Game-Changing Strategies How to Create New Market Space in Established Industries by Breaking the Rules Constantinos C. Markides
Game-Changing Strategies
Game-Changing Strategies How to Create New Market Space in Established Industries by Breaking the Rules Constantinos C. Markides
Copyright 2008 by John Wiley & Sons, Inc. All rights reserved. Published by Jossey-Bass A Wiley Imprint 989 Market Street, San Francisco, CA 94103-1741 www.josseybass.com No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the Web at www.copyright.com. Requests to the publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748- 6008, or online at www.wiley.com/go/permissions. Readers should be aware that Internet Web sites offered as citations and/or sources for further information may have changed or disappeared between the time this was written and when it is read. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifi cally disclaim any implied warranties of merchantability or fi tness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profi t or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. Jossey-Bass books and products are available through most bookstores. To contact Jossey-Bass directly call our Customer Care Department within the U.S. at 800-956-7739, outside the U.S. at 317-572-3986, or fax 317-572-4002. Jossey-Bass also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Library of Congress Cataloging-in-Publication Data Markides, Constantinos. Game-changing strategies : how to create new market space in established industries by breaking the rules / Constantinos C. Markides. 1st ed. p. cm. Includes bibliographical references and index. ISBN 978-0-470-27687-7 (cloth) 1. Creative ability in business. 2. Organizational change. 3. Corporations Growth. I. Title. HD53.M364 2008 658.4'012 dc22 2008009622 Printed in the United States of America first edition HB Printing 10 9 8 7 6 5 4 3 2 1
Contents Introduction 1. The Innovation Is in the Business Model 1 2. Discovering New Business Models 23 3. Creativity Is Not Enough: From Discovering to Implementing New Business Models 55 4. Using Dual Business Models to Compete: Is a Separate Unit Necessary? 81 5. Separation Is Not Enough: How to Achieve Ambidexterity 99 6. Responding to Business-Model Innovation 121 7. When Would Established Firms Discover New Business Models? 143 8. Rethinking Innovation in the Big Firm 163 Appendix A: Examples of a Few Less Well-Known Business-Model Innovators 175 Appendix B: How to Enhance Corporate Creativity 185 Appendix C: How to Measure Relatedness Between Two Markets 193 ix v
vi CONTENTS Notes 197 References 205 Acknowledgments 211 The Author 213 Index 215
To the memory of my friend and colleague, Professor Paul Geroski
Introduction Common sense as well as academic research argues that attacking bigger competitors will most likely lead to failure. For example, a series of studies undertaken at London Business School in the early 1990s examined how new market entrants in several U.K. industries fared against much bigger established competitors.1 Not surprisingly, the failure rate of new entrants was quite high more than 85 percent of them failed within fi ve years of entry. The established competitors had few diffi culties repelling these smaller attackers: the studies found that the top - ranked fi rm in a particular industry had a probability of about 96 percent of surviving as No. 1 a near certainty. 2 For the secondranked fi rm the probability of survival was 91 percent, and for the third - ranked fi rm 80 percent. In fact, most of the turnover that occurred among the top fi ve in an industry was due to mergers rather than smaller entrants outcompeting market leaders. Yet, without disputing the statistics, we all know of examples of companies that attacked much bigger competitors with great success. In several instances, not only did the smaller fi rm survive, it managed to emerge as one of the leaders in the industry! IKEA did it in the furniture retail business, Canon in copiers, Bright Horizons in the child care and early education market, MinuteClinic in the general health care industry, Starbucks in coffee, Amazon in bookselling, K - Mart in retailing, Southwest, easyjet, and Ryanair in the airline industry, Red Bull in the carbonated soft drinks industry, Lulu in publishing, Enterprise in the car rental market, Netfl ix and Lovefi lm in the DVD rental ix
x GAME-CHANGING STRATEGIES market, Honda in motorcycles, Wit Capital in investment banking, Skype in telephony, Priceline in the travel agent market, Casella in the wine market, Metro International in newspapers, and Home Depot in the home improvement market. The list could go on! The Secret of Success: A New Business Model What explains the success of these outliers and what can we all learn from their experiences? After studying more than seventy such fi rms, I believe that the answer to this question is simple enough: successful attackers do not try to be better than their bigger rivals. Rather, they actively adopt a different strategy (or business model) and aim to compete by changing the rules of the game in the industry. Over and over, what I have observed is that signifi cant shifts in market share and company fortunes Examples of Business-Model Innovators The Body Shop Amazon Charles Schwab Swatch Starbucks IKEA Dell Southwest and easyjet Kresge (K-Mart) CNN Lulu Nucor MinuteClinic Canon University of Phoenix Skype Bright Horizons Metro International Home Depot Bloomberg ebay Sephora Travelocity Priceline Akimbo Netfl ix and Lovefi lm ING Direct LibraryThing
