for the modern corporation to subcontract the creation of radical new products to the market and for start-up firms to subcontract the consolidation of these products to big established firms. This will strike some people as too radical an idea, but it is in fact a business model that is widely accepted in industries where companies live and die on their ability to bring creative new products continuously to the market. We are talking about creative industries such as movies, plays, art galleries, book publishing and music publishing. Think about it. A major book publisher does not try to create any of its “new products” (the books) internally. It could, of course, attempt to do so. It would involve hiring thousands of employees, giving them an office and a computer and asking them to produce new books in return for a fixed salary. But how silly does that sound? An organisational structure like that would be the
Professor Richard Caves is to be thanked for this insight. Caves alerted us to the striking similarity between what we are proposing (division of labour between young and established firms) and what he was observing in his study of creative industries. This is an arrangement which appears to be the norm in several creative industries. How many art galleries do you know that create their own “products” (paintings) every year? Equally, how many famous painters do you know who used to be full-time employees of major art houses? The image of Picasso or van Gogh labouring away in the R&D lab of a major gallery, straining to create their next masterpiece is so laughable, that no one would take it seriously. Yet this is exactly how we have organised the modern corporation to deliver new radical products. As a final example, consider the record industry. It would be hard to imagine any famous singers actually working as full-time employees of the big record companies. Professor Caves’ research on the subject has shown that there is a very clear division of labour in this market: “Large and small firms play different roles in the recruitment of performers and promotion of their albums. The large companies’
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What we are proposing here is for the modern corporation to subcontract the creation of radical new products to the market and for start-up firms to subcontract the consolidation of these products to big established firms.
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fastest way to destroy the very creativity and innovation it seeks to generate! Instead of attempting to do everything internally, a major book publisher goes out in the market, identifies potential product creators (authors) and signs them up to deliver their product. Once the product is created (outside the bureaucracy of the big firm), the author subcontracts the marketing, promotion and distribution of their creation to the book publisher. Just as it would be silly for the big publisher to attempt to create the new products internally, it would be a similar act of folly for an individual author to attempt to sell and promote their book on their own. The division of labour 30
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distinctive competence lies in promotion and record distribution on a large – increasingly international – scale. The small or independent company performs the gatekeeping function of recruiting new artists and, particularly, identifies and promotes new styles of music and types of performers. The distinction closely parallels that between contemporary art galleries that focus on identifying and developing artists with promise and those devoted to promoting successful artists.” A similar proposition to ours was developed by Reid McRae Watts. In The Slingshot Syndrome, he makes the same link between creative industries and the creation of new radical products, showing Racing to be second
distribute the new product and uses its massive marketing power and existing distribution infrastructure to sell, promote and distribute the film. Therefore, in several creative industries we see a clear separation between those who create the product and those who promote, distribute and sell it. Needless to say, the “promoters” must be knowledgeable about the latest technology and products so that they can make an intelligent assessment of whether a painting, book or record is good enough for them to promote. But they do not have to be actively involved in its creation. If this organisation of work functions well in creative industries, shouldn’t we at least attempt to import it into other industries that aspire to become more creative? In fact, when we compare the basic economic properties of creative industries with the features that characterise new radical markets, the two types of market are amazingly similar. Given this fact, we would be surprised if the organisational structure that characterises creative industries cannot be readily imported into any industry that aspires to create radical new markets. ■
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how the modern corporation could structure itself along the lines that one sees in creative industries. The interested reader is directed to both books. Some people might object that the division of labour between creators and promoters that we see in creative industries is easy to achieve because the creators of the product are mostly individuals (authors, singers, painters). Therefore, the argument goes, it is easy to allow them to operate as free agents and simply sign them up whenever they have something to offer. By contrast, the creation of a new radical product often requires many scientists to work together, usually in the same laboratory, building upon the knowledge and expertise of the organisation. This requires some co-ordination and supervision of the work. Although this is a valid concern, we only have to look at the film industry to understand how the division of labour that we are advocating here could be achieved even when there are many people involved in the creation of the product and co-ordination is necessary. In the film business, a new product (a movie) starts with a screenplay, often written by an
Resources Markides, Costas, and Geroski, Paul A. (2004), Fast Second: How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets, Jossey Bass. Caves, Richard (2000), Creative Industries: Contracts between Art and Commerce, Harvard University Press. Watts, Reid McRae (2000), The Slingshot Syndrome: Why America’s Leading Technology Firms Fail at Innovation, Writers Club Press.
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independent agent (the writer). The writer approaches several producers to seek financing. The producers may be independent or employed by distribution companies such as Disney, Sony, or Time-Warner. Once a producer acquires the rights to the screenplay, it is their job to provide the financing as well as the director and the actors to make the movie. Once again, these are all independent agents, willing to offer their services to a specific project for a specific fee. It is only when the product is finally created that the big established firm – the studio – moves into action. The studio acquires the rights to
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The image of Picasso or van Gogh labouring away in the R&D lab of a major gallery, straining to create their next masterpiece is so laughable, no one would take it seriously. Yet this is exactly how we have organised the modern corporation to deliver new radical products.
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Costas Markides (cmarkides@london.edu) is Robert P Bauman Professor of Strategic Leadership at London Business School. Paul A. Geroski (pgeroski@london.edu) is chairman of the Competition Commission and a professor of economics at London Business School. London Business School Regent’s Park London NW1 4SA United Kingdom Tel +44 (0)20 7262 5050 Fax +44 (0)20 7724 7875 www.london.edu A Graduate School of the University of London
Costas Markides and Paul Geroski are the authors of Fast Second: How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets (Jossey Bass, 2004).
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