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Published: August 26, 2005

 
 

Format Invasions: Surviving Business’s Least Understood Competitive Upheavals

Conversely, incumbents often reject the notion of adopting the new format on the grounds that doing so would require abandoning their up-market feature and amenity offering, and thus cause an unthinkable revenue loss. They fail to see a major opportunity: that the company can combine high features and amenities with the new format’s low costs. There is a realistic opportunity, for instance, for a traditional airline to continue providing high levels of service while adopting Southwest’s more efficient production model. (In Exhibit 2, the traditional airline could move down the dotted line to the new format with mainstream features.)

This confusion also seems to underlie Harvard Business School Professor Clayton Christensen’s well-known views on format competition. Professor Christensen argues that innovative products and business formats (or “value networks,” as he calls them) begin life underperforming the requirements of a market’s core customers. Later, as the intruder’s performance improves, it gains the ability to enter the incumbents’ core markets. Whatever the merits of this view with respect to technological innovations such as improved disk drives, it does not apply to new business formats. The choice of business format and the choice of amenity level are largely independent of each other. Most format innovations indeed appear at the low end of the market, but this is only because that represents the simplest and most expedient route for the intruder to monetize its innovation.

When a new-format intruder offers more features and amenities than its traditional competitors do, they will not necessarily be the same mix. The new format makes some amenities easier and some harder to provide, so the intruders do what any seller would do: accentuate their advantages. Airline passengers, for example, may wait a bit longer for connecting flights on Southwest, but they get nonstop flights more frequently. Retail customers may drive a bit farther to shop at a “big box” store, but they can choose from a broader variety of goods. In any case, these differences tend to be modest; the new format’s lower costs and prices swamp any differences in its amenity mix.

Late in the cycle, as new-format intruders take ever more market share, the increasingly strapped incumbents often start to merge. From one perspective, these mergers appear inevitable and beneficial: Old-format companies face a contracting market, which simply cannot support as many of them as it did before (even if the overall market remains robust). However, the traditional companies often expect more from this kind of industry consolidation than it can provide. Too often, they view consolidation as a real fix, rather than seeing it correctly as another step in their decline. This is because they view their collective overcapacity as the problem, rather than recognizing it as a symptom of the format invasion.

The Incumbent’s Opportunity
Some incumbents have responded successfully to a format invasion. When they do, the results are extraordinarily profitable. We’ve looked at several companies that took on a format invasion successfully, and at several others that more or less tried but failed. Nothing we’ve seen indicates that the companies that made a successful transition to a new format had any greater depth of technical, financial, or operational resources than the peers they left behind. Nor did we find that they had “less to lose” by giving up the old format. But the winners adhered to a few basic principles, while avoiding some clear pitfalls.

The experience of Best Buy and Circuit City over the past decade comes close to being a controlled experiment on this point. At the outset, nothing about Best Buy’s market position or format distinguished it from Circuit City. If anything, Circuit City had more resources with which to innovate. But Best Buy identified and acted upon an opportunity where Circuit City did not.

 
 
 
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Resources

  1. Clayton M. Christensen, Scott D. Anthony, and Erik A. Roth, Seeing What’s Next: Using the Theories of Innovation to Predict Industry Change (Harvard Business School Press, 2004): A theory of disruptive success that partly, but not completely, meshes with the format invasion concept.
  2. Jeff Ferry, “Flextronics: Staying Real in a Virtual World,” s+b, Winter 2004: A Singaporean contract manufacturer emulates Toyota’s innovations. Click here.
  3. Victoria Griffith, “Welcome to Tesco, Your Glocal Superstore,” s+b, First Quarter 2002: Of the s+b retail case studies, the most relevant format-renewal example. Click here.
  4. Tom Hansson, Jürgen Ringbeck, and Markus Franke, “Flight for Survival: A New Business Model for the Airline Industry,” s+b, Summer 2003: More detailed view of the airline format invasion and its cost consequences. Click here.
  5. Art Kleiner, “The Next Wave of Format,” Deeper News, 2001: Manifesto about Internet and media formats as socially created, not technological, innovations. Click here.
  6. William Leach, Land of Desire: Merchants, Power, and the Rise of a New American Culture (Vintage, 1993): Early 20th-century format invasions among department stores, fashion merchandisers, and investment banks.
  7. Chuck Lucier, “Herb Kelleher: The Thought Leader Interview,” s+b, Summer 2004: The cofounder of Southwest Airlines explains the strategy underlying his airline’s cost advantage. Click here.
  8. Costas Markides and Paul Geroski, “Colonizers and Consolidators: The Two Cultures of Corporate Strategy,” s+b, Fall 2003: Cultural change for enabling resilience among incumbents. Click here.
  9. James Womack and Daniel T. Jones, Lean Solutions: How Producers and Customers Achieve Mutual Value and Create Wealth (Simon & Schuster, 2005): Wholesale Toyota-inspired manufacturing and service redesign.