Why Companies need Innovation? Market Competition Perspective

This blog is part of a series of blogs, which I am planning to write on the topic of innovation. In this first blog, I look at the factors that force companies to innovate and why innovation is so important today.

How Market Competition is shaping business landscape?

During the last two decades the political, economic and technological developments have changed the world like never before in human history. Starting with the collapse of USSR and the end of bi-polar world political order, the world politics started converging. This gave momentum to coordinated global economic efforts and the formation of World Trade Organization. The liberalization of economies and reduction in trade barriers, coincided with the emergence and embracing of Internet globally, and helped shape the world that we are in today.

 The globalization of markets, rapid removal of trade barriers helped many large markets to open up for new competition. Many of the markets which had not faced competition due to government controls saw their market shares erode due to new entrants and in many cases large established businesses struggled against new competition. Many large companies when faced with competition at home markets opted to expand in overseas markets where they did not have local market knowledge and often found it harder to compete.

The advances in the Internet and related communication technologies helped the economic integration as well as made the scale of market competition global. No longer businesses could take their geographical location as a strategic advantage because of emergence of online businesses.

As the creation of knowledge and access to it became more accessible the information that was exclusive to incumbents became available to all. This has put pressure on companies to have clear strategies. Because unless companies have a clear vision about how they are going to be distinctly different and unique from their competitors in offering something different to their customers, they are going to get eaten by the competition.

 According to Michael Porter there are three principles of competitive strategy:

1-    Its not just a matter of being better at what you do; it’s a matter of being different at what you do. If everybody is competing on the same set of variables, then the standard gets higher but no company gets ahead. The basis of the competitive strategy is to get ahead of others. The companies that will be true market leaders will be those that don’t just optimize within an industry, but that actually reshape and redefine their industry. The important aspect is to try to shape the nature of competition and compete on your own rules.

2-    The second principle is that good strategy makes the company different and gives it a unique position. Unique position can be achieved through the delivery of a particular mix of value to some customer groups, which are a subset of a market. The fundamental principle here is that you can’t be above average if you want to please the entire market. A company can’t be every thing to all people and do a very good job of it. Strategy is about picking some options from the available choices. Companies need to decide what particular kind of value they want to deliver to which customers.

3-    Potter’s third principle is that it’s just not good enough to be different. You have got to be different in ways that involve trade-offs with other ways of being different. If a company wants to serve a particular target customer group with a particular definition of value, this must be inconsistent with delivering other types of value to other customers. Otherwise it will be easy for competitors to replicate or imitate the value, which you offer. If there are no trade-offs between what your competitors do and what your company does then everyone is competing for the same customers using the same value proposition and it is called a loser’s game.

 In general companies do not like to make choices, which limits their product range, and narrow the range of value they can deliver to their customers. And this unwillingness to make choices is one of the big obstacles to creating a focused winning strategy.

Innovate to achieve Business Goals

The key to any innovative company is to have a good strategic vision, which gives it a distinctive position. Innovation means offering things in different ways, creating new combinations of value offered, to further reinforce the strategic intent of the organization. Innovation doesn’t mean small, incremental improvements (these are just part of being a dynamic organization). Innovation is about finding new ways of combining things generally. The essential core of strategy is cross-functional or cross-activity integration that enhances organizational capacity to link and integrate activities across the whole value chain and to achieve complementarities across many activities.

So if a software engineering team can simplify the release process and has the capability to release to specific customers then product development and marketing teams can plan better go to market activities with more focus on customers. The gradual release of software to customers can reduce the pressure from customer call centers and allow the limited company resources to be better utilized. These cross-functional capabilities when deployed to serve target customers create source of competitive advantage internal to the company. It is difficult for the competitors to imitate this from the outside.

Take the example of Amazon.com EC2 cloud services. Due to its enormous scale and requirements for online data and storage needs, Amazon had to invest heavily in building gigantic network and data farms. With the rise of cloud computing Amazon saw an opportunity to monetize its IT investments and made its vast data infrastructure opened to everyone. They definitely did not see this as counter to its competitive position as other organizations were building this huge infrastructure too. However by offering and bundling these services in a new way, not only Amazon was able to generate new source of revenue, it was also able to create efficiencies of scale and shared its IT costs with many more businesses.

In my opinion innovation that does not align with company strategy and does not provide it a distinctive position in the market has little value from a strategic perspective. This may take company in a new direction and might distract the senior management from focusing on core business.

In my next blog I will discuss what can be done to make companies more effective in innovating new products and services that makes their organization more relevant in the marketplace.