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Published: June 1, 2004

 
 

The Innovator's Prescription: The Art of Scale

How to turn someone else’s idea into a big business.

Illustration © Dan Page, 2004
In October 2003, in a statement issued after the company’s annual meeting, Procter & Gamble Chairman and Chief Executive Alan G. Lafley said, “Our vision is that 50 percent of all P&G discovery and invention could come from outside the company.” The target was ambitious: In 2002, only one-fifth of new ideas put into development by P&G came from theoutside. But the company hoped that if it worked with public companies, startups, and universities, outside innovation would ultimately comprise half its portfolio.

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.

 
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Resources

  1. Costas Markides and Paul Geroski, “Colonizers and Consolidators: The Two Cultures of Corporate Strategy,” s+b, Fall 2003; Click here.
  2. C.K. Prahalad and Venkatram Ramaswamy, “The Co-Creation Connection,” s+b, Second Quarter 2002; Click here.
  3. Clayton M. Christensen, Mark W. Johnson, and Darrell K. Rigby, “Foundations for Growth: How to Identify and Build Disruptive New Businesses,” Sloan Management Review, Spring 2002; Click here. 
  4. Gary Hamel, “Bringing Silicon Valley Inside,” Harvard Business Review, September/October 1999; Click here. 
  5. Constantinos Markides, “Strategic Innovation in Established Companies,” Sloan Management Review, Spring 1998; Click here. 
  6. James Brian Quinn, “Outsourcing Innovation: The New Engine of Growth,” Sloan Management Review, Summer 2000; Click here. 
  7. Henry Chesbrough, Open Innovation: The New Imperative for Creating and Profiting from Technology (Harvard Business School Press, 2003)
  8. Gary Hamel, Leading the Revolution (Harvard Business School Press, 2000)
  9. Richard Leifer, Christopher M. McDermott, Gina Colarelli O’Connor, Lois S. Peters, Mark Rice, and Robert W. Veryzer, Radical Innovation: How Mature Companies Can Outsmart Upstarts (Harvard Business School Press, 2000)
  10. Steven P. Schnaars, Managing Imitation Strategies: How Later Entrants Seize Markets from Pioneers (Free Press, 1994)
  11. Gerard J. Tellis and Peter N. Golder, Will and Vision: How Latecomers Grow to Dominate Markets (McGraw-Hill, 2001)