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 / Fall 2004 / Issue 36(originally published by Booz & Company)


Mastering Imitation

The proper focus of innovation will vary greatly from company to company, but at a high level successful businesses can be divided into two camps: process innovators and product innovators. Process innovators distinguish themselves by being more efficient in how they work; they produce fairly standardized products at a lower cost than competitors do, enabling them to earn relatively high profits at prevailing market prices (or drive competitors out of business through ruthless discounting). Process innovators tend to be the largest of all companies, dominating big, mature markets. Product innovators, on the other hand, make their mark by offering customers particularly attractive goods or services — those that offer superior functionality, more fashionable designs, or simply more enticing brand names or packaging. Their supranormal profitability, as an economist would put it, derives from the premium prices they can charge. Product innovators tend to pioneer new markets or to hold lucrative niches in older industries.

In the personal computer market, Dell stands as a classic process innovator. Its products are nothing special — they’re essentially commodities that meet the prevailing needs of most buyers. But through the relentless fine-tuning of its supply, assembly, and distribution operations, Dell has gained a wide cost advantage over its rivals that has made it the fastest-growing, most profitable company in its industry — by far. Apple, on the other hand, is the model of an effective product innovator. It has carved out a profitable niche in a cutthroat business by offering distinctive and stylish products that a sizable set of buyers are willing to pay more for.

What’s especially noteworthy about Dell and Apple is the discipline they bring to innovation. They innovate where creativity will buttress their core advantages, and they imitate elsewhere. You could argue, in fact, that to be a successful product innovator you need to be an adept process imitator, and to be a winning process innovator you need to be a good product imitator.

Dell, for instance, is skilled at quickly copying products and product features, which has enabled it to apply its superior process skills to a series of new markets, from servers to storage drives to switches. In some cases, it simply contracts with existing suppliers to provide it with commodity products to push through its distribution system. In challenging Hewlett-Packard in the lucrative market for printers, Dell is buying its products from Lexmark and rebranding them as its own. It thus avoids high research and development expenditures, further reinforcing its cost advantage.

As for Apple, its resurgence since the late 1990s has been as attributable to emulating processes as to churning out breakthrough products like the iMac and iBook. Soon after Steve Jobs returned as CEO in 1996, for example, he hired an operations ace, IBM and Compaq veteran Timothy Cook, to retool the company’s rusty supply chain. By copying the best practices pioneered by companies like Dell, Mr. Cook dramatically reduced Apple’s in-channel inventory, and the savings in working capital provided an immediate boost to profitability. On the distribution end, Apple has successfully copied efficient direct-to-customer channels such as online sales and dedicated stores.

Compare Dell’s and Apple’s highly disciplined innovation efforts to Gateway’s shoot-anything-that-moves approach. Gateway started as a process innovator, becoming, with Dell, a pioneer of direct distribution, but it also tried to be a product differentiator, maintaining relatively high-cost manufacturing plants, investing more than Dell in R&D, and launching expensive brand-advertising campaigns. It innovated aggressively on the retailing end as well, pioneering the exclusive stores that Apple would later (and more successfully) copy. It even tried to be a service innovator, pursuing a highly publicized “beyond the box” strategy involving the provision of various consulting services to small businesses. By trying to innovate everywhere, Gateway failed to build a strong competitive advantage anywhere. It was unable to distinguish its products enough to escape the industry price wars, and its operating costs remained much higher than Dell’s. Today, it is struggling
to survive.

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