Marketing Innovation

Accidental innovation - Corn Flakes!

Sometimes, you just can't improve on reality.

From http://yhoo.it/l1UDs8

Corn Flakes

As a Seventh Day Adventist, Dr. John Harvey Kellogg adhered to his faith's vegetarian diet as well as the teachings of the cultish, nutritional hardliner Sylvester Graham, the inventor of graham crackers.

In 1894, while employed by the Battle Creek Sanitarium in Michigan, he began experimenting with ways to make that restrictive diet more palatable and an inexpensive way to feed his charges.

Leaving some boiled wheat unattended, it went stale. Attempting to salvage it by rolling it into dough, Kellogg (aided by his brother Will) found that it tore into pieces and refused to hold a shape. Undaunted, they toasted the flakes and were pleasantly surprised by the result.

After a bit of trial and error, the brothers decided to use corn, instead of wheat, as the main ingredient. The result was deemed tasty enough by patients that Will founded a company bearing the Kellogg's (NYSE: K - News) name to sell their corn flakes.

Dr. John, however, opted out of the venture, angered that his brother tampered with the healthful nature of the recipe by adding sugar to the mix. It should be noted that the elder Kellogg wasn't so much worried about obesity or bad teeth; as a staunch practitioner of sexual abstinence, he theorized that his corn flakes would suppress physical urges. Sugar, an aphrodisiac in his opinion, would undo that.

Further revolutionizing how the world eats breakfast, a patient at Kellogg's sanitarium, C.W. Post, used his own variation of the cereal to create his own company and a competing product, Post Toasties.

The Vanilla Paradox: Crossing the Blue Ocean to Mass Market Success

Do you have an innovative product in a mature market?  That isn’t an oxymoron -- most innovations are improvements on existing products or services, and need to be differentiated from what is currently available.  Otherwise, they risk becoming, as a former IBM colleague put it, “just another flavor of vanilla”.

So, how do you go about avoiding the Vanilla Paradox^TM?  I believe that the answer lies in combining the lessons in Geoffrey Moore’s “Crossing the Chasm”/“Inside the Tornado” books with the ideas in W. Chan Kim and Renée Mauborgne’s “Blue Ocean Strategy”.

The main lesson from Moore is that to penetrate the mass market (aka “cross the chasm”), you should identify a niche, or market segment, and provide a “whole product” to it.  A “whole product” is defined as “the minimum set of product and services necessary to ensure that the target customer will achieve his or her compelling reason to buy”.  (Click on the image to see a larger version.)

In other words, a complete solution to a real problem.

That may appear to be obvious, but the key words are “complete” and “real”.  In many innovations, the entrepreneur will offer a new capability, but not a solution.  The customer must still perform some integration-type work to make the innovation into a success.  (These customers are the “early adopters” on the other side of the chasm.)  The “whole product” concept is key.

The other challenge is the “real” problem.  If you have improved an existing product or service, whether it is a light bulb, trailer hitch, asthma inhaler, or invoicing service (etc.), there are a great number of existing customers who are perfectly content to stick with the status quo.

What you want to do is make these customers think differently about the product or service in a way that makes them predisposed to consider buying your innovation.  The message from “Blue Ocean Strategy” is that you need to reinvent the “value curve”.  The objective is to create a “blue ocean” (i.e. uncontested market space) vs. a “red ocean” (a hyper-competitive market space).

The value curve is the relative weight that customers assign to various factors in the purchase decision. Very often price is the most important factor in the value curve, but there are usually others.  

Let’s take ice cream.  Store brands will win on price, but Häagen-Dazs, Edy’s and other premium brands have differentiated based on purity of flavor, fat content, texture, and so on.  And that’s just for vanilla! Ben & Jerry’s has all sorts of funky names for their flavors and a mystique that customers buy into as part of the brand.

Chan and Mauborgne show that the innovator has four strategy options in reshaping the value curve (click on the image to see a larger version of the chart):

• REDUCE certain factors below the industry standard
• CREATE new factors that the industry does not offer
• RAISE certain factors above the industry standard, and
• ELIMINATE certain factors altogether.

Sometimes, the best way to do this is “create” a new way of looking at the product or service -- ask customers to think about their product usage in a new way.  Are they wasting time using existing products?  Is there a safety problem with the current way of doing things?  Is there a new capability that your innovation would enable?  If so, bring that to your customers attention, and you know have a “complete solution” to a “real problem”.  

And you’ve crossed the blue ocean! 

