Procter & Gamble’s goal is part of the newest wave in management thinking. Thought leaders from academia and inside companies have argued repeatedly in recent years that opening the firm to outside innovation is an important path to sustained growth. Berkeley’s Henry Chesbrough calls this model “open innovation.” C.K. Prahalad and Venkatram Ramaswamy of the University of Michigan argue that companies and their customers should innovate together, to “co-create value.”
This advice differs markedly from conventional thinking about innovation. There has long been a cultural and management bias in favor of discovery, especially discovery that takes place inside the corporate walls. Many of us aspire to become a modern-day Thomas Edison — the pioneer, the inventor, and the founder of a firm that launches the industries of the future. A natural by-product of this bias is that most of the academic research on and guidance given to companies to make them more “innovative” is primarily guidance on how they can become better at “creation” — discovering something new, testing it in the market, and, if successful, creating a new market.
However, successful innovation requires much more than discovering something new. As we all know, the majority of new ideas fail or never grow beyond small and insignificant market niches. To be truly successful, a new idea must ultimately grow and capture a mass market. Our aim is to describe the strategies that a company can use to turn someone else’s big idea into a big business.
We begin with a radical recommendation: To succeed at scaling up new radical markets, don’t even try to create them.
Consolidation Is King
In our last article for strategy+business, we argued that discovery and scaling up are essentially different activities that do not necessarily have to be performed by the same firm. (See “Colonizers and Consolidators: The Two Cultures of Corporate Strategy,” Fall 2003.) In fact, in the majority of cases, the companies that pioneer — or, in our terminology, colonize — new radical markets are not the ones that ultimately consolidate and take ownership of those markets.
Radical (or disruptive) innovations are those that, like the PDA in the 1990s, the PC in the late 1970s, and the television in the 1950s, introduce major new value propositions that upset existing customer habits and behaviors. Moreover, the markets they create undermine the competencies and complementary assets on which existing competitors have built their success.
We believe that big established firms do not have to be actively involved in both the colonization and the consolidation of new radical markets. Given their skills and attitudes, incumbents will be better off if they stick to consolidation, positioning themselves to exploit the pioneering efforts of others. One primary way established firms can accomplish this is by developing a network of feeder firms and serving as a venture capitalist to them. When a feeder firm has successfully demonstrated the existence of a market for a new product or service, the established firm can use its skills and competencies — in manufacturing, marketing, sales, and management of the extended enterprise — to scale up that market.