INTRODUCTION xi took place not by trying to play the game better than the competition but by playing a different game in a sense, by avoiding head - on competition. The box lists a number of such business - model innovators from a variety of industries both high - tech and low - tech, growing and mature. Consider, for example, Enterprise Rent - A - Car, the biggest car rental company in North America. Rather than target travelers as its customers (as Hertz and Avis did), Enterprise focused on the replacement market (that is, providing cars to customers who d had an accident). Rather than operate out of airports, it located its offi ces in downtown areas. Rather than use travel agents to push its services to end consumers, it uses insurance companies and auto mechanics. Rather than wait for the customer to pick up the rental, it brings the customer to the car. In short, Enterprise built a business model that is fundamentally different from those of its biggest competitors. This allowed it to start out in 1957 as a new start - up fi rm in the industry and grow into the biggest competitor in less than fi fty years. Consider also the case of MinuteClinic, a company founded in 2000 and already an industry leader in the retail - based health clinic industry in the United States. The company is based on the premise that certain simple health problems can be more quickly and cheaply diagnosed and treated at a walk - in clinic than in a doctor s office or an emergency room. Unlike traditional clinics that treat a wide variety of health problems, the company treats only common ailments such as strep throat and ear infections. It employs nurse practitioners armed with software that helps them test for and treat a handful of medical conditions. The software has the most up - to - date medical guidelines for diagnosis and treatment and applies strict rules that help ensure consistency of service. A doctor is generally available for phone consultation only. Prices are posted for all to see. Patients who come in with complaints not on the list or symptoms that indicate something more serious are referred to a doctor or an emergency room without a fee. The service does not require an appointment; it is quick
xii GAME-CHANGING STRATEGIES (about fifteen minutes from start to finish), and it is cheap a visit to test for strep throat costs $ 44 versus an average of $ 109 at a doctor s office or $ 328 in an emergency room. Both examples highlight a generalization at the heart of this book: without the benefit of a technological innovation, it is extremely difficult for any firm to successfully attack bigger competitors or to successfully enter new markets where big established players rule. The strategy that seems to improve the probability of success in these situations is the strategy of breaking the rules of discovering and exploiting a different business model from the one that the current leaders employ in a given industry. So What? Obviously this is not the first book to proclaim the virtues of this kind of innovation, and this is not the first time that managers have been encouraged to seek and exploit a new business model in their industry. Numerous books have been written and many ideas have been proposed on how firms could innovate in this way. For example, Kim and Mauborgne (2005) developed the beautiful concept of blue ocean strategy and formulated a number of analytical techniques (such as the Strategy Canvas and the concept of the Value Curve ) to help companies identify ways in which they can create new market space for themselves through business model innovation. Similarly, Christensen (1997) and Christensen and Raynor (2003) developed the concept of disruptive innovation and then used it to advise companies on how to develop new growth businesses using disruptive innovation as a platform. Other authors have proposed even more radical ideas. For example, Hamel (1996, 1999, and 2000) proposed ideas such as making the strategy process democratic and bringing Silicon Valley inside the organization as ingredients to business - model innovation. Markides (1997, 1998) argued that corporations could learn from the success of the capitalist system by importing
INTRODUCTION xiii into their organizations those features of capitalism (such as decentralized allocation of resources and experimentation) that promote innovation. And Markides and Geroski (2005) suggested that big firms should help start - up firms create new business models and then use a fast - second strategy to acquire the start - up firms and scale up the new ways of competing. In short, the list of ideas on how to discover new business models is rather long; interested readers are also referred to the work of Charitou (2001), Gilbert (2003), Gilbert and Bower (2002), Hammer (2004), Kuhn and Marsick (2005), Mitchell and Coles (2003), and Slywotzky (1996). But here s the catch and the reason this book has come about. Despite all the advice and despite the wealth of ideas, it is very rare to find a business - model innovation that originated from an established big company. According to the available evidence: The majority of business-model innovations are introduced by newcomers in an industry (rather than established competitors). Not only do established competitors fi nd it diffi cult to innovate in this manner, they also fi nd it next to impossible to respond to such innovations in an effective way. Most of the time, the established fi rms response is to imitate the innovation (rather than consider ways of neutralizing it or even destroying it). The majority of the responses fail because the established fi rms fi nd it diffi cult to manage two different and confl icting games at the same time. Why despite all the ideas and advice do big, established firms fail to pioneer new business models in their industries? These firms have the resources, the skills, and the technologies to do a much better job at innovation than the new start - up firms. Furthermore, the advice that has come their way on how to do so