The End of the 4 P's of Marketing -- and How to Get Them Back

I’m in the market for a new digital camera, and I’ve been doing research for months about which one to buy.  In the course of that research, I’ve noticed that the price band for any given model is very narrow -- across all “places” where the camera is available.  The Internet is my primary source of information about price -- Amazon, J and R Photo, B and H Photo -- but as I branch out into mass merchandisers like Best Buy, Circuit City, and even the office superstores and department stores, I’ve noticed that they all offer a given model at essentially the same price.

So two of the four “P’s” -- price and place -- have been removed from the marketer’s arsenal as levers of differentiation.   Price has found its floor below which no firm will go, and it is available everywhere.  What to do?  

The answer to which the business world turns seems to be to spend money on a third “P” -- promotion.  Advertising is not only a method of promotion, it has become the source of entire business models. 

This is not sustainable. 

The amount of advertising that the average buyer is subjected to -- across all media -- makes the incremental impact of any single ad microscopic.  (If there is any impact at all.)  In short, you can’t promote your way to differentiation, either.  What’s left?

The fourth “P”:  product.  The product (or service) itself is the one lever that a company can use to differentiate itself.  The way to accomplish that is through innovation -- continuing to improve your offering through new features that benefit your customers (current and future). 

Going down this path is a commitment to a new way of doing business.  Once on this path, you can’t get off.  Anything you introduce will be copied, and become the basis of competition for everyone.  You must stay out ahead of the pack.  Innovation must become -- and stay -- part of the DNA of your organization.

The good news is that innovative products that offer new features that benefit your customers reignite the ability of the other three P’s to be marketing levers.  Innovative products have less competition than commodities, so you can offer them in unique places.  You can price in a premium for that innovation (or perhaps you have lowered costs, so you can offer more at a given price point.)  You can promote a difference (or, even better, have other people -- influencers -- promote it for you!)

The erosion of the three P’s seems to point to an inescapable conclusion:  innovation is imperative.  Keeping your “eye” on innovation can bring the four “P’s” back into play.

Think Differently about Your Business and Innovation Can Happen

I've just finished reading a great book called "Small Giants:  Companies That Choose to Be Great Instead of Big" by Bo Burlingame.  In it, he profiles 14 companies, from a single person firm to a $200 million-a-year company (which may not be all that small to some people!)  Each of the companies, or, more accurately, their leaders, made a decision to stop growing at some point and focus on the unique culture and offerings that made their company great.

One company stood out to me from an innovation standpoint, and that is CitiStorage in New York City.  They are in the records storage business, which is a fancy way of saying that they store boxes of files for a fee.  This is a commodity type of enterprise.  Differentiation is difficult, if not impossible.  It is hard to imagine how one can store boxes better than the next guy.  It's easy to do a bad job, but doing a great job of storing boxes?

The owner, Norm Brodsky, had an opportunity to get into the business, and very quickly learned that the barriers to entry were pretty strong.  Customers typically entered into long term contracts; there was a per-box removal fee to move to another supplier; and price competition was fierce.  Not exactly a level playing field.

Mr. Brodsky needed a new way of thinking about his business.  One day, it came to him -- he wasn't in the records storage business, he was in the real estate business, renting space to boxes!  Once he had that in mind, he asked himself how to make more money from a rental property.  Simple -- have more rental units.  Looking at how the business of renting space to boxes worked, it was by the square foot.  So, logically, if he could store more boxes per square foot than his competitors, he could lower prices AND pay the removal fee to get business in.  So he looked for a warehouse with "very high ceilings and racks that go right up to the roof".  Bingo.  He found one, opened it up, and then went and built a few more like it.  A major breakthrough. 

To me, that is what innovation and entrepreneurship are about -- having a breakthrough idea (in any industry) and making it real.  That breakthrough comes from thinking differently about your business.

I should mention that innovation is just part of the CitiStorage story.  Mr. Brodsky has put together a great culture.  Here is his company's vision, from their website: 

We are more than Archival Storage and Records Management.

CitiStorage strives to better the lives of our employees, customers and community. Our entrepreneurial leadership sets a high standard of honesty and integrity, which is the foundation of our reputation. We believe in the inherent dignity of the individual and recognize that our strength is in our diversity. Committed to personal growth and advancement, we offer ongoing training and staff education. Our ability to change and create new ways of meeting our customers' needs and surpassing their expectations will ensure our company's long term success.

NOTE:  Here's a link to the full story.

What is a strategy, and why do you need one?

Good questions -- glad you asked!  Let's take them in order.

What is a strategy?

Broadly, a strategy is a plan for setting long term goals and putting in place the actions (tactics) for achieving them.

A corporate level strategy would include the following types of items (this is not an exhaustive list):

    •    Mission of the company (why it exists);
    •    Vision for the company (what is the desired future state);
    •    What products and/or services to offer, now and in the future (a roadmap);
    •    How to make money (business design);
    •    Growth targets (if any);

A marketing strategy fits within an overall corporate strategy. It is the process of:

    •    Determining who your customers are (or should be);
    •    What is important to them; and
    •    What sets you apart from your competition.

Why do you need one?

Most people think of strategy at one of three main points in the lifecycle of a business:  The start-up phase; when things are stagnating; or when growth has run amok.  A strategy provides focus to a business -- which is particularly important at each of these stages.

Strategies are developed as part of a discrete planning process.   Take that mission and vision thing to heart -- that will provide the illumination for the strategic plan.  It will help you see the customer needs; the changing environment; competition (existing, emerging, and potential); trends in technology; and forces affecting people and hiring.

Once the company strategy is in place, the marketing strategy can be developed.  How to position your offerings, how to generate awareness of and demand for them, and what you need to deliver a complete solution to the customer will come from that strategy.

The most important part is the execution.  There are far more great strategic plans than there are corporate success stories.  Putting the right actions into place, and then measuring the right performance elements, and adjusting based on this feedback are essential to the bottom line --  where the money hits the bank account.

I recently had the opportunity to meet with executives at OVO Innovation (www.ovoinnovation.com), who make some very interesting software to help the innovation process.  Their motto is "Innovate on Purpose" (TM)-- what a great thought!

Many businesses are reasonably successful without a well-defined strategy.  Just like innovation, it can happen without a process.  However, a good strategy can help you become successful on purpose.

What can Small Businesses Learn from GM?

A lot.  The simple answer is "passion", and that is tied to innovation.

Passion is kind of a funny word to use with respect to business, and suggestions that "passion return to the boardroom" or the like are (appropriately) met with grins.  But there is a role for passion in business.

I got to thinking about this topic over a year ago, when GM (and Ford) bonds were cut to "junk" status.  GM's market share is sliding toward 20%.  Toyota is poised to pass GM as the world's largest automaker.  The current news is that one of GM's biggest shareholders is pushing for an alliance with Nissan and Renault, who are both led by Carlos Ghosn.  How did this come about?  What went wrong?  I think it is a matter of outlook and training.  The difference between passion for your business, and mere competence.

GM is led by Rick Wagoner, who has a bachelor's degree in economics from Duke and an MBA from Harvard.  Mr. Ghosn was educated as an engineer.  Hmmm.

Cars are designed and built by engineers.  For all their stodgy image, engineers dream, design, develop, and make the things we buy.  I once heard engineering described as "the art of the possible".  If you can imagine it, it can be built.  Great cars are inspired and built by great engineers.  That's where the passion comes in -- from eating, sleeping, and breathing cars.

Managers may be competent -- gifted, even -- in business-related activities,  but let's not confuse that with passion for the business they are in.  Management skills should be built on top of the skills at the core of the business (as Mr. Ghosn demonstrates) and driven by passion.

Two years ago, my family took a long driving trip through the American West for two and a half weeks.  We put a couple thousand miles on our rental vehicle, a Chevrolet Classic.  It was disappointing at best.  (The car, not the trip.  We had a wonderful time.  This country has some absolutely breathtaking natural beauty.)

Yes, the Classic started every time, ran when it was supposed to, protected us from the elements, and went where it was pointed, but those are the commodity elements of a car.  I can't remember any distinguishing features, and the reputation of Chevrolet is certainly not why I rented it.

It was an uninspiring product (and a lousy advertisement for GM).

Last year, GM lost 10.6 billion dollars.  Much of the blame has been placed on onerous pension and healthcare costs, and management has proposed that GM use it's cash hoard to preserve the current business until those costs go away, and then start reinvesting.  It is also selling off 51% of GMAC (the financing arm) to raise $14 billion in more  cash.

This is not an innovative strategy.  It is not a strategy for winning, or growing.  It hasn't even stopped the loss of market share.

I have no doubt that GM hires and retains huge numbers of enormously talented engineers.  My guess is that very few of them are proud of the Classic.  I can imagine that, if pressed, they would say that they wanted to do a much better car, but the "bean counters" and/or "marketing" prevented it.

Once I would have dismissed this as whining and blame shifting.  Experience suggests otherwise.  Successful organizations tend to manage what made them successful rather than what will continue to make them successful.    They look in the rearview mirror instead of through the windshield.  Risk is avoided.  Innovation is stifled.  The status quo is preserved.  They get "stuck".

Passionate people are rarely satisfied with the status quo.  They want to do more; to make things better; to help their customers solve more problems.  They innovate -- and they innovate in innovative ways!  Perhaps the best thing that could come out of this proposed alliance for GM is to get an engineer -- and hugely successful manager -- to run the show.  Hopefully, this will lead to an explosion of new products -- maybe from fewer nameplates (I hesitate to call them "brands").  The seeming resurgence of Cadillac gives one hope.

Another example of how dramatic the role innovation and passion play can be found in the personal computer industry.  When was the last time a truly innovative product came out of HP or Dell?  (I'm hard pressed to think of one.)  Where are the innovative PC's coming from?  (Apple.)    Are Mark Hurd and Kevin Rollins passionate about PCs?  Is Steve Jobs?  I think the answers are obvious.

In small and mid-sized companies, it is likely that the person running the company is passionate about the business.  They "eat, sleep, and breathe"  it.   The company grows.  Employees are excited about coming to work.  Customers look forward to doing business with the company and using its products.  Observers say good things about the company.  They are all passionate as well.

Alas, they may also fall victim to the same process of getting "stuck".   Fortunately, small and mid-sized businesses are more nimble than Fortune 500 companies like GM.  If you recognize that you are falling into this pattern, it is easier to break out of it -- easier to introduce innovation.  Easier to get "unstuck".

Lesson:  The inspiration for innovation will come from people who are passionate about their business. Good management will capture that and turn it into a forward-looking strategy.  We can all learn from GM.

P.S.  There are a number of great books written about this subject.  Three of my favorites are:

•    "The Innovator's Dilemma", by Clayton Christensen;
•    "The Innovator's Solution", by Clayton Christensen and Mark Raynor; and
•    "Blue Ocean Strategy", by W. Chan Kim and Renee Mauborgne.

P.P.S.  In a January, 2005 interview, Kevin Rollins, CEO of Dell, called the iPod a "fad".  Take a look at Apple vs. Dell's share price in the last two years. 

Core competencies: What are they and will they guarantee success if I have one?

I was recently at a two-day strategic planning retreat for a company, and we were exploring the current business model for the company.  I had proposed that the current design was tired, and perhaps there were other models for furthering the company's mission than what was being done today.  One of the other directors, a former CEO of the company, said, "But we're doing what we're good at -- it is our core competency!"

That's a common mistake -- assuming that what you are good at is a "core competency".  The phrase "core competency" was introduced in 1990 in a Harvard Business Review article called (cleverly) "The Core Competency of the Corporation" by Gary Hamel and C.K. Prahalad.

They did give three tests to see if what you've got is a "core competency":

1. It provides customer benefits,
2. It is hard for competitors to imitate, and
3. It can be leveraged widely to many products and markets.

Merely being good (even great) at something is NOT a "core competency" if it doesn't meet those three tests.  Many companies have offerings or processes that pass the first two tests, but not the third.

An example of a company that does have a core competency is Dell Computer -- at least for now -- and that is supply chain management.  They have honed their supplier processes (and the terms and conditions under which they buy PC components) to an art form that allows them to turn over inventory at a rate at least 10 times higher than their nearest competitor.  This allows them not only to have lower profit margins, but to  thrive at those lower margins.  (They recently took a hit on the stock price because they cut prices aggressively in the second quarter.  They still make billions of dollars.)  However, every silver lining has its cloud, and here is Dell's:  They have optimized this competency for the PC industry (where they assemble finished goods out of standardized components) with a specific fulfillment model (they don't build until you've ordered, thus avoiding tying money up in inventory).

Strategies must evolve as the market environment changes.  Dell has been extraordinarily successful over the last 20 years, and particularly the last five or six.  But, as TI's CEO recently said in an article on thestreet.com:

"We're leaving a PC world where the ratio of equipment to people was one-to-one and going to a     world where you have up to 10 devices per person," said [Rich] Templeton, pointing to the cell         phones, MP3 players and portable game devices that many people now own. 

    At the same time, said Templeton, emerging markets such as India, China and Russia are adding     billions of new consumers to the market "overnight," as those nations join the global economy. 

    This combination of more devices per consumer and more consumers overall will allow TI to         continue to outgrow the semiconductor industry as it has for the past four years, said Templeton.

To me, this means that Dell's core competency in the PC market might not play as well in the emerging market dynamics of what's been called the "Post-PC Era".

To summarize, there are two lessons about core competencies that I've learned throughout my practice and career:

1.  Just being good at something doesn't a "core competency" make.
2.  Core competencies aren't a guarantee of perpetual